Iñaki Aldasoro, Gerardo Ferrara, Sam Langfield, Zijun Liu, Tomohiro Ota, 04 December 2019

Macroprudential regulation is in vogue, but liquidity requirements are typically seen only as a microprudential tool. This column shows how a macroprudential approach to liquidity requirements could improve regulatory efficiency. By concentrating liquidity in systemically important banks, financial stability can be enhanced without increasing aggregate requirements.

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.

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.

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.

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