RD News 14March12

• BIS: Speech by Tiff Macklem, Senior Deputy Governor of the Bank of Canada: Promoting growth, mitigating cycles and inequality – the role of price and financial stability
• Markets work better than anything else at delivering opportunity and prosperity.
• An efficient and resilient financial system is an essential enabler to growth and inclusion.
• Markets only work well within sound policy frameworks. All markets – and financial markets in particular – need clear rules, diligent oversight, and consistent enforcement of the rules. Systemic crises are not the inescapable product of capitalism, and inequality is not the necessary by-product of growth.

• BoE: Speech by Andrew Haldane drawn from a paper written jointly with two Bank colleagues, Robleh Ali and Paul Nahai-Williamson: Towards a common financial language
• The recent financial crisis exposed failures in the information systems of many firms, with few having the means to aggregate quickly information on exposures and risks.
• There are no technological barriers to a transformation in finance similar to that of product supply chains and the World Wide Web, where the adoption of a common language has delivered huge improvements in system resilience and productivity. Four potential benefits:
• improvements in risk management in firms;
• improvements in risk management across firms;
• mapping the financial network could be comprehensively improved, both in terms of granularity but also timeliness;
• help lower barriers to market entry in banking and “…might even begin to erode the too-big-to-fail problem through market forces”.

• The Federal Reserve has announced summary results of the latest round of bank stress tests (the Comprehensive Capital Analysis and Review 2012).
• Methodology and Results for Stress Scenario Projections
• Press release:
• The tests show that the majority of the largest US banks would continue to meet supervisory expectations for capital adequacy despite large projected losses in an extremely adverse hypothetical economic scenario.
• This time around banks are not expected to be required to raise capital.
• According to the Fed banks that participated in both 2011 and 2012 stress testing have increased their capital to $759 billion in the fourth quarter of 2011 from $420 billion in the first quarter of 2009.

• ECB: Publication: The great financial crisis: Lessons for financial stability and monetary policy. An ECB colloquium held in honour of Lucas Papademos, 20-21 May 2010
• Comment by Paul Tucker on p22.

RD News 13March12

• BoE:
• Speech by Paul Tucker: Insurance, stability and the UK’s new regulatory architecture (see also BoE news release summary)
• Speech by Paul Fisher: Policy making at the Bank of England: the Financial Policy Committee (see also BoE news release summary)
• the new arrangements for macroprudential policy in the Financial Policy Committee (FPC) are “truly ground-breaking”, but the effective implementation of macroprudential frameworks “offers plenty of challenges”
• the pursuit of financial stability “does not mean eliminating all risk”
• the FPC will hold its fourth meeting on Friday 16 March, where macroprudential tools will be discussed, following a period of consultation

• ICFR - Financial Times Research Prize (The contest asked: “What does good regulation look like?”)
• Winning paper: Good Financial Regulation: Changing the Process is Crucial by Connel Fullenkamp (Prof of Economics at Duke University) and Sunil Sharma (Dir of the IMF-Singapore Regional Training Institute)
• laments the lack of international co-ordination between regulators
• calls for the establishment of at least one body with oversight of the entire financial system
• calls for existing regulatory agencies to be financially independent, funded through a levy on the financial system
• Runners-up:
• What does good regulation look like? by Ceyla Pazarbasioglu (IMF), Noel Sacasa (HKMA), Amadou N R Sy (IMF)
• Note discussion of risk weights and risk limits on p6
• Good Banking Regulation Needs Clear Focus, Sensible Tools, and Political Will by Anat R Admati (Stanford University) and Martin F Hellwig (Max Planck Institute for Research on Collective Goods)
• Highly-commended:
• Good Regulation Needs to Fix the Broken Incentives by Martin Čihák (World Bank), Asli Demirgüç-Kunt (World Bank), and R Barry Johnston (World Bank)   
• The Shape of Regulation to Come by José Jorge (University of Porto)
• From Deregulation to Reregulation: Prospects for Success (or Failure) by Laura Kodres (IMF) and Aditya Narain (IMF)
• What is Good Financial Regulation After the 2008 Financial Crisis? by Demis Mavrellis (Atlantic Council)     
• Beyond Legal Entity Identifier: An Information Infrastructure for Monitoring Systemic Risk by Sharada Alampalli (University at Albany)     
• What Does Good Regulation Look Like? An Alternative Institutional Framework to Financial Regulation by Zoltán Sárkány (Queen Mary, University of London)   

