RD News 21Dec11

• Fed: Large bank and SIFI rules
• Applies to all US bank holding companies with consolidated assets of $50 billion or more and any nonbank financial firms that may be designated by FSOC as systemically important companies.
• Proposing a number of measures including:
• Risk-based capital and leverage requirements. Firms must develop annual capital plans, conduct stress tests, and maintain adequate capital, including a tier one common risk-based capital ratio greater than 5%, under both expected and stressed conditions. In a second phase, the Board will issue a proposal to implement a risk-based capital surcharge based on the framework and methodology developed by the BCBS.
• Liquidity requirements. Institutions subject to qualitative liquidity risk-management standards generally based on the interagency liquidity risk-management guidance. These standards would require companies to conduct internal liquidity stress tests and set internal quantitative limits to manage liquidity risk. In the second phase, the Board would issue one or more proposals to implement quantitative liquidity requirements based on the Basel III liquidity rules.
• Stress tests. Stress tests of the companies would be conducted annually by the Board using three economic and financial market scenarios. A summary of the results, including company-specific information, would be made public. In addition, the proposal requires companies to conduct one or more company-run stress tests each year and to make a summary of their results public.
• Single-counterparty credit limits. Requirements limit credit exposure of a covered financial firm to a single counterparty as a percentage of the firm's regulatory capital. Credit exposure between the largest financial companies would be subject to a tighter limit.
• Early remediation requirements. A number of triggers for remediation--such as capital levels, stress test results, and risk-management weaknesses--in some cases calibrated to be forward-looking. Required actions could include restrictions on growth, capital distributions, and executive compensation, as well as capital raising or asset sales.

• BCBS: Application of own credit risk adjustments to derivatives - consultative document
• A deterioration in a bank's own creditworthiness can lead to an increase in the bank's common equity as a result of a reduction in the value of its liabilities. Basel III seeks to prevent this.
• Application to fair valued derivatives is not straightforward since their valuations depend on a range of factors other than the bank's own creditworthiness.
• Paper proposes that debit valuation adjustments (DVAs) for over-the-counter derivatives and securities financing transactions should be fully deducted in the calculation of Common Equity Tier 1.

• IMF: The New Economics of Capital Controls Imposed for Prudential Reasons
• Externalities are associated with financial crises because individual market participants do not internalize their contribution to aggregate financial instability when they make their financing decisions.
• As a result they impose externalities in the form of greater financial instability on each other, and the private financing decisions of individuals are distorted towards excessive risk-taking.
• Prudential capital controls can induce private agents to internalize these externalities and thereby increase macroeconomic stability and enhance welfare.
• At a microeconomic level, we need to better understand the breadth of balance sheet effects that occur during episodes of financial amplification and how they relate to macroeconomic phenomena.
• At the level of implementation, more research is needed on what forms of capital controls are most desirable and effective in preventing the buildup of risks that may result in large financial crises.

• K C Chakrabarty (Dep Gov RBI): Ten Commandments for a successful banking career
• Thou shalt:
• manage the people with empathy
• strive to become a knowledge worker
• be accountable for all your work
• do hard work
• develop the right attitude
• attempt to become a pioneer
• develop a professional approach
• be analytical
• be information literate
• avoid complacency during good times and not lose hope during bad times

RD News 20Dec11

• BCBS: Core Principles for Effective Banking Supervision – Consultative doc
• Principles 1-13 address supervisory powers, responsibilities and functions, focusing on effective risk-based supervision, and the need for early intervention and timely supervisory actions.
• Principles 14 to 29 cover supervisory expectations of banks, emphasising the importance of good corporate governance and risk management, as well as compliance with supervisory standards.
• Key improvements emerging from trends observed in the financial crisis:
• greater intensity and resources to deal effectively with systemically important banks;
• importance of applying a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analysing and taking pre-emptive action to address systemic risk;
• increasing focus on effective crisis management, recovery and resolution measures in reducing both the probability and impact of a bank failure.

