Does macropru leak? Evidence from a UK policy experiment

Working Paper No 445 by Shekhar Aiyar, Charles W Calomiris and Tomasz Wieladek.

The regulation of bank capital to improve the resilience of the financial system and, related to this aim, as a means of smoothing the credit cycle are central elements of forthcoming macroprudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit: (i) changes in capital requirements need to affect loan supply by regulated banks, and (ii) substitute sources of credit should not fully offset changes in credit supply by affected banks. This paper examines micro evidence – lacking to date – on both questions, using a unique data set. In the United Kingdom, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. Over the 1998-2007 period, UK-regulated banks reduced lending in response to tighter capital requirements. But non UK-regulated banks (resident foreign branches) increased lending in response to tighter capital requirements on a relevant reference group of regulated banks. This ‘leakage’ was material although only partial: it offset – by about one third – the initial impulse from the regulatory change. These results suggest that, on balance, changes in capital requirements can have a substantial impact on aggregate credit supply by UK-resident banks. But they also affirm the importance of cross-country co-operation on macroprudential policies.

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Source: Bank of England

French president Nicolas Sarkozy has announced plans to impose a tax on financial transactions, he said he hoped his move would push other countries into taking action

French president Nicolas Sarkozy says measures he has taken have helped stabilise the economic crisis in France (Link to this video)

The French president said a new 0.1% tax would come into force in August regardless of whether or not the European Union agrees to impose a ‘Tobin tax’ across the EU.

In a lengthy TV interview the French president said he hoped his move would push other countries into taking action. “What we want to do is create a shockwave and set an example that there is absolutely no reason why those who helped bring about the crisis shouldn’t pay to restore the finances,” Sarkozy said. “We hope the tax will generate €1bn (£800m) of new income and thus cut our budget deficit.”

The tax has been dismissed by many experts as a purely political move as Sarkozy trails behind socialist Francois Hollande in the polls ahead of the country’s presidential elections.

The country’s national bank, the Bank of France, has already questioned the feasibility of a tax that will only be imposed in France and the nation’s financial sector has been very vocal in its opposition. “A tax that’s limited to France would weigh on growth, lead to a loss of competitiveness, and create a heavy handicap for the financing of the French economy,” the French Banking Federation said this month.

Shares in France’s big banks, Société Générale and BNP Paribas, both dropped 3% in early trading.

The tax has become politically important to Sarkozy because he pledged to impose it when France held the presidency of both the G8 and G20 last year.

In September the European commission suggested a tax of 0.1% on equity and bond transactions and 0.01% on derivatives, which it said could raise €55bn a year. European Union finance ministers are due to discuss the tax in March.

The threat of a Europe-wide transaction tax was one of the reasons why David Cameron vetoed the EU treaty change to tackle the eurozone crisis in December. He said it would be “madness” and cost the UK 500,000 jobs.

David Hillman, a spokesman for the Robin Hood Tax campaign in the UK, said: “Sarkozy has shown he is capable of reining in the banks and ensuring they pay more in tax. Why then is David Cameron so resistant when the idea is backed by the British people?

“If he’s serious about us ‘all being in this together’ he needs to get on and introduce Britain’s own tax to make banks pay their fair share.”

The French tax will apply to share purchases, including high frequency trading, and CDS transactions. Unlike the European commission proposal, it will not apply to bond trading.

Sarkozy also announced plans to raise VAT to 21.2% from 19.6% in October to fund a cut in national insurance-type charges on companies. He hopes the changes will boost job creation and discourage French industry from moving abroad. “We have to re-ignite growth,” Sarkozy said. “We have to catch up in Europe and in the world. Our market share is declining. If we continue to burden our companies with charges that aren’t theirs to pay, how can we compete?”

When one journalist pointed out that prices rose in the UK after the government increased VAT, Sarkozy said: “The United Kingdom has no industry any more.”

Source: The Guardian UK

David Cameron, UK prime minister, reopened tensions on Thursday with Paris and Berlin, after he said the economic design of the eurozone was seriously flawed and described as “madness” plans for a European tax on financial transactions

The prime minister also made pointed – if indirect – criticisms of Germany, insisting some countries must allow their trade surpluses to fall, to redress imbalances in the eurozone. He also called on Berlin to contribute more resources and guarantees to help solve the crisis in the currency zone.

Mr Cameron’s comments at the World Economic Forum in Davos are likely to be seen in France and Germany as more unhelpful commentary from the sidelines from a prime minister who admitted to CNN that he was happy to be “out of the room” when single currency issues were discussed.

The British prime minister will attend a European summit in Brussels next Monday, his first encounter with many of his counterparts since the fractious meeting last month which saw Mr Cameron veto changes to the EU treaty to reinforce eurozone fiscal discipline.

Up to 26 other EU members have been forced to create a separate treaty to bypass the British blockade and Mr Cameron’s comments in Davos are unlikely to soothe the tensions caused by his use of the veto.

