RD News 6March12

• CPSS: Paul Tucker appointed Ch

• BIS: Collateral requirements for mandatory central clearing of over-the-counter derivatives
• By the end of 2012, all standardised over-the-counter (OTC) derivatives must be cleared with central counterparties (CCPs).
• Paper estimates the amount of collateral that CCPs should demand to clear safely all interest rate swap and credit default swap positions of the major derivatives dealers.
• Results suggest that major dealers already have sufficient unencumbered assets to meet initial margin requirements, but that some of them may need to increase their cash holdings to meet variation margin calls.
• Default funds worth only a small fraction of dealers' equity appear sufficient to protect CCPs against almost all possible losses that could arise from the default of one or more dealers, especially if initial margin requirements take into account the tail risks and time variation in risk of cleared portfolios.
• Concentrating clearing of OTC derivatives in a single CCP could economise on collateral requirements without undermining the robustness of central clearing.

• B Mahapatra (ED, RBI): Implications of Basel III for capital, liquidity and profitability of banks
• The costs for Indian banks will be less than those for banks from other jurisdictions.
• Indian banks generally have only very small trading books or exposures to complex financial instruments - the effect of Basel III on their capital structure will be “insignificant”.
• More than 50% of Indian banks would be able to implement the Basel III capital requirements without any phase in, owing to already high levels of capital. This entails a far lower impact on banks’ return on equity than for US or European banks.

• IMF: Balance-Sheet Shocks and Recapitalizations
• Gains from recapitalizing the financial sector in response to large but rare net worth losses are as large as those from eliminating business cycle fluctuations.
• Also find that:
• gains are increasing in the size of the net worth loss,
• are larger when recapitalization funds are raised from the household rather than the real sector,
• may increase with a reduction in financial intermediaries idiosyncratic risk.  

• BIS: A Comprehensive Look at Financial Volatility Prediction by Economic Variables
• Variables that proxy for credit risk and funding (il)liquidity consistently show up as common predictors of volatility across several asset classes.
• Variables capturing time-varying risk premia (such as valuation ratios for equities, or interest rate differentials in foreign exchange) also perform well as predictors of volatility.
• In contrast to these financial predictors, variables that proxy for macroeconomic conditions, are much less informative about future volatility.

• V K Sharma(ED, RBI): The framework for pre-empting systemic financial risks
• In India, we have had remarkable financial stability, not fortuitously, but thanks to pre-emptively and pro-actively delivered counter-cyclical prudential measures like the increase in risk weights for exposures to commercial real estate, capital market, venture capital funds and systemically important non-deposit accepting Non Banking Finance Companies (NBFCs).
• To contain potential systemic liquidity risk, the Reserve Bank has capped banks’ investments in Fixed Income Mutual Funds to 10% of their net worth.
• Monetary policy tools can also be deployed alongside the counter-cyclical prudential regulatory measures as a complementary companion tool to credibly, effectively and decisively address the build-up of systemic financial risks.
• The famous Taylor rule can be modified suitably to include, alongside inflation and GDP, additional terms representing systemic financial conditions based on the financial parameters for detecting asset bubbles and under-pricing of risks.

RD News 1March12

• Paul Tucker: National balance sheets and macro policy: lessons from the past 
• We must not rely entirely on central banks ‘mopping up’ after financial crises. Not only does it strain our capabilities ex post, it is counterproductive ex ante. If central banks are perceived as writing deep-out-of-the-money put options, then the market, believing it is protected by those tail-risk puts, will itself take more risks than otherwise. We need overall macro regimes that aim to make chronic imbalances and over-indebtedness less likely and less threatening.
• We must try to identify and remove microeconomic incentives that distort risk-taking behaviour into dangerous channels. And given the interconnectedness of global finance, we –especially in the UK – must be alert even to such distortions elsewhere. US housing finance was a domestic system whose structure led to problems with global spillovers.

• Lord May: Banking ecosystems interview
• Simplifying the system will help but banking also needs extra precautions against the ’super-spreaders’ of infection in the network. For example, during the SARS epidemic, certain individuals infected dozens of others while some infected very few. Applied to the banking system, problems at a major bank would infect many other institutions, while the closure of a small building society may have limited impact.
• “Excessively complicated ecosystems will be destabilised by their complexity,” he says. “There are more and more complicated products with faster and faster trading. I accept my financial knowledge is limited, but if I were supreme dictator I would ask whether we should be putting a limit on how fast you can trade.”