• BoE: Instruments of macroprudential policy – discussion paper
• Three categories of instruments under consideration, those that:
• affect the balance sheets of financial institutions;
• affect the terms and conditions of financial transactions;
• influence market structures.
• Balance sheet tools include:
• maximum leverage ratios, countercyclical capital and liquidity buffers, time-varying provisioning practices, and distribution restrictions.
• Sectoral capital requirements or ‘variable risk weights’ could have a role in targeting emerging risks in particular exposure classes.
• Tools that influence the terms and conditions of loans and other financial transactions include:
• ability to restrict the quantity of lending at high loan to value, or high loan to income ratios,
• power to impose and vary minimum margining requirements or haircuts on secured financing and derivative transactions.
• Market structure tools include:
• obligations to conduct financial trading on organised trading platforms and/or to clear trades through central counterparties.
• Targeted disclosure requirements could be used to enhance resilience by limiting uncertainty about specific exposures or interconnections.
• Adjusting risk weights on intra-financial system activities could also play a role in limiting excessive exposures building up between financial institutions.

• EBA: Draft ITS on supervisory reporting requirements – consultation paper
• Aims at implementing uniform reporting requirements which are necessary to ensure fair conditions of competition between comparable groups of credit institutions and investment firms.
• Reporting requirements developed taking into account the nature, scale and complexity of institutions' activities.
• Proportionality integral part of ITS with certain reporting requirements being applicable only to institutions using complex approaches to measure own funds requirements or to institutions that have significant risk exposures.

• FT: Tobin tax costs ‘would fall on investors’
• Ultra-conservative money market funds would be hardest hit by an FTT.
• Might also accelerate the ongoing shift from active to passive investment.
• Securities trading could increasingly switch from the cash to the derivatives market.

RD News 19Dec11

• ECB: Biannual Financial Stability Review
• Identifies four main risks:
• contagion between public finances, the financial sector and economic growth;
• funding strains in euro-area banks;
• weakening macroeconomic activity and credit risks for banks;
• imbalances between key global economies.
• Related to financial regulation, the review argues against maximum harmonisation of capital requirements, suggesting that for stability reasons, EU member states should be able to apply more stringent rules than the harmonised minima.

• BCBS: Definition of capital disclosure requirements – consultative doc
• Disclosure requirements that aim to improve the transparency and comparability of a bank's capital base.

• BCBS – The Joint Forum: Principles for the supervision of financial conglomerates – consultative doc
• The Joint Forum's aim is to focus on closing regulatory gaps, eliminating supervisory ‘blind spots,’ and ensuring effective supervision of risks arising from unregulated financial activities and entities.
• Principles:
• Supervisory powers and authority – The legal framework should grant the necessary power and authority to supervisors to enable cooperation, coordination and information exchange among supervisors in order to facilitate effective group-wide supervision.
• Supervisory responsibility - Supervisors should establish, implement and maintain a comprehensive framework of risk-based minimum prudential standards for financial conglomerates.
• Corporate governance – must have transparent organisational and managerial structure, which is consistent with its overall strategy and risk profile and is well understood by the board and senior management of the head company.
• Capital adequacy and liquidity – must maintains adequate capital and liquidity on a group-wide basis to act as a buffer against the risks associated with the group’s activities, particularly in times of stress.
• Risk Management - independent, comprehensive and effective risk management framework, which includes a robust system of internal controls.

• EIOPA: Report on Financial Literacy and Education Initiatives by Competent Authorities
• Most EIOPA Members neither have a national strategy on financial education nor have one under preparation.
• Given the renewed emphasis on consumer protection after the financial crisis, information about the state of financial literacy and efforts to improve financial education will be crucial for developing consumer-oriented regulatory regimes.

