The negative impact of higher capital requirements under Basel II on the provision of trade finance has been cited as one of the factors behind the Great Trade Collapse. This column exploits the adoption of the Basel II framework in Turkey in 2012 to investigate how a shock to the supply of trade-specific finance (in this case, letters of credit) affected firm-level exports. Changes in the cost of letters of credit affected Turkish firms’ reliance on trade finance, but the regulatory shock did not affect firm-level export growth.
Banu Demir Pakel, Tomasz Michalski, Evren Örs, 20 January 2017
Stephen Cecchetti, Kim Schoenholtz, 15 August 2016
The UK’s Brexit referendum is providing us with the first significant test of the new regulatory system. This column asks whether banks have sufficient capital and liquidity to withstand the ‘shock’. Unless the global financial system as a whole is well capitalised, it remains only as strong as its weakest link. And while the UK authorities have done a reasonable job of strengthening their banks and financial system, a number of large European banks are seriously undercapitalised.
Kebin Ma, 09 May 2016
Bank liquidity is a key component of the post Global Crisis environment. In this video, Kebin Ma discusses the interaction between market liquidity risk and funding liquidity risk. Capital requirements for preventing bank losses might not be as effective as we thought. The video was recorded in April 2016 at the First Annual Spring Symposium on Financial Economics organised by CEPR and the Brevan Howard Centre at Imperial College.
David Miles, 03 May 2016
Capital requirements for banks are a key issue in the post-Crisis environment. In this video, David Miles discusses the importance of creating incentives for banks to start using equity rather than debt to finance themselves. The combination of asymmetric information and limited liability can give banks an incentive to take on more risk; capital requirements would force banks to take on less risk. This video was recorded in April 2016 at the First Annual Spring Symposium on Financial Economics organised by CEPR and the Brevan Howard Centre at Imperial College.
Avinash Persaud, 14 April 2016
Since the breakup of Bretton Woods in the early 1970s, the housing market has been at the centre of the biggest banking crises across the world. This column considers the nexus between housing, banking, and the economy, and how these ties can be broken. It argues for two modest regulatory changes in banking and insurance. These would result in life insurers and pension funds providing mortgage finance, better insulating the economy and homeowners from the housing cycle.
Jochen Andritzky, Niklas Gadatsch, Tobias Körner, Alexander Schäfer, Isabel Schnabel, 04 March 2016
The excessive exposure of banks to sovereign debt continues to threaten the stability of the Eurozone. Based on a recent proposal by the German Council of Economic Experts, this column suggests steps towards severing the sovereign-bank nexus. The loss-absorption capacity of banks could be increased through risk-adjusted large exposure limits and risk-adequate capital requirements.
John Vickers, 15 February 2016
Much stronger capital buffers are fundamental to banking reform. But seven years on from the Global Crisis, the question of how much stronger has not been fully decided. This column reviews the Bank of England’s recently published framework for the systemic risk buffer. It is suggested that the Bank should go further than it proposes, and require stronger capital buffers for systemically-important retail banks.
Dennis Bams, Magdalena Pisa, Christian Wolff, 16 December 2015
Small businesses are the engine of innovation and job creation, and Basel regulation acknowledges their special role and discounts the capital requirements for loans to small firms. This column argues that the Basel requirements overstate the riskiness of small businesses, and that retail exposures are a much safer investment than previously thought. By forcing banks to hold a disproportionately higher amount of capital against such loans, Basel can unintentionally harm lending to small private firms.
Taylor Begley, Amiyatosh Purnanandam, Kuncheng Zheng, 08 May 2015
A key regulatory response to the Global Crisis has involved higher risk-weighted capital requirements. This column documents systematic under-reporting of risk by banks that gets worse when the system is under stress. Thus banks’ self-reported levels of risk are least informative in states of the world when accurate risk measurement matters the most.
Xavier Vives, 17 March 2015
The 2007–08 crisis revealed regulatory failures that had allowed the shadow banking system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between these two approaches. Ring-fencing may make banking groups more easily resolvable and therefore lower the cost of imposing market discipline.
Piotr Danisewicz, Dennis Reinhardt, Rhiannon Sowerbutts, 05 March 2015
In a global financial system, macroprudential policies may create international spillovers. This column presents new evidence on how the organisational structure of a bank affects the magnitude of these spillovers. An increase in capital requirements at home causes foreign branches to reduce their lending growth to other banks operating in the UK more than foreign subsidiaries do. Seemingly, this is because branches are an integral part of the parent company.
