RD News 2Dec11

• BCBS Consultative doc: The internal audit function in banks
• Require banks to have an internal audit function with sufficient authority, stature, independence, resources and access to the board of directors.
• Management must take appropriate corrective action in response to internal control weaknesses identified by internal auditors.
• Document based on 20 principles, organised in three sections:
• Supervisory expectations relevant to the internal audit function.
• The relationship of the supervisory authority with the internal audit function.
• Supervisory assessment of the internal audit function.

• IMF: Credit Growth and Bank Soundness: Fast and Furious?
• Rapid credit growth during the last decade weakened banks as credit became less dependent on bank soundness—an effect that was most pronounced in banks that were growing particularly fast, and during overall boom episodes in credit markets.
• Foreign banks seemed willing to take on greater risks than domestic banks - cross-border spillovers are an issue.
• The rapid growth of weak banks during booms drives the process linking credit booms to financial instability episodes.

• IMF: The Relative Volatility of Commodity Prices: A Reappraisal

• On average, the prices of individual primary commodities may be less volatile than those of individual manufactured goods.
• Stability problems for developing economies may have more to do with excessive concentration in primary commodities, rather than volatile prices themselves.
• In the context of the G20’s commitment to combat commodity price volatility, which has tended to focus on the role that financial innovation has played in commodity markets (consequently placing a lot of emphasis on financial regulation), this study indicates that there are more factors in play when it comes to macroeconomic stability than just financial services.

• Christian Noyer (Gov, Bank of France; Ch BIS Board):Europe – a financial crisis, not a monetary one
•  Europe is the most financially integrated area in the world. There is full capital mobility, financial regulation is almost totally harmonized, financial infrastructures and payment systems are closely interconnected.
• An integrated financial system may be efficient, but not necessarily robust.
• The more complex and interconnected it gets, the more vulnerable it is when exposed to small, and localized, shocks.
• Three separate dynamics at work:
• Between solvency and liquidity – the distinction has become blurred.
• Between sovereigns and banks. Sovereign CDSs act as floors to bank CDSs and, conversely, banks’ creditworthiness depends on their exposure to sovereign risk. This circularity creates powerful feedback loops.
• Interbank relationships - counterparty risk between financial intermediaries depends as much on perception as on reality.
• The essential weakness of Europe does not primarily lie in the fragility of any of its components. Europe’s fragility comes from its difficulty to organize and manage, in times of crisis, the complex interactions occurring at the heart of its financial system.

• BoE: Andrew Gracie appointed Director of the Special Resolution Unit
• Under the Banking Act 2009, the Bank was made responsible for a Special Resolution Regime for dealing with distressed banks. When a firm fails, the Bank acts to safeguard the public interest, including the maintenance of financial stability, the preservation of continuity in banking services and the protection of depositors, all at the lowest possible cost to the public.