• Reuters: SEC regulator sceptical on MMF reform
• Daniel Gallagher (Republican SEC official): ‘We cannot know what risks money market funds pose unless ... we have a clearer understanding of the effects of the commission's 2010 money market reforms… Any rulemaking in this space could be premature and possibly unnecessary.’  
• ‘The level of capital that would be required to legitimately backstop the funds would effectively end the industry… And I have doubts that a smaller cap that accrues over time would be sufficient to protect investors in funds in an actual crisis.’

• EBA: Guidelines on internal compliance – compliance table

• HM Treasury: Response to Vickers report
• Ring-fence to be introduced, with large ring-fenced banks to hold at least 10% equity capital.
• UK operations of British banks, and the non-UK operations of UK-headquartered banks which pose a threat to UK taxpayers, must hold at least 17% loss absorbing capital.
• Depositor preference will be introduced, after consultation.
• FCA will have mandate to promote competition in the interests of consumers.
• Legislation for the ring-fence will be separated and brought forward to be completed in 2015, and banks to comply ‘as soon as practically possible thereafter.’

RD News 16Dec11

• Mark Carney: Growth in the age of deleveraging
• Austerity is a necessary condition for rebalancing, but it is seldom sufficient. There are really only three options to reduce debt: restructuring, inflation and growth.
• There are no effective mechanisms that can produce the needed adjustment in the short term. Devaluation is impossible within the single-currency area; fiscal transfers and labour mobility are currently insufficient; and structural reforms will take time.
• To repay the creditors in the core, the debtors of the periphery must regain competitiveness. This will not be easy. Most members of the euro area cannot depreciate against their major trading partners since they are also part of the euro.

• Vítor Constâncio: Challenges to monetary policy in 2012
• Expect to see inflation to stay above 2% for several months to come, but it will decline to below 2% during 2012.
• The ECB is able and willing to continue fulfilling central banks’ classical role as financial lender of last resort, handling liquidity problems in the financial system without endangering price stability.

• BCBS: Basel III definition of capital - FAQs

• Jaime Caruana: Why central bank balance sheets matter
• Policy tools that involve the active use of central bank balance sheets – both the assets and the liabilities – can help monetary authorities to navigate the policy challenges during times of financial stress and when interest rates are close to zero.
• The increased use if these tools in recent years means that devising exit strategies from these enlarged balance sheets will be an issue that will preoccupy us for some years to come.

• BIS: Is the long-term interest rate a policy victim, a policy variable or a policy lodestar?
• Few financial variables are more fundamental than the “risk free” real long-term interest rate because it prices the terms of exchange over time.
• During the past 15 years, it has dropped from a range of 4 to 5% to a range of 0 to 2%. By late 2011, cyclical factors had driven it close to zero.
• Possible persistent factors are:
• the investment of the large savings generated by developing Asia in highly-rated bonds;
• accounting and valuation rules for institutional investment;
• financial sector regulation.
• The consequences could be far-reaching:
• cheaper leverage;
• less pressure to correct fiscal deficits;
• larger interest rate exposures in the financial industry;
• a more cyclical bond market.
• During the financial crisis, central banks in advanced countries have made the long-term interest rate a policy variable as Keynes advocated.
• Coordination between central bank balance sheet policies and government debt management is essential. With government debt very high for years to come, bond market volatility may prove inescapable

• Norman Chan (CEO HKMA): Excessive leverage – root cause of financial crisis
• Current crisis have been driven by excessive leverage in private and public sectors alike in the major industrial economies, resulting in dangerously high levels of debts.
• There is no clever or easy way out of the trap of excessive leverage. While innovative financial derivatives may facilitate borrowing and leverage, or even conceal them, no financial engineering can reduce debt and achieve de-leveraging without the required reduction in public spending and the economic and social pains that the de-leveraging process generates.

• ECB: Monthly Bulletin - December
• Availability of external financing - bank loans in particular - has decreased, while the need for such finance has increased.