• Andrew Sheng: Greening urban growth: green grids of life, not gridlock
• System-wide problems cannot be solved partially. We need a systemic and systematic way of thinking and acting on the interactive and interconnected way the world evolves. Systems thinker Frithof Capra has argued that the "Development process is not purely an economic process. It is also a social, ecological, and ethical process - a multi-dimensional and systemic process".

 

• BoE: Martin Weale: From retailers’ paradise to shoppers’ strike: what lies behind the weakness in consumption?
• A tightening of the conditions on which credit is available and a fear that people will not be able to obtain credit in the event of an adverse shock to their income, will lead to an increase in saving.
• Tight credit has the effect of making consumption more sensitive to income and less sensitive to interest rates than it might otherwise be.

• IOSCO: Final recommendations on OTC derivative mandatory clearing
• Reuters report
• Recommends that the derivatives market and regulators should work together to decide which contracts should be centrally cleared.
• However, it also suggests that there should be a “top-down” approach, whereby supervisors have authority to instruct banks and clearing houses to clear certain broad classes of products even if a clearing house has yet to be licensed to do so.
• Exemptions from mandatory clearing should be narrowly defined and limited.

• IMF: Systemic Real and Financial Risks: Measurement, Forecasting, and Stress Testing
• Model for identifying real time systemic risks in the financial sector.
• The model provides forecasts of indicators of systemic real risk and systemic financial risk based on density forecasts of indicators of real activity and financial health.
• It includes stress-tests as measures of the dynamics of responses of systemic risk indicators to structural shocks identified by standard macroeconomic and banking theory.

RD News 27Feb12

• World Bank: China needs reform to support growth
• Reforms should include commercializing the banking system, gradually removing interest rate controls, deepening the capital market and further developing independent and strong regulatory bodies to support the eventual integration of China’s financial sector within the global financial system.
• Financial reforms in the next two decades should be decisive, comprehensive and well-coordinated, following a properly sequenced roadmap. A priority is to liberalize interest rates according to market principles.
• China's leaders have promised repeatedly to support entrepreneurs who create new jobs and wealth. But most bank lending still goes to state companies, and Beijing's huge stimulus in response to the 2008 crisis set back reforms by pouring money into government industry while thousands of private companies went bankrupt.

• Andy Haldane: UK Banking must change to serve SMEs
• "UK needs structural reconfiguration of the banking industry to ensure that SMEs have the financing they need to be tomorrow's growth."

• EC: High-Level Expert Group to Investigate Structural Reform for EU Banks - mandate
• List of members
• Erkki Liikanen, Gov Bank of Finland
• Jose Manuel Campa, Spanish Finance Minister, 09-11
• Louis Gallois, CEO EADS
• Monique Goyens, Director General BEUC
• Jan Pieter Krahnen, Ch Corporate Finance Goethe-Universitat
• Allessandro Profumo, CEO UniCredit 97-10
• Carol Sargeant, CRO Lloyds 04-10
• Zdenek Tuma, Governor Czech National Bank 00-10
• Herman Wijffels, ED World Bank 06-08
• The group “should have regard to ongoing regulatory reform in the EU and globally and should assess the added value of structural reform”, and should pay “particular attention to ongoing structural reforms” such as the US Volcker Rule and the UK Independent Commission on Banking.
• The group is tasked with giving recommendations to reduce the risks of the banking system as a whole, to reduce the risks that individual firms pose to the financial system, to reduce moral hazard, and to promote competition, while maintaining the integrity of the internal market.
• The group will conduct hearings and consultations, scheduled to report by the end of summer 2012. 

• IOSCO: Suitability Requirements with respect to the Distribution of Complex Financial Products
• “the growing complexity of financial products and financial innovation may make the associated investment risks less apparent to investors”, particularly when products are idiosyncratic.
• The responsibilities of intermediaries with respect to ensuring that products are suitable for particular types of clients.
• Outlines a number of principles for assessing suitability and for ensuring adequate disclosure about investment risks.

• William Dudley (Pres NY Fed): Fiscal Challenges
• The US faces substantial fiscal challenges in the years ahead. And, in one important respect—net interest expense—these challenges may be more daunting than fully appreciated currently. In particular, the interest bill on the growing federal debt burden has been temporarily restrained by the low level of interest rates and high level of remittances from the Federal Reserve to the Treasury.
• In addition, while significant fiscal adjustments must take place, it is important to recognize that such efforts will necessitate offsetting shifts in private domestic spending and production both here and abroad.

• Warren Buffett: Annual Shareholder Letter
• Washington Post report
• Buffett’s replacement decided, but not revealed.