A detailed account of the Icelandic crisis and the failure of regulatory enforcement (not necessarily of regulatory easing) in propelling risky behaviour by the banks: http://www.voxeu.org/article/gambling-resurrection-iceland
Showing posts with label banks regulation. Show all posts
Showing posts with label banks regulation. Show all posts
Sunday, January 12, 2014
12/1/2014: Icelandic Banks Crisis: Failure to Enforce?
A detailed account of the Icelandic crisis and the failure of regulatory enforcement (not necessarily of regulatory easing) in propelling risky behaviour by the banks: http://www.voxeu.org/article/gambling-resurrection-iceland
Sunday, July 14, 2013
14/7/2013: Banking Reforms : recent links
Some recent articles on Banks Reforms in the global and EU context:
"A viable alternative to Basel III prudential rules" by Stefano Micossi (9 June 2013) argues that Basel III "…proposed reforms will fail to correct flaws in the old system. The new rules are even more complicated, opaque and open to manipulation. What is needed is a radical shift to prudential rule based on a straight capital ratio."
Link: http://www.voxeu.org/article/viable-alternative-basel-iii-prudential-rules
And in a typically Bruegelesque fashion, "Basel III: Europe’s interest is to comply" by Nicolas Véron (5 March 2013) argues that since "the EU was once a champion of global financial regulatory convergence", then "the EU should drop its lacklustre inertia and pursue Basel III because, in the end, it’s in its interests to comply. EU policymakers ought to aim at enabling the adoption of a Capital Requirements Regulation that would be fully compliant with Basel III."
Link: http://www.voxeu.org/article/basel-iii-europe-s-interest-comply
His colleague, Daniel Gros is of a view that diversification is a good thing, but diversification not i regulatory space. In his "EZ banking union with a sovereign virus" (14 June 2013) he argues that: "The doom-loop between banks and the national governments played a dominant role in the Eurozone crisis for Ireland and Cyprus. A Eurozone banking union is usually viewed as the solution. This column argues that the doom-loop cannot be undone as long as banks hold oversized amounts of their government’s debt. A simple solution would be to apply the general rule that banks are prohibited from holding more than a quarter of their capital in government bonds of any single sovereign." Here's the problem, however, in both Cyprus and Ireland sovereign bonds holdings of own governments were not a problem. In Cyprus the problem was holding of Greek Government bonds, and in Ireland, the contagion mechanism was from inter-bank lending and banks' own bonds issuance to the sovereign via a blanket 2008 Guarantee.
Link: http://www.voxeu.org/article/ez-banking-union-sovereign-virus
"Implementation of Basel III in the US will bring back the regulatory arbitrage problems under Basel I" by Takeo Hoshi (23 December 2012) says that "rejigging financial regulation is in vogue. But, in the world of international finance, how well do different regulatory systems join up?" In the US context, the author "argues that the US Dodd Frank Act and Basel III are, in part, incompatible and that harmonising them may lead to unintended consequences. The US ought to tread carefully here but should also try hard to maintain the spirit of better financial regulation."
Link: http://www.voxeu.org/article/implementation-basel-iii-us-will-bring-back-regulatory-arbitrage-problems-under-basel-i
There's a huge amount of opinion published on Voxeu.org on bank regulation: http://www.voxeu.org/debates/banking-reform-do-we-know-what-has-be-done
ZeroHedge classic: http://www.zerohedge.com/node/475643 "The Secret Sauce Of Iceland's Success Story: Debt Liquidation?" argues that "That Iceland is so far the only success story in the continent of Europe, which continues sliding into an ever deeper depressionary black hole, as a result of the complete destruction of its financial sector and its subsequent rise from the ashes, is by known to most. …As it turns out, perhaps the biggest jolt to Icelandic economic growth is what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation."
