Stephen Cecchetti, Kim Schoenholtz, 09 May 2018

Gene Ambrocio, Esa Jokivuolle, 14 May 2018

The Basel III reform raised banks’ capital requirement per risk-weighted assets considerably, while risk weights were largely unchanged. This column uses a simple model to explore whether these risk weights discourage productive business investments. The model shows that when firms face collateral constraints, the optimal risk weights on corporate loans should be ‘flatter’ than they are at present. A quantitative assessment, however, suggests that welfare losses from the current system may not be large.

Fernando Restoy, Raihan Zamil, 06 April 2018

The shift from incurred to expected loss provisioning under IFRS 9 is one of the most important changes in the history of financial reporting of banks, and materially alters the way banks value loans and calculate credit loss provisions. This column outlines the major changes and associated implementation challenges and identifies steps that market participants and supervisors can take to facilitate high-quality implementation of the accounting standard.  

Michele Lanotte, Pietro Tommasino, 05 February 2018

Late last year, the Basel Committee decided to maintain the status quo regarding regulation of banks’ sovereign debt holdings. This column summarises the reasons to be cautious of stricter regulation of banks’ sovereign exposures. Theory and experience suggest small net benefits from such a reform, with possible increases in tail risks. The best instrument to tackle the problem is not microprudential regulation, but sounder public finances and the completion of the banking union.

Natalia Tente, Natalja von Westernhagen, Ulf Slopek, 06 December 2017

Regulators are still debating the amount of capital needed to support bank losses in a financial crisis. This column presents a new, pragmatic stress-testing tool that can answer the question under macroeconomic stress scenarios. The method models inter-sector and inter-country dependence structures between banks in a holistic, top-down supervisory framework. A test of 12 major German banks as of 2013 suggests that while there is enough capital in the system as a whole, capital allocation among the banks is not optimal.

John Vickers, 18 September 2017

The general opinion expressed by those in the financial sector and its regulators is that reform since 2008 has got us to about the right place in terms of limits on bank leverage. But the majority view of economists outside the financial sector is that Basel III goes nowhere near far enough. This column argues that while it represents a huge improvement on Basel II, Basel III should be seen as a staging post, not an end-point, and built upon in the years ahead.

Xavier Vives, 06 December 2016

As with previous systemic crises, the 2007-2009 crisis has created regulatory reform, but is it adequate? This column argues that prudential regulation should consider interactions between conduct – capital, liquidity, disclosure requirements, macroprudential ratios – and structural instruments, and also coordinate with competition policy. Though recent reforms are a welcome response to the latest crisis, we do not know how effective they will be in future.

Thorsten Beck, Elena Carletti, Itay Goldstein, 22 November 2016

The Global Crisis has led to a new wave of regulation. This column argues that improved capital requirements, liquidity requirements, bank resolution and cross-border regulatory cooperation are welcome, but that unresolved problems remain. Specifically, regulation may become too complex, focus too little on macroprudential risks, be inadequate to deal with crises in global financial institutions, or fail to cope with financial innovation.

Anatoli Segura, Javier Suarez, 05 October 2016

The Global Crisis has led many to conclude that maturity and liquidity mismatch in the financial system prior to the Crisis were excessive and not properly addressed by the existing regulatory framework. This column looks at the justification for the new minimum standard aimed at reducing banks' maturity mismatch – the net stable funding ratio – and assesses its likely impact. While the rationale for limiting banks’ maturity mismatch is strong, the reduction in maturity transformation achieved with the new standard is likely to be too drastic, actually implying a net welfare loss.

Filippo Ippolito, José-Luis Peydró, Andrea Polo, Enrico Sette, 10 May 2016

By providing liquidity to credit line borrowers and depositors, banks are potentially exposed to simultaneous runs on their assets and liabilities. This risk became a reality when the European interbank market froze in the summer of 2007. This column discusses the risk of double-bank runs, liquidity risk management by banks and the implications for the regulation of the financial sector, in particular Basel III. In 2007, banks with a larger exposure to the interbank market suffered a spike in drawdowns on their outstanding credit lines to firms, and were effectively exposed to a ‘double-run’. Importantly, this fragility was mitigated by active pre-crisis liquidity risk management by banks. 

Angus Armstrong, Philip Davis, 22 April 2016

Since the Global Crisis, a number of regulatory policies have been discussed, proposed and sometimes implemented to address shortcomings in the regulatory framework. This column presents the views of the speakers at a recent conference on whether we have reached an efficient outcome. For most of the speakers, the answer was a resounding “no”.

Di Gong, Harry Huizinga, Luc Laeven, 18 February 2016

Prior to the Global Crisis, banks could easily use off-balance sheet structures to lower their effective capitalisation rates. This column examines another way that US banks circumvented capital regulations – by maintaining minority-owned, non-consolidated subsidiaries. Had these subsidiaries been consolidated, average reported equity-to-assets ratios would have been 3.5% lower. These findings suggest that some US banks were actively misrepresenting the riskiness of their assets prior to the crisis.

Nikolaos Papanikolaou, Christian Wolff, 06 December 2015

In the years running up to the global crisis, the banking sector was marked by a high degree of leverage. Using US data, this column shows how, before the onset of the crisis, banks accumulated leverage both on and, especially, off their balance sheets. The latter activities saw an increase in maturity mismatch, raised the probability of bank runs, and increased both individual bank risk and systemic risk. These findings support the imposition of an explicit off-balance sheet leverage ratio in future regulatory frameworks.

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.

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.

Georg Ringe, Jeffrey Gordon, 28 January 2015

Bank resolution is a key pillar of the European Banking Union. This column argues that the current structure of large EU banks is not conducive to an effective and unbiased resolution procedure. The authors would require systemically important banks to reorganise into a ‘holding company’ structure, where the parent company holds unsecured term debt sufficient to cover losses at its operating financial subsidiaries. This would facilitate a ‘single point of entry’ resolution procedure, minimising the risk of creditor runs and destructive ring-fencing by national regulators.

Jon Danielsson, 18 January 2015

The Swiss central bank last week abandoned its euro exchange rate ceiling. This column argues that the fallout from the decision demonstrates the inherent weaknesses of the regulator-approved standard risk models used in financial institutions. These models under-forecast risk before the announcement and over-forecast risk after the announcement, getting it wrong in all states of the world.

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. 

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