• OECD: Systemically important banks and capital regulation challenges
• Capital regulation based on risk-weighted assets encourage innovation designed to circumvent regulatory requirements and shifts banks’ focus away from their core economic functions.
• Tighter capital requirements based on risk-weighted assets may further contribute to these skewed incentives.
• Redirection towards core economic functions will impose minimal macroeconomic costs, with a -0.02% impact on GDP for every 1% increase in bank equity, relative to a risk-weighted regime.

RD News 15Dec11

• BoE: Reform of the International Monetary and Financial System  
• The ability of today’s system to achieve simultaneously the three key IMFS objectives — internal balance, allocative efficiency and financial stability — has been compromised by the existence of underlying frictions.
• These frictions have interacted to encourage the build-up of excessive current account imbalances and to increase the welfare costs of the eventual adjustments to these imbalances.
• Four key categories of frictions:
• missing markets, which can encourage EMEs to accumulate official reserves and manage their exchange rates;
• international institutional frictions, which may incentivise EMEs to undervalue their exchange rates in pursuit of an export-led growth strategy;
• imperfect information, which can amplify exchange rate and capital flow volatility, and encourage excessive leverage in countries that receive net capital inflows;
• nominal rigidities, which can exacerbate the output costs of eventual corrections.
• Each of these frictions has resulted in externalities, which have in turn led to sub-optimal global outcomes.

• BoE: The future of international capital flows
• Over the next 40 years the distribution of external assets will shift to emerging markets. By 2050, more than 40% of all external assets will be held by BRICs, up from the current 10%.
• Non-G7 annual capital outflows are simulated to be more than twice the size of G7 outflows by 2050.
• Key challenge for policymakers is to mitigate the potential financial stability risks associated with much larger future international capital flows while simultaneously preserving the key benefits that financial globalisation has to offer.

• BIS: Jaime Caruana: Foreign participation and bond market development in Asia and the Pacific
• In government bond markets, better liquidity allows the fiscal authority to raise funds with less crowding-out of the private sector and gives the monetary authority more scope to conduct monetary policy effectively.
• In corporate bond markets, liquidity allows businesses and financial institutions to raise long-term funds on terms that promote a better allocation of resources and risks.

• BIS: Long-term fiscal sustainability in major economies
• Three current sources of fiscal imbalances:
• Cyclical - attributable to both the automatic reductions in taxes and increases in spending that the recession brought and the countercyclical discretionary measures that governments adopted.
• Ongoing structural primary misalignments between revenues and spending that would exist in the short run even at full employment.
• Pension and health spending, which are projected to grow rapidly for most countries in the growing decades due to aging populations and continued excess cost growth in health care spending.

• BIS: The ‘Austerity Myth’: gain without pain?
• Questions the short run validity of the ‘expansionary fiscal consolidation hypothesis’.
• Main driver of growth more likely to be exports than internal.
• Wage moderation plays a key role in recapturing competitiveness.

• BIS: The liquidation of government debt
• Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. One subtle form is  ‘financial repression.’
• Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.
• Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation.
• For the US and UK estimates of annual liquidation of debt via negative real interest rates equal on average 2-3% of GDP per year.

• BIS: Perceptions and misperceptions of fiscal inflation
• Fiscal policy and inflation concerns will grow as aging populations increase demands on government expenditures in coming decades.
• It is widely perceived that fiscal policy is inflationary if and only if it leads the central bank to print new currency to monetize deficits. But it is a misperception that this is the only channel for fiscal inflations.
• Nominal bonds, the predominant form of government debt in advanced economies, derive their value from expected future nominal primary surpluses and money creation; changes in the price level can align the market value of debt to its expected real backing. This introduces a fresh channel, not requiring monetization, through which fiscal deficits directly affect inflation.