Irish Times covers the outright bizarre and sublimely ironic day-dreaming that is going on in Ireland's highest policy circles. The latests instalment is transformation of the IFSC into a sort of "We've screwed up so comprehensively, we can sell this as competence" story: http://www.irishtimes.com/business/sectors/financial-services/ifsc-faces-radical-rethink-as-effects-of-crash-become-clear-1.1460832?page=2
Pearls of wisdom: "Ryan’s paper makes eight proposals, including “relaunching the IFSC brand” along product lines – global asset finance, a global servicing platform and a global listing platform." All of which have been already in place for years to various success. "The document recommends the creation of a JobsHub to allow firms seeking staff to “find people quickly and cost effectively”." Other things: setting up IFSC as a centre for 'bad banks' on foot of 'experience already present in NAMA'. This is the logic of converting Dublin Bay into a global toxic refuse dump for the UK and European waste disposal, because we 'already have considerable expertise' at the Poolbeg waste facilities. And last, but not least: converting IFSC into "global centre of excellence for property"… Even the Irish Times could not have escaped the obvious irony present in this idea.
Last, but not least, Bloomberg report on Michel Barnier balmy ideas on 'Bank-Crisis' plans for the EU: http://www.bloomberg.com/news/2013-07-09/eu-steels-for-battle-over-bank-resolution-plans-led-by-germany.html from July 9. "The European Union’s executive arm proposed procedures for handling failing banks with a 55 billion-euro ($70 billion) backstop, setting up a showdown with Germany over control of taxpayers’ cash." Good summery of current play on this.
"A viable alternative to Basel III prudential rules" by Stefano Micossi (9 June 2013) argues that Basel III "…proposed reforms will fail to correct flaws in the old system. The new rules are even more complicated, opaque and open to manipulation. What is needed is a radical shift to prudential rule based on a straight capital ratio."
Link: http://www.voxeu.org/article/viable-alternative-basel-iii-prudential-rules
And in a typically Bruegelesque fashion, "Basel III: Europe’s interest is to comply" by Nicolas Véron (5 March 2013) argues that since "the EU was once a champion of global financial regulatory convergence", then "the EU should drop its lacklustre inertia and pursue Basel III because, in the end, it’s in its interests to comply. EU policymakers ought to aim at enabling the adoption of a Capital Requirements Regulation that would be fully compliant with Basel III."
Link: http://www.voxeu.org/article/basel-iii-europe-s-interest-comply
His colleague, Daniel Gros is of a view that diversification is a good thing, but diversification not i regulatory space. In his "EZ banking union with a sovereign virus" (14 June 2013) he argues that: "The doom-loop between banks and the national governments played a dominant role in the Eurozone crisis for Ireland and Cyprus. A Eurozone banking union is usually viewed as the solution. This column argues that the doom-loop cannot be undone as long as banks hold oversized amounts of their government’s debt. A simple solution would be to apply the general rule that banks are prohibited from holding more than a quarter of their capital in government bonds of any single sovereign." Here's the problem, however, in both Cyprus and Ireland sovereign bonds holdings of own governments were not a problem. In Cyprus the problem was holding of Greek Government bonds, and in Ireland, the contagion mechanism was from inter-bank lending and banks' own bonds issuance to the sovereign via a blanket 2008 Guarantee.
Link: http://www.voxeu.org/article/ez-banking-union-sovereign-virus
"Implementation of Basel III in the US will bring back the regulatory arbitrage problems under Basel I" by Takeo Hoshi (23 December 2012) says that "rejigging financial regulation is in vogue. But, in the world of international finance, how well do different regulatory systems join up?" In the US context, the author "argues that the US Dodd Frank Act and Basel III are, in part, incompatible and that harmonising them may lead to unintended consequences. The US ought to tread carefully here but should also try hard to maintain the spirit of better financial regulation."