Mr Cameron said that the UK was a model of a successful currency union – between England and Scotland – because it had a central bank able to stand behind the currency and financial system, flexibility to deal with economic shocks and a system of fiscal transfers and collective debt issuance.

“Currently it’s not that the eurozone doesn’t have all of these – it’s that it doesn’t really have any of these,” Mr Cameron said.

He criticised eurozone leaders for being distracted by other issues, such as the introduction of a financial transaction tax (FTT) – an initiative he described as “quite simply madness”. The tax, which levies a small charge on a range of financial market trades, is a key part of Nicolas Sarkozy’s campaign in this year’s French presidential election.

Mr Cameron’s speech in Davos reflected British officials’ deep frustration with Germany’s leadership of the single currency area. The British prime minister called for a much stronger firewall to prevent contagion within the eurozone, common European sovereign debt, and for powerful countries committing to reduce their trade surpluses as much as the struggling countries seek to minimise their deficits.

But the message that will annoy Berlin the most was that he called on Germany to allow its trade surplus to fall. “Yes, tough fiscal discipline is essential. But this is a problem of trade deficits, not just budget deficits,” Mr Cameron said.

“As Mario Monti has suggested, the flip side of austerity in the deficit countries must be action to put the weight of the surplus countries behind the euro,” he said, referring to the Italian prime minister. “I’m not pretending any of this is easy. These are radical, difficult steps for any country to take.”

The German government has signalled to lawmakers in the Bundestag that it is willing to consider a scaled-back FTT to keep the UK – and some restive German MPs – on board.

A spokesman for the German finance ministry said its “absolute priority” was to pursue an FTT at a European Union level. But according to MPs and legislative aides, a senior finance ministry official told a finance committee meeting on Wednesday that Berlin would consider a suggestion by the Free Democrats, junior partner to the Christian Democrats, to move to a UK-style stamp duty on share transactions.

Ralph Brinkhaus, a backbench finance expert, on Thursday became the first Christian Democrat openly to support the stamp duty initiative. “I and many colleagues think it’s good we’ve got new movement in this debate,” he told the FT. “We have to keep what’s do-able in our sights and we’d welcome any compromise everyone could agree to – something between the maximal demands [of a blanket FTT] and a ‘stamp duty plus X’. We should really aim to keep the UK aboard.”

Source: Financial Times

Speech by Chris Salmon, Executive Director, Bank of England

In a speech delivered at the BAFT-IFSA Global Annual Meeting on 24 January 2012, Chris Salmon, Executive Director for Banking Services and Chief Cashier, describes how the financial crisis has influenced the perspective of financial stability policymakers towards payment operations. He argues that this will impact upon banks in two main ways: first, authorities are likely to place more attention on the overall network of payment operations within a financial system; and second, in the context of resolution plans, authorities are likely to ask more questions about the internal organisation of firms’ operations. Chris Salmon concludes by encouraging those in the transactions banking world to consider the attitudes of financial stability authorities and the broader regulatory back-drop when developing their medium-term planning.

In terms of the overall network, Chris Salmon focuses on the pattern of direct and indirect participation in payment systems and highlights some of the risks of systems which have a disproportionately high level of indirect participation.

Following comments from a speech in July, Chris Salmon reiterates the Bank’s view that an increase in direct participation in CHAPS would be good for UK financial stability. He provides an update on the Bank’s work to achieve this including the fact that one large indirect participant has formally committed to join and a second is moving towards a similar formal decision. “If all the banks we have talked to in this round of discussions were to join CHAPS…payment flows made by indirect participants would account for less than 40% of the total, making substantial inroads into our tiering problem.” Chris Salmon also outlines a number of other ways in which the overall payment systems network could be made more robust.

Chris Salmon goes on to consider the impact of the work of the Financial Stability Board (FSB) on the orderly resolution of financial institutions on the payments world. Salmon believes it is unlikely that the internal organisation of payments will be unaffected as and when large firms address the organisational issues which the FSB has identified. Resolution authorities will also want to understand how customers will be able to continue making and receiving payments following a resolution.

Notes

1. The payments map comprises a central hub, the system and its direct members, with many spokes reflecting agency relationships between the direct and indirect participants. The relative importance of the ‘hub’ and the ‘spokes’ for a payments network is typically summarised through a ‘tiering’ statistic: the ratio of direct participants to all banks that make payments via the system. In highly tiered systems the ‘spokes’ are relatively important (and the statistic low in value), with the opposite true when most participants are direct members of the core scheme. (Taken from page 4 of the speech.)

2. CHAPS is a high value payment systems. The CHAPS payment system is designed for making instant, high-value sterling transfers. Typically, members of the public will initiate payment using CHAPS only rarely, for example when buying a house. Financial institutions will make many large CHAPS transactions daily, regularly settling inter-bank loans worth hundreds of millions of pounds.

Download the Full Speech, 24 January 2012.