• BIS: Quarterly Review Dec11
• Euro area sovereign crisis drives global financial markets
• Eurozone crisis central driver of markets Sept-Dec.
• Highlights of BIS international statistics
• Renminbi internationalisation and China's financial development
• The Chinese authorities have begun to internationalise the renminbi before fully liberalising China’s capital account. The renminbi is crossing borders at a transitional stage in China’s financial development.
• In the country’s banking system, the net interest margin is still regulated, lending is still subject to quantitative guidance and foreign banks are still limited to playing a small role.
• Similarly, in the corporate bond market, issuance is still rationed.
• Backed by capital controls, these reinforcing restrictions provide the authorities with direct leverage over credit growth and its allocation.
• Relaxed capital controls would put at risk bond market rationing, regulated deposit and lending rates, and quantitative credit guidance.
• FX strategies in periods of distress
• Even though FX investment strategies have fared comparatively well recently, short-term downside risks to investors can still be substantial. This is an important aspect given the short-term nature of the typical strategies deployed in these markets.
• One bad month can be sufficient to wipe out one to two years of average returns.
• We also show, however, that investments in equities expose investors to even larger downside risks.
• Assessing global liquidity
• Global liquidity has become a buzzword in international policy debates, bit is ill-defined. This lack of precision can lead to potentially undesirable policy responses.
• It is an important driver of capital flows, global asset price dynamics and inflation. International monetary arrangements – including exchange rate regimes, capital account policies and financial safety nets – have a major bearing on global liquidity.
• Policy responses to global liquidity call for a consistent framework that takes into account all phases of global liquidity cycles, countering both surges and shortages.
• The impact of recent central bank asset purchase programmes
• Estimates the impact of the recent purchases of Treasuries by the Fed and of gilts by the BoE on government bond yields.
• Yields fell significantly over the course of each programme and the Feds new maturity extension programme should have a comparable effect on longer-term bond yields,
• Enhanced BIS statistics on credit risk transfer
• Non-rated multi-name credit risk sourced from multiple sectors has been transferred from derivatives dealers to IFGCs, SPVs and OFCs.
• Such risk transfers are likely to have been generated by basket CDS, synthetic CDOs or CDS index tranches.
• These types of CDS can be difficult to value and have experienced significant price jumps in the past.
• To the extent that such risks remain, they appear to have been passed on from the banking sector to shadow banks.
• The new data also show that BSDs and SPVs had sold on a net basis credit protection on financial debt. The risk of simultaneous default of protection sellers and reference entities is often higher when these institutions come from a common sector, rather than different sectors.

• BoE: Spencer Dale (ED Monetary policy) Prospects for monetary policy: learning the lessons from 2011 
• Not all of our disappointing growth performance can be laid at the door of the euro crisis. Much of the weakness can be related to the unavoidable fall in our real living standards as the cost of energy and other goods and services we import from abroad rose in price.

• Andy Haldane (in the New Scientist) To navigate economic storms we need better forecasting
• Finance is a classic complex, adaptive system, similar to an ecosystem. The growth in its scale, complexity and adaptation in the past generation alone would rival that of most other complex systems in the past century. The growth in certain financial markets and instruments has far outstripped Moore's Law of a doubling of computer power every 18 months. The stock of outstanding financial contracts is now around 14 times annual global GDP.
• Historically, finance has not thought of itself as a system. Instead, financial theory, regulation and data-collection has tended to focus on individual firms. Joining the dots was in no one's job description.
• The key to that is to explore the underlying architecture of the network, not the behaviour of any one node. To make an analogy, you cannot understand the brain by focusing on a neuron - and then simply multiplying by 100 billion.

