RD News 9May12

• BIS working paper: When capital adequacy and interest rate policy are substitutes (and when they are not) by Stephen G Cecchetti and Marion Kohler
• Uses a simple macroeconomic model to study the extent to which capital adequacy requirements and interest rates might be substitutes in meeting the objective of stabilising the economy.

• Speech by Andreas Dombret: Europe’s solution for too-big-to-fail
• The G20’s solution proposal for new SIFI rules are built on two pillars:
• The likelihood of a SIFI failing has to be reduced, meaning that SIFIs are to be more resilient, mainly through specific capital surcharges that go beyond the requirements of Basel III.
• The restructuring or resolution of a SIFI is to be made possible in future without jeopardising financial stability and without having to resort to taxpayers’ money.

• Speech by Paul Tucker: Resolution – a progress report
• Progress report on global planning for resolution regimes aimed at addressing the problem of Too Big To Fail. 
• Stresses that a robust, credible resolution regime “... can lead to a much better financial system, with stronger market discipline and so less stability-threatening imprudence.”
• Examines the issue of the trigger for resolution, which some have criticised for being unclear, adding uncertainty to the resolution process.
• The EU directive on resolution regimes will be “…crucial in giving us all the tools we need”; with Dodd-Frank already in place, “…it will help set the tone for the world.”

• IMF working paper: Bank Capitalization as a Signal by Daniel C Hardy
• The level of a bank‘s capitalization can effectively transmit information about its riskiness and therefore support market discipline, but asymmetry information may induce exaggerated or distortionary behavior: banks may vie with one another to signal confidence in their prospects by keeping capitalization low, and banks‘ creditors often cannot distinguish among them - tendencies that can be seen across banks and across time.

• Speech by William C Dudley (President & CEO, NYFed): What Does Interconnectedness Imply for Macroeconomic and Financial Cooperation?
• Likens the connection between the economic policy making of different countries to “the Prisoner’s Dilemma—a non-cooperative approach will lead to inferior results for both players compared to a cooperative approach in which each side foregoes the chance for highest potential payoff in exchange for the payoff that maximizes returns jointly.”
• Observations on the regulatory side:
• “Essential that regulations be harmonized internationally to a much greater degree than in the past.”
• “Critical that the harmonized regulations produce something that is coherent and effective on an international level, and that the different regimes in specific jurisdictions add up to a workable whole.”
• “Regulatory harmonization and cooperation, by necessity requires trust and a willingness to share relevant information across jurisdictions.”
• “We live in a globalized world both with respect to the macro-economy and the financial system. But too often we set macroeconomic policy and regulatory policy at a national level, and miss important opportunities to coordinate and make the global economic and financial system stronger overall.”
• “We need to understand where greater global perspective is required and we need to apply that perspective consistently across jurisdictions in a timely manner. If we don’t do this, we won’t achieve all the benefits that are possible from global specialization and we will continue to run significant risks with respect to financial stability.”