RD News 13Feb12

• BIS: Jaime Caruana: Building a resilient financial system - Presentation
• Aim - a financial system characterised by less leverage, better risk management especially for liquidity, better incentives, less moral hazard, stronger oversight and more transparency.
• A globalised financial system requires global rules. This does not mean that identical rules must be applied for every country or region. But it does mean that, to be effective, financial regulation and supervision should be guided by broadly consistent approaches. The alternative is a race to the bottom as market players seek to arbitrage across divergent national regimes – and no financial centre would want to win such a race.
• The rules for the countercyclical buffer also represent an important step forward in terms of home-host cooperation. They require an internationally active bank to take account of the prevailing buffers in each jurisdiction in which it has a credit exposure in calculating its overall capital requirement. In other words, a host supervisor can increase the capital buffer required of a foreign-headquartered bank if this is called for by domestic conditions.
• The Basel Framework lets banks use their own internal data and models as inputs for the calculation of capital requirements, so that some variation in risk-weighted assets is inevitable.
• That said, these calculations do vary enough to warrant further investigation. The bottom line is that minimum capital requirements must accurately reflect the risk that banks actually face. Regulators are therefore doing studies based on benchmark or hypothetical portfolios.
• Shadow banks - we should enhance the oversight and consider regulation of the shadow banking system in areas where systemic risk and regulatory arbitrage evidently pose risk.

• EBA: aggregate assessment of banks’ capital plans
• EBA had stressed that capital raising should not impact lending to the real economy through excessive deleveraging, but should instead be met by direct capital raising or curbing discretionary payouts.
• Plans submitted by European banks “are not viewed as having a negative impact” on lending, with the impact being “less than 1% of the total amount”. Further, the plans suggest a capital surplus of 26%, giving room for flexibility. Direct capital raising will account for the majority of action taken.

• IMF: The Global Macroeconomic Costs of Raising Bank Capital Adequacy Requirements
• A single percentage point increase in capital requirements for all banks globally would cause a peak reduction of 0.5% of GDP, with higher losses for emerging markets than advanced economies.

• IMF: Short-term Wholesale Funding and Systemic Risk: A Global CoVaR Approach
• Short-term wholesale funding is a key determinant in triggering systemic risk episodes.
• No evidence that a larger size increases systemic risk within the class of large global banks.
• The sensitivity of system-wide risk to an individual bank is asymmetric across episodes of positive and negative asset returns.
• Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee’s proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.

• ECB: Benoît Coeuré: Global liquidity and risk – a re-interpretation of the recent crises
• The self-reinforcing interaction between risk appetite and liquidity ultimately determines the relationship between the official and the overall level of global liquidity.
• Private liquidity is created to a large degree through cross-border operations of banks and other financial institutions, and increasingly within the shadow banking system.
• In normal times, private liquidity dominates official liquidity. But private liquidity is highly procyclical and highly endogenous to the conditions that prevail in the global financial system.
• The inherent endogeneity of private liquidity means that it can easily evaporate in times of financial stress.
• The pro-cyclicality is documented via the strong interaction of private liquidity and the global risk appetite of financial institutions. Indeed, the global risk appetite is one of the main determinants of the multiplier that links levels of overall liquidity to levels of official liquidity.

• H R Khan (Dep Gov RBI): Understanding psychology for responsible financial behaviour
• All of us could use the findings of behavioral economics in our daily lives as well as in policy making.
• The important lesson of life is that we should not evolve into insensitive individuals who care only for short term monetary gains by putting at stake ethics and moral values, thereby disrupting the financial system and causing huge social and economic damage.