• MMFs: 5 consecutive weeks of net inflows

• Securities and Exchange Board of India (Sebi) sets up an International Advisory Board
• Viral Acharya, Stern School
• Jane Diplock, Independent Director Singapore Exchange
• Mark Maletz, HBS
• Maureen O'Hara, Cornell University's Johnson Graduate School of Management
• Arvind Panagariya, Columbia University's School of International & Public Affairs
• Andrew Sheng, CBRC

• FSA: Deposit insurance disclosure mandatory
• All banks, building societies and credit unions in the UK must ‘prominently display’ the level of compensation that depositors have if the institution were to fail, which includes display in all branches and websites.
• FSA: RBS failure report

RD News 8Dec11

 

 

• EBA: Stress tests - press release 
• FT: German banks weakest in stress tests
• Stress test pushes up the Europe-wide deficit from €106bn in Oct to €115bn now.
• Germany’s Commerzbank is facing the prospect of nationalisation - must raise €5.3bn of equity to come into line with the 9 per cent core capital ratio that EBA is demanding by June 2012.
• German banks’ aggregate capital shortfall, which also includes a €3.2bn gap at Deutsche Bank, jumped from €5.2bn to €13.1bn.

 

• IMF working paper: The Nonbank-Bank Nexus and the Shadow Banking System
• Asset managers are a major source of funding for banks through the shadow banking system. They are dominant sources of demand for non-M2 types of money and serve as source collateral ‘mines’ for the shadow banking system.
• Banks receive funding through the re-use of pledged collateral ‘mined’ from asset managers. Accounting for this, the size of the shadow banking system in the U.S. may be up to $25 trillion at year-end 2007 and $18 trillion at year-end 2010, higher than earlier estimates.
• In terms of policy, regulators will need to consider the re-use of pledged collateral when defining bank leverage ratios.
• Regulatory efforts aimed at altering funding structures need to be complemented. Current approaches are actively pushing banks away from short-term, secured, wholesale funding markets and incentivizing them to issue more deposits and term funding. Unless the supply of preferred assets is addressed by more safe assets (including sovereign bonds), shadow banking will fill the void.
• Regulatory proposals, such as Dodd-Frank and Basel III, that are pushing riskier activities outside the banking system (e.g. proprietory desks, hedge funds and OTC derivatives), will increase shadow banking; thus its linkages to traditional banking warrant closer attention.

• Andrew Sheng: European Debt Depression - The State versus the Market
• Debt deflation dynamics:
• First stage involves distress selling of assets by the borrowers to reduce their debt.
• Stage two affects bank balance sheets that contract when customers are paying off their debt. A general fall in asset prices, signalling the reversal of the asset bubble, creates a further fall in business net worth.
• The consequent decline in the profit level cuts back trade volume when households feel less confident about spending and investors worry about the future.
• At the macro-level, trade and output falls while unemployment grows, causing more market pessimism. As the public begins to hoard cash, the velocity of circulation slows down further.
• This causes a fall in nominal rates, but since inflation may be falling faster, the rise in real rates worsens the debt burden of the borrowers.
• The euro zone is in the grip of this depressing state of affairs.
• European problem is a twin bank-fiscal bind, in which the governments have to bail out the banks, but their own fiscal debt overhang is now the root of further deflation.

• ECB: announces measures to support bank lending and money market activity
• Mario Draghi: statement
• Cutting interest rate by 25 bps to 1%.
• Inflation is likely to stay above 2% for several months to come, before declining to below 2%.
• ECB announces four non-standard measures to boost bank liquidity and certainty in the money markets. It will:
• provide two long term refinancing operations with a maturity of 36 months
• increase collateral availability by reducing the rating threshold for certain asset-backed securities
• cut the reserve ratio from 2% to 1%
• temporarily discontinue the fine-tuning operations carried out on the last day of each maintenance period, which will also help money market activity.

• FED Board: Risk-Based Capital Guidelines: Market Risk; Alternatives to Credit Ratings for Debt and Securitization Positions
• Alternative standards of creditworthiness must be used in place of credit ratings to determine the capital requirements for certain debt and securitization positions covered by the market risk capital rules.
• Proposed creditworthiness standards include:
• use of country risk classifications published by the OECD for sovereign positions
• company-specific financial information and stock market volatility for corporate debt positions
• a supervisory formula for securitization positions.

