Examines “whether banks in Asian jurisdictions have in fact been provisioning in a fashion that reduces financial system procyclicality.”
“The analysis of Asia’s post-financial crisis experience should be of interest to the many national and international authorities that are now considering measures to promote more forward-looking provisioning practices, so that banks enter periods of worsening credit quality with higher levels of reserves, providing a buffer to reduce the downward pressure on earnings and capital that would otherwise occur.”
Main findings:
Japanese banks show procyclical provisioning;
Countercyclical loan loss provisioning by banks dominates throughout emerging Asia, and most strikingly so in India;
The degree to which policy initiatives were responsible for this, as opposed to simply more prescient behaviour on the part of banks, remains a subject for future investigation.
Collection of papers relating to a 2011 workshop look at issues of cross-border flows and some of the difficulties encountered in trying to develop towards the ideal of a “globally consolidated balance sheet”.
The discussion paper for the workshop argues that an inability to “see” such a balance sheet at the level of institutions or even nations, means that systemic risks cannot be monitored, and that a globally consolidated approach to measuring the ‘where’, ‘who’ and ‘how’ of financial exposures is needed.
The Irving Fisher Committee on Central Bank Statistics (IFC) has said it will produce a further discussion paper to follow up this work.
Chapter 3 probes the implications of recent reforms in the financial system for market perception of safe assets.
Notes the likely trend for a rise in the demand for safe assets at a time when there is likely to be a restricted supply. Useful boxes contain an analysis of the effect of Basel III and the changes to the OTC derivative market on the demand for safe assets.
(Chapter 4 investigates the growing public and private costs of increased longevity risk from aging populations.)
Reflects on the causes and consequences of the financial crisis, the authorities’ response and the changing structure of financial regulation in the UK (BoE news release summary here).
Contributions from Jaime Caruana (p2) and Paul Tucker (p8), as well as discussion of the evolution of the business models of financial institutions (p2-6) and of risk weighting of sovereign debt (p13).
Capital regulation – as well as a firm-based approach to capital regulation we need the creation of a more systemic, or macroprudential, component of capital regulation.
Basel is assessing the consistency of risk-weighting practices by banks.
Liquidity standards:
Liquidity Coverage Ratio (LCR), is designed to ensure a firm’s ability to withstand short-term liquidity shocks through adequate holdings of highly liquid assets.
Net Stable Funding Ratio (NSFR), is intended to avoid significant maturity mismatches over longer-term horizons.
SIFI failure resolution:
The coexistence of internationally active firms with nationally based insolvency regimes means that there could be important cross-border legal complications when a home jurisdiction places into receivership a firm with significant assets, subsidiaries, and contractual arrangements in other countries.
A comprehensive, treaty-like instrument for a global bank resolution regime is an unrealistic prospect for the foreseeable future.
Regulatory reform should reinvigorate the principle that risks and returns have to be closely aligned:
Market participants must be held responsible for their actions, the possibility of losses or even default is a constitutive element of any functioning market, and the financial markets are no exception.
The financial system plays an indispensable role in fostering innovation and growth. This role has never been static: it is evolving constantly. And throughout history, this process has been accompanied by exaggerations.
The continuing, never-ending challenge of financial market regulation is to limit the latter without stifling the undeniably beneficial forces at work in the financial system – we have to tame market forces and self-interest, but should not exorcise them.
Congressman Barney Frank, one of the architects of the Dodd-Frank Act, has urged regulators to simplify the rule and release a new version by 3 September.
Frank’s proposal is for regulators to issue guidance on the time period between 21 July and 3 Sept, and then subject a simplified version to a two year review period, throughout which regulators would be able to learn from experience.
BCBS is set to allow all bank deposits at central banks with a maturity period of under 30 days to be classified as short-term liquid assets, eligible for inclusion in the new liquidity coverage ratio (LCR) buffer.