RD News 12March12

• BIS: Quarterly review, March 2012
• Highlights of the BIS international statistics by Stefan Avdjiev and Andreas Schrimpf
• Bank stock returns, leverage and the business cycle by Jing Yang and Kostas Tsatsaronis
• Results of the analysis provides support for the regulatory reform embodied in the most recent revision of the Basel prudential framework for banks. In particular, they suggest that higher capital requirements can be beneficial to equity investors by restraining bank leverage, and provide an additional rationale for the introduction of countercyclical capital buffers.

• Speech by Benoît Coeuré (Member of the Exec Board of the ECB): The reform of financial regulation – priorities from an European Central Bank perspective. Three main issues of special importance from the ECB’s perspective are:
• Timely and consistent implementation of the new Basel III framework.
• Ongoing work to address the “too big to fail” problem, particularly within the specific EU landscape.
• OTC derivatives, market infrastructures, and the MiFID review.

• IMF working paper: Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking by Gianni De Nicolò, Andrea Gamba and Marcella Lucchetta

• Debate on transaction tax heats up in Europe

• ECB working paper: CISS – A composite indicator of systemic stress in the financial system by Dániel Holló, Manfred Kremer and Marco Lo Duca

• Federal Reserve Board, International Finance Discussion Paper: The Effect of TARP on Bank Risk-Taking by Lamont Black and Lieu Hazelwood

RD News 8March12

• CCMR: Inadequate Cost-Benefit Analysis Opens Dodd-Frank Rulemaking to Challenge and Delay
• Over a quarter of the 192 rules have no cost-benefit analysis at all.
• Over a third have entirely non-quantitative cost-benefit analysis.
• The majority of the 50 rules that do contain quantitative analysis limit it to administrative and similar costs, but ignore the Rule’s expected broader economic impact.

• Deutsche Bundesbank: Executive board composition and bank risk taking
• The socioeconomic composition of executive boards impacts banks’ risk taking, with more risk taking at banks managed by younger executives and banks with a higher proportion of female board members, and less risk taking at banks with a higher proportion of executives with PhDs.
• The first of these is statistically significant and with an economically large effect; the second is found to have an economically marginal effect; while the third is statistically significant but with a small effect.
• The study was conducted using data from all German banks between 1994 and 2010.

• FSB: Technical features of the Legal Entity Identifier
• Work is proceeding intensively under five workstreams - each having its own mandate and deliverables:
• governance;
• operational model;
• scope, confidentiality and access;
• funding;
• implementation and phasing.

• Kiyohiko G Nishimura(Dep Gov, Bank of Japan): What should we learn from the Eurozone Crisis? A regulatory-reform perspective
• Increasing capital buffers may contribute to maintaining a bank’s solvency over the medium term, but increasing banks’ capital burden in a stressful time might create an adverse feedback loop of intensified capital constraints, weak bank lending and economic slowdown, thus accelerating the bank deleveraging that could lead to a devastating credit crunch.
• Regulatory changes often have unintended and sometimes considerable cross-border impacts in the increasingly integrated world of finance, as evidenced by the leveraging rule and other regulatory changes of 2004 on European financial institutions, and now possibly by the Volcker Rule on non-U.S. financial institutions.

• IMF: Bank Asset Quality in Emerging Markets: Determinants and Spillovers
• There are significant links between banks’ asset quality, credit and macroeconomic aggregates.
• Lower economic growth, an exchange rate depreciation, weaker terms of trade and a fall in debt-creating capital inflows reduce credit growth while loan quality deteriorates.
• This analysis was used in th Global Financial Stability Report (Sept11) to help evaluate the sensitivity of banks’ capital adequacy ratios to macroeconomic and funding cost shocks.

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.