While banking is procyclical, the capital framework is largely static. The countercyclical capital buffer is discretionary, with potential danger of inaction, and is also limited in scale. This column proposes an expanded capital conservation buffer, which would act as an automatic stabiliser. This could incorporated in the next Basel review and the upcoming Solvency II review.
Financial regulation and banking
A new EU directive proposes important reforms to member countries’ corporate insolvency processes. This column argues that the directive is a step in the right direction but that it has crucial flaws in the way it envisions restructuring and priority of creditors. It also proposes a system – comparable to the US approach – in which restructuring and liquidation are alternative options triggered by insolvency, and that respects the absolute priority of creditors.
Financial crises play a key role in changing existing policies concerning financial markets and institutions. This column provides new evidence for the negative impact of financial crises on the process of financial liberalisation. It also shows, however, that such interventions are only temporary and that the liberalisation process resumes quickly after a crisis. These results support the view that governments use short-term policy reversals as a tool to ease crisis pressures.
Deviations from covered interest parity represent, in theory, an arbitrage opportunity. This column shows that post-crisis, financial regulation may explain why this mispricing persists and cannot be arbitraged away. It also finds that more constrained dealers demand an extra premium from their clients for synthetic dollar funding relative to direct dollar funding, resulting in deviations in covered interest parity.
The stability of the financial system depends on the capital of banks and other financial institutions. But the measurement of bank capital depends on regulatory accounting methods, which, as events a decade ago showed dramatically, do not always reflect economic realities in a timely fashion. This column argues that market-based measures should play a greater role in regulatory assessment than is current practice, in particular in stress tests.
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18 - 20 July 2019 / Columbia University & Federal Reserve Bank of New York, NYC, USA / Central Bank Research Association (CEBRA)
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17 - 18 August 2019 / Peking University, Beijing / Chinese University of Hong Kong – Tsinghua University Joint Research Center for Chinese Economy, the Institute for Emerging Market Studies at Hong Kong University of Science and Technology, the Guanghua School of Management at Peking University, the Stanford Center on Global Poverty and Development at Stanford University, the School of Economics and Management at Tsinghua University, BREAD, NBER and CEPR
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