• FT: Financial firms hit by flood of new rules
• Average of 60 regulatory changes every working day, a 16% increase over last year.
• Regulators around the world announced 14,215 changes in the 12 months to November, up from 12,179 for the same period a year earlier.
• Regulatory announcements have been increasing by between 16 and 20% each year since the ‘08 financial crisis.
• More than half the regulatory activity of the past two years has come from the US and Canada – reflects more regulators both at the federal and state level and the enormous amount of rule-making of giant Dodd-Frank act.
• Richard Reid, ICFR Research Director: ‘highlights again the issues we will have in trying to harmonise and co-ordinate progress on the regulatory agenda across regions…The low weight of regulatory activity in Asia and the Middle East probably reflects the fact that those regions have had a relatively good crisis and that their financial systems are relatively small.’

• Reuters: Banks seek to avoid Volcker rule ‘fire sale’
• US banks want regulators to give them more time to liquidate investments in certain private equity funds under the Volcker rule, arguing that without more leeway they will have to hold ‘fire sales.’
• The Volcker rule, part of Dodd-Frank Act, greatly restricts the amount banks can invest in hedge and private equity funds.
• Banks already have been trying to shrink their private equity portfolios.
• For instance, at the end of the third quarter the book value of BofA's private equity investments was $1.8 billion, compared to $4.8 billion a year earlier.
• But they fear certain funds with a longer time horizon, such as those tied to real estate, will take longer than the general timeframe of five years laid out in the Volcker rule to sell the assets at decent prices.
• ‘You are going to have to go out and sell to third parties, who are not banking entities, that are salivating, just waiting for this to happen because all of these interests will be sold at significant discounts’.

RD News 7Dec11

 

 

• Donald Kohn: The Financial Policy Committee at the Bank of England
• Pre-crisis, the most obvious failing of the UK system was that no single institution had the responsibility, authority, or powers to monitor the system as a whole, identify potentially destabilizing trends and respond to them with concerted action.
• Prudential Regulatory Authority will concentrate on microprudential oversight, while a new Financial Policy Committee will provide for the dedicated macroprudential overlay.
• If we see the threat to stability as being immediate and serious, we will be able to issue directives to the microprudential authorities on regulatory tools that should be deployed in the pursuit of macroprudential policy.

• Sweden Defends Higher Capital Ratios of 10-17%
• The Swedish central bank (Riksbank) has undertaken a study of the long-term social costs and benefits of increased bank capital requirements, concluding that the Basel III requirements ‘are too low for the Swedish banks.’
• Appropriate capital ratio for Swedish banks between 10-17% of risk-weighted assets.
• Arguing that existing studies have not taken Swedish conditions into consideration.
• Report follows a recent defence of “maximum harmonisation” of capital rules by the EBA, further indicating tensions between national and international approaches.

• State Street: Market constraints hinder more foreign investment in China – China’s Funds Future Vision paper
• Foreign investors continue to remain significantly underweight on Chinese assets because of market constraints.
• China’s managed funds sector grew to more than $335 billion AUM last year.
• The latest proposed expansion of the renminbi qualified foreign institutional investors scheme (RQFII), would allow domestic Chinese brokerages and fund companies to raise money offshore for investment in the domestic markets. This is directly linked to China’s desire to expand the use of renminbi outside its borders.
• China’s funds sector represents a significant long-term strategic play for foreign fund managers so long as they remain vigilant in aligning with regulatory changes in the market.

• ECB: publishes structural financial indicators for 2010
• Covers 06-10. Comprise statistics on the number of local units (branches) and employees of EU credit institutions; data on the degree of concentration of the banking sector in each State; the share of foreign-controlled institutions EU national banking markets.
• In most EU Member States, the number of credit institution units has continued downward trend observed in previous years. Number of credit institution employees has also declined.
• Data also shows that the degree of concentration and the share of foreign-controlled institutions vary significantly across national banking markets.