Previously it had been expected that only 50% of these deposits could be used to meet banks' liquidity requirements.
The FSB will facilitate the formation of a joint private sector task force to develop principles for improved disclosures based on current market conditions and risks, including ways to enhance the comparability of disclosures. The task force will be encouraged to have dialogue with standard-setting bodies.
The FSB will also ask the task force to identify leading practice risk disclosures presented in annual reports for end-year 2011.
Possible shadow banking entities and activities on which the Commission is currently focussing its analysis:
Special purpose entities which perform liquidity and/or maturity transformation; for example, securitization vehicles such as ABCP conduits, Special Investment Vehicles (SIV) and other Special Purpose Vehicles (SPV)
Money Market Funds (MMFs) and other types of investment funds or products with deposit-like characteristics, which make them vulnerable to massive redemptions ("runs")
Investment funds, including Exchange Traded Funds (ETFs), that provide credit or are leveraged
Finance companies and securities entities providing credit or credit guarantees, or performing liquidity and/or maturity transformation without being regulated like a bank.
FSB rough estimate of the size of the global shadow banking system € 46trillion in 2010, having grown from € 21 trillion in 2002. This represents 25-30% of the total financial system and half the size of bank assets.
In the US, this proportion is even more significant, with an estimated figure of between 35% and 40%.
The loosening in monetary policy undertaken in recent years encourages people to spend more and save less, and slows the reallocation of capital and labour to more productive uses.
“Loose monetary policy can in part be thought of as a form of forbearance: putting off difficult changes and adjustments to a later day”. Monetary policy must trade off short-term support against stifling long-term change.
U.S. financial institutions have very limited direct net credit exposures to the most vulnerable euro-area countries, and U.S. ssss
Although U.S. banks have limited exposure to peripheral European countries, their exposures to European banks and to the larger, “core” countries of Europe are more material. Moreover, European holdings represented 35% of the assets of prime U.S. money market funds in February, and these funds remain structurally vulnerable despite some constructive steps, such as improved liquidity requirements, taken since the recent financial crisis.
Commenting on the announcement, Sir Mervyn King said, “I am sad that Hector Sants has decided to stand down. I am very grateful to him for staying on for longer than he had planned."
The Bank will work closely with HM Treasury in searching for the first Chief Executive of the Prudential Regulation Authority (PRA) who will also be the Deputy Governor with responsibility for Prudential Regulation. That appointment will be made by the Chancellor. The person appointed will take up the position when the PRA comes into existence in 2013.
It is the complexity of an interconnected financial system, and not the absolute size of the ‘shadow banking’ system, which are relevant for financial stability.
Three big risks from shadow banking:
the procyclicality which results from secured finance and mark-to-market accounting;
non-transparent maturity transformation in long, complex chains;
the relationship between funding and market liquidity.
Recommends a “bias to prudence”, and a “bias against complex interconnectivity”.
Encourages further work to be done to improve the role of external audits in providing information to regulators and supervisors.
Includes work which will improve the information produced by external audits, as well as work to improve audit regulation to improve the quality of audits.
Emphasises the importance of audits, and notes its view that greater international consistency in external audit practices will be beneficial for audit quality.
IOSCO have launched a consultation on 15 high level principles for the regulation of exchange traded funds (ETFs), falling into three categories: classification and disclosure; marketing and sales; and structuring of ETFs.
ETFs have been highlighted by regulators as a potential source of systemic risk for the financial system, due to rapid growth in the size of the market, and the increasing complexity of some products which fall under the name of ETFs.
IOSCO are inviting comment on whether the principles will address financial stability concerns, and whether further work is required on ETFs and broader subjects relevant to their regulation. The principles outline actions that regulators should both “encourage” and “consider imposing”, ranging from disclosure requirements on the workings of particular ETFs, to compliance functions and potential sources of systemic risk. The deadline for consultation is 27 June 2012.
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).
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.
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?”)
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.
