Caterina Mendicino, Kalin Nikolov, Juan Rubio-Ramirez, Javier Suarez, Dominik Supera, 24 February 2021

Well-capitalised banks make the financial system more resilient to episodes such as the COVID-19 crisis. This column assesses how much capital would be optimal for banks to hold, taking into consideration the risk of banking crises driven by borrower defaults. It finds that capital requirements of around 15% provide the optimal trade-off between lowering the frequency of banking crises caused by borrower defaults and maintaining the availability of credit in normal times. While the exact figure depends on a number of assumptions, it is higher than both the Basel III minimum and the optimum implied by macroeconomic frameworks that underestimate or neglect the impact of borrower default on bank solvency.

Hans Gersbach, 18 February 2021

Since the financial crisis of 2007/08, bank equity regulation has been tightened. This is one reason why broad money supply reacted only weakly to the enormous expansion of the monetary base. This column argues that the process of tightening bank equity regulation has come to an end and will not have the same disinflationary effects after the pandemic. The large reserve balances held by banks may become a greater concern and pose larger inflation risks in the years to come. 

Stefano Corradin, Marie Hoerova, Glenn Schepens, 12 February 2021

Euro area money markets have gone through substantial changes and turbulent periods over the past 15 years. These have included the global and euro area sovereign debt crises, new liquidity and leverage requirements, and the expansion of the Eurosystem balance sheet through asset purchase programmes. This column discusses the interaction between money markets, new Basel III regulations, and central bank policies. The analysis shows that money market conditions worsen when financial stress increases, or if central bank asset purchases induce scarcity effects. It outlines implications of changing money market conditions for monetary policy implementation and transmission.

Rodrigo Coelho, Fernando Restoy, Raihan Zamil, 11 April 2020

Regulatory divergence in the banking sector, including differences in how jurisdictions apply Basel III and other regulatory standards, could be a significant source of market fragmentation. Unwarranted divergence in prudential requirements may discourage cross-border activities, international capital flows, and global risk-sharing. This column identifies three main sources of regulatory fragmentation in the post-Basel III era and proposes policy measures to reduce excessive discrepancies in the application of global banking rules. Maintaining trust in banks’ financial health is crucial in periods of economic and financial disruption – such as the COVID-19 pandemic.

Charles Goodhart, Dirk Schoenmaker, 11 July 2019

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.

Thorsten Beck, Liliana Rojas-Suarez, 04 May 2019

The Global Crisis originated in the financial systems of advanced countries, so it is unsurprising that the Basel III international standards focused on the stability needs of these countries. This column assesses the implications of Basel III for emerging markets and developing economies. It also outlines the recommendations from a task force of current and former senior officials from central banks in these countries on how to make Basel III work for them.  

Denefa Bostandzic, Felix Irresberger, Ragnar Juelsrud, Gregor Weiss, 15 January 2018

Since the financial crisis, curbing systemic risk has become a key objective for policymakers around the world. This column sheds light on how successful capital requirements are in terms of reducing systemic risk, in the context of the European banking sector. Results show that an increase in capital requirements in Europe lead to heightened measures of systemic risk, in opposition to the goals of the exercise. This does not imply, however, that capital requirements are welfare decreasing.

David Martinez-Miera, Rafael Repullo, 08 December 2018

The current financial system is characterised by the coexistence of direct market finance, regulated banks, and shadow banks. This column looks at what gives rise to each of these sources of finance as well as the effect of bank capital regulation on the financing that flows through them. High 'flat' (or risk-insensitive) capital requirements shift intermediate-risk entrepreneurs from regulated banks to shadow banks, while high risk-based requirements do the same for high-risk entrepreneurs, increasing the risk of the corresponding loans. This result highlights the need to take into account the existence of shadow banks when designing bank capital regulation. 

Pierluigi Bologna, Arianna Miglietta, Anatoli Segura, 29 October 2018

Proponents of contingent convertible bonds, or CoCos, argue that they are effective instruments for bank recapitalisation. Sceptics argue that they introduce too much complexity, with potentially destabilising consequences. This column addresses this dispute empirically, using the dynamics of the CoCo market in 2016. The CoCo market at the time exhibited adverse dynamics that can’t be explained by banks’ fundamentals. Though some of this instability may have been transitory, the findings imply that the market should be monitored as it develops.

Stephen Cecchetti, Kim Schoenholtz, 10 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”.

Pages

CEPR Policy Research