• Miguel Fernández Ordóñez (Gov, Bank of Spain): Mechanisms to prevent and manage banking crises in the future
• We should cease referring to the “crisis” in the singular and start talking about “crises” in the plural. This is because the far-reaching shock the Spanish economy and its banking system have undergone has not been caused by a single crisis but by the extraordinary overlapping of three economic/financial crises:
• International financial crisis
• Typically Spanish crisis, associated with excesses in the real estate sector, private-sector debt and deteriorating competitiveness
• Eurozone sovereign debt crisis
• Overall impact of these three crises is an extraordinarily complex scenario with multiple and unprecedented interactions. We must avoid intellectual laziness and seek innovative solutions to manage an exit from the situation. This is because many of the solutions used in the past are not only no longer available or useless, but – given the side-effects – may even prove harmful.
• It would be a grave error to establish rigid criteria that rule out the possibility of incorporating fresh financial restructuring tools.
• A consistent and internationally coordinated response to the crisis must be made compatible with a reasonable adaptation to the specific circumstances of each country.

• Svante Öberg (Dep Gov, Riksbank): Monetary policy’s Catch-22 – uncertainty
• As monetary policy acts with a lag, it must be based, at least partly, on forecasts. However, our forecasting ability with regard to GDP growth and inflation is very limited one year ahead and largely non-existent two and three years ahead.
• Should therefore place greater emphasis on analysing the initial situation and making forecasts for the coming year.
• We should also concentrate on assessing the repo rate over the coming six months, as there is such great uncertainty over the repo rate in the longer run.
• We should regard the forecasts for longer than one year ahead as potential scenarios rather than unbiased forecasts.

RD News 6Dec11

• US May Not Fully Adopt International Accounting Standards 
• The US may only selectively adopt international accounting standards created by the International Accounting Standards Board (IASB). 
• Convergence of accounting rules is part of the G20’s initiatives for reforming financial markets, but has been hit with a number of setbacks, with deadlines increasingly pushed back as different agencies disagree about both substance and timing. 
• The SEC is set to make an announcement in the next few days as to which accounting standards it will adopt and which it will not. The IASB has said that it will make an “important” speech in response to any US announcement. 
• Possible system of so-called "condorsement" where each IASB rule is adopted individually rather than a wholesale switch -- an idea backed by the trustees of the U.S. Financial Accounting Standards Board (FASB).

• EBA: Andrea Enria: Towards an EU Single Rulebook

• Defends maximum harmonisation, highlighting capital requirements in particular, which have been a source of tension between the EU and UK authorities.
• Calls for “constrained discretion” in national macroprudential supervision.
• EC will soon issue a new Directive on crisis management and resolution.
• Regarding the “ultimate challenge” of supervisory convergence, the speech calls for a “Single Guidebook” for supervisors, which would define common procedures across Europe.

• Dan Tarullo on Dodd-Frank Act implementation
• ‘The best way to avoid another TARP is for our large regulated institutions to have adequate capital buffers, reflecting the damage that would be done to the financial system were such institutions to fail.’
• No decision has yet been made on whether the tougher capital guidelines for large U.S. banks that are not on the global bank list will be in the form of a quantitative surcharge.

• IMF working paper: Safeguarding Banks and Containing Property Booms 

• Assesses effectiveness of macroprudential policies against a number of different indicators of property sector activity and financial stability.
• At cross-country level the use of LTV caps decelerates property price growth.
• Both LTV and DTI caps slow property lending growth.
• LTV caps also affect a broader range of financial stability indicators in economies with pegged exchange rates and currency boards.
• LTV tightening could affect property activity through the expectations channel rather than through the credit channel.

• BoE: Introduction of the Extended Collateral Term Repo Facility

• New contingency liquidity facility, the Extended Collateral Term Repo (ECTR) Facility, designed to mitigate risks to financial stability arising from a market-wide shortage of short-term sterling liquidity.

• Fed Board: Announces Chs & DChs of Fed Reserve Banks for 2012