Link: http://www.voxeu.org/article/implementation-basel-iii-us-will-bring-back-regulatory-arbitrage-problems-under-basel-i
There's a huge amount of opinion published on Voxeu.org on bank regulation: http://www.voxeu.org/debates/banking-reform-do-we-know-what-has-be-done
ZeroHedge classic: http://www.zerohedge.com/node/475643 "The Secret Sauce Of Iceland's Success Story: Debt Liquidation?" argues that "That Iceland is so far the only success story in the continent of Europe, which continues sliding into an ever deeper depressionary black hole, as a result of the complete destruction of its financial sector and its subsequent rise from the ashes, is by known to most. …As it turns out, perhaps the biggest jolt to Icelandic economic growth is what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation."
Irish Times covers the outright bizarre and sublimely ironic day-dreaming that is going on in Ireland's highest policy circles. The latests instalment is transformation of the IFSC into a sort of "We've screwed up so comprehensively, we can sell this as competence" story: http://www.irishtimes.com/business/sectors/financial-services/ifsc-faces-radical-rethink-as-effects-of-crash-become-clear-1.1460832?page=2
Pearls of wisdom: "Ryan’s paper makes eight proposals, including “relaunching the IFSC brand” along product lines – global asset finance, a global servicing platform and a global listing platform." All of which have been already in place for years to various success. "The document recommends the creation of a JobsHub to allow firms seeking staff to “find people quickly and cost effectively”." Other things: setting up IFSC as a centre for 'bad banks' on foot of 'experience already present in NAMA'. This is the logic of converting Dublin Bay into a global toxic refuse dump for the UK and European waste disposal, because we 'already have considerable expertise' at the Poolbeg waste facilities. And last, but not least: converting IFSC into "global centre of excellence for property"… Even the Irish Times could not have escaped the obvious irony present in this idea.
Last, but not least, Bloomberg report on Michel Barnier balmy ideas on 'Bank-Crisis' plans for the EU: http://www.bloomberg.com/news/2013-07-09/eu-steels-for-battle-over-bank-resolution-plans-led-by-germany.html from July 9. "The European Union’s executive arm proposed procedures for handling failing banks with a 55 billion-euro ($70 billion) backstop, setting up a showdown with Germany over control of taxpayers’ cash." Good summery of current play on this.
Friday, May 3, 2013
3/5/2013: Basel 2.5 can lead to increased liquidity & contagion risks
Banca d'Italia research paper No. 159, "Basel 2.5: potential benefits and unintended consequences" (April 2013) by Giovanni Pepe looks at the Basel III framework from the risk-weighting perspective. Under previous Basel rules, since 1996, "…the Basel risk-weighting regime has been based on the distinction between the trading and the
banking book. For a long time credit items have been weighted less strictly if held in the trading book, on the assumption that they are easy to hedge or sell."
Alas, the assumption of lower liquidity risks associated with assets held on trading book proved to be rather faulty. "The Great Financial Crisis made evident that banks declared a trading intent on positions that proved difficult or impossible to sell quickly. The Basel 2.5 package was developed in 2009 to better align trading and banking books’ capital treatments." Yet, the question remains as to whether the Basel 2.5 response is adequate to properly realign risk pricing for liquidity risk, relating to assets held on trading book.
"Working on a number of hypothetical portfolios [the study shows] that the new rules fell short of reaching their target and instead merely reversed the incentives. A model bank can now achieve a material capital saving by allocating its credit securities to the banking book [as opposed to the trading book], irrespective of its real intention or capability of holding them until maturity. The advantage of doing so is particularly pronounced when the incremental investment increases the concentration profile of the trading book, as usually happens for exposures towards banks’ home government. Moreover, in these cases trading book requirements are exposed to powerful cliff-edge
effects triggered by rating changes."
In the nutshell, Basel 2.5 fails to get the poor quality assets risks properly priced and instead created incentives for the banks to shift such assets to the different section of the balance sheet. The impact of this is to superficially inflate values of sovereign debt (by reducing risk-weighted capital requirements on these assets). Added effect of this is that Basel 2.5 inadvertently increases the risk of sovereign-bank-sovereign contagion cycle.
The paper is available at: http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/qef159/QEF_159.pdf
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