Jon Danielsson, Eva Micheler, Katja Neugebauer, Andreas Uthemann, Jean-Pierre Zigrand, 23 February 2015
The proposed EU capital markets union aims to revitalise Europe’s economy by creating efficient funding channels between providers of loanable funds and firms best placed to use them. This column argues that a successful union would deliver investment, innovation, and growth, but it depends on overcoming difficult regulatory challenges. A successful union would also change the nature of systemic risk in Europe.
Philippe Karam, Ouarda Merrouche, Moez Souissi, Rima Turk, 02 February 2015
In the wake of the Crisis, policymakers have introduced liquidity regulation to promote the resilience of banks and lower the social cost of crisis management. This column shows that a funding liquidity shock, manifested as lower access to wholesale sources of funding following a credit rating downgrade, translates into a significant decline in both domestic and foreign lending. Liquidity self-insurance by banks mitigates the impact of a credit rating downgrade on lending.
Xavier Vives, 22 December 2014
Banking has recently proven much more fragile than expected. This column argues that the Basel III regulatory response overlooks the interactions between different kinds of prudential policies, and the link between prudential policy and competition policy. Capital and liquidity requirements are partially substitutable, so an increase in one requirement should generally be accompanied by a decrease in the other. Increased competitive pressure calls for tighter solvency requirements, whereas increased disclosure requirements or the introduction of public signals may require tighter liquidity requirements.
Stephen Cecchetti, 17 December 2014
Regulators forced up capital requirements after the Global Crisis – triggering fears in the banking industry of dire effects. This column – by former BIS Chief Economist Steve Cecchetti – introduces a new CEPR Policy Insight that argues that the capital increases had little impact on anything but bank profitability. Lending spreads and interest margins are nearly unchanged, while credit growth remains robust everywhere but in Europe. Perhaps the requirements should be raised further.
Stephen Cecchetti, 17 December 2014
Regulators forced up capital requirements up after the Global Crisis – triggering fears in the industry of dire effects. CEPR Policy Insight 76 – by former BIS Chief Economist Steve Cecchetti – argues that the capital increases had little impact on anything but bank profitability. Lending spreads and interest margins are nearly unchanged, while credit growth remains robust everywhere but in Europe. Perhaps the requirements should be raised further.
Christian Thimann, 17 October 2014
Having completed the regulatory framework for systemically important banks, the Financial Stability Board is turning to insurance companies. The emerging framework for insurers closely resembles that for banks, culminating in the design and calibration of capital surcharges. This column argues that the contrasting business models and balance sheet structures of insurers and banks – and the different roles of capital, leverage, and risk absorption in the two sectors – mean that the banking model of capital cannot be applied to insurance. Tools other than capital surcharges may be more appropriate to address possible concerns of systemic risk.
Patricia Jackson, 13 October 2014
Following the Global Crisis the focus has been on how to make banks safer. Capital and liquidity requirements have been tightened, but attention now needs to shift to corporate governance and risk culture. This column argues that in opaque organisations, formal risk-appetite frameworks can provide a pre-commitment mechanism that tightens risk governance, but a focus on the wider risk culture is also important.
Christian Thimann, 10 October 2014
Regulation of the global insurance industry, an emerging challenge in international finance, has two central objectives: strengthening the oversight of insurance companies designated ‘systemically important’; and designing a global capital standard for internationally active insurers. This column argues that it is a Herculean task because the business model of insurance is less globalised than other areas in finance; because global regulators have less experience of insurance than banking where global standards have been pursued for a quarter of a century; and because, as yet, there is limited research-based understanding of the insurance business and its interactions with the financial system and the real economy. But in the aftermath of the global financial crisis and the AIG disaster, regulators are under strong pressure to make progress.
Olivier Blanchard, 03 October 2014
Before the 2008 crisis, the mainstream worldview among US macroeconomists was that economic fluctuations were regular and essentially self-correcting. In this column, IMF chief economist Olivier Blanchard explains how this benign view of fluctuations took hold in the profession, and what lessons have been learned since the crisis. He argues that macroeconomic policy should aim to keep the economy away from ‘dark corners’, where it can malfunction badly.