Source: Bank of England

IMF Global Financial Stability Report GFSR Market Update

Since the last Global Financial Stability Report (GFSR), risks to stability have increased, despite various policy steps to contain the euro area debt crisis and banking problems. European policymakers have outlined significant policy measures to address the medium-term issues contributing to the crisis, and some of these have helped to improve market sentiment, but sovereign financing remains challenging and downside risks remain. If funding challenges result in a round of deleveraging by banks, this could ignite an adverse feedback loop to euro area economies. The United States and other advanced economies are susceptible to spillovers from a potential intensification of the euro area crisis, and some have homegrown challenges to the removal of financial tail risks, including overcoming political obstacles to achieving an appropriate pace of fiscal consolidation. Developments in the euro area also threaten emerging Europe and may spill over to other emerging markets. Further policy actions are needed to restore market confidence. This effort will require building larger backstops for sovereign financing, assuring adequate bank funding and capital, and maintaining a sufficient flow of credit to the economy, possibly by establishing a “gatekeeper” charged with preventing disorderly bank deleveraging.

The euro area debt crisis has intensified further, requiring urgent action to prevent highly destabilizing outcomes.

Sovereign bond yields in the periphery rose sharply, especially at short to medium maturities, inverting yield curves in the last quarter of 2011 and signaling increased concerns about financing and default risks. As outlined in the September GFSR, policy packages have been insufficient to contain adverse feedback loops, thus trapping some sovereigns in a ―bad equilibrium‖ as long-term foreign investors shed exposures. Domestic institutions were unable to fill the gap, and the European Central Bank (ECB) became a critical support for peripheral sovereign debt through its Securities Markets Program (SMP). As the crisis intensified, it spilled from the periphery into the core with yields rising and spreads widening, including on the sovereign debt of Austria and France. As of end-2011, more than two-thirds of euro area sovereign debt had credit default swap (CDS) spreads of over 200 basis points (Figure 1). Since September, ratings downgrades and negative outlooks across a wide range of euro area sovereigns have also contributed to the rise in yields. Although there has recently been some improvement in market conditions, fundamental challenges remain. … more

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Source: International Monetary Fund

Response from the Court of the Bank of England to the recommendations made by the Treasury Committee and Joint Committee on the draft financial services bill on the accountability of the Bank of England

On 8 November 2011, the Treasury Select Committee of the House of Commons published a Report on the “Accountability of the Bank of England”.  On 19 December 2011, a Joint Select Committee of the Lords and Commons issued a Report on the Draft Financial Services Bill.  On 17 January 2012, the Court of the Bank issued its response to both.

Key points from the full response.

• The new responsibilities for the Bank of England in the area of financial stability will need to
  be accompanied by new accountability mechanisms. As with the mechanisms for monetary
  policy, at the centre of these should be direct accountability to parliament through the
  Treasury Committee.
• Building on the recommendations of the Treasury and Joint Committees, we propose that this
  is supplemented by establishing an Oversight Committee, with direct access to the
  policymaking processes and papers in the Bank, and formed of non-executive directors.
• The role of this Committee should be to assess whether the processes employed in making
  financial stability policy decisions have considered a full range of options and have taken
  reasonable account of the relevant information, analysis (including of the lessons from the
  past), differing views amongst policymakers, and challenges from outside the Bank.
• The Oversight Committee should also commission reviews from experts outside the Bank of
  the performance of the Bank’s financial stability policymakers. These reviews would
  recommend lessons for them. And the Oversight Committee would assess the Bank’s
  response to those recommendations.

• The Bank’s financial stability role gives it operational responsibility for managing a financial
  crisis. All decisions in a crisis involving public funds, regardless of the amount, are however,
  for the Chancellor. So the forthcoming crisis management Memorandum of Understanding
  between the Bank and the Treasury should establish a clear framework for co-ordination. It
  should also establish a power for the Chancellor, when public funds are at risk and there is a
  serious threat to financial stability, to direct the use of the Bank’s tools of crisis management.
• We support the Treasury Committee’s recommendation that future Governors of the Bank
  should be appointed for a single eight-year term.

For an update see our snippet: MPs reject Bank of England’s governance plan.

The Financial Times provides the following comment entitled:

King holds fast on Bank supervision

The governor of the Bank of England on Tuesday dismissed suggestions that its proposed new powers be subjected to internal checks and balances, in an often testy encounter with MPs.

Sir Mervyn King rejected the Treasury select committee’s proposal for a powerful supervisory board to be created within the bank, insisting such a body would damage decision-making by “second guess[ing] the decisions of policymakers”. His testimony allayed few concerns that the Bank would be insufficiently accountable once it adopted sweeping new powers over interest rates, the supply of credit and bank supervision early next year.

“This exceptionally powerful public institution needs stronger oversight,” Andrew Tyrie, Treasury committee chairman, said, adding that the Bank’s response was “still not adequate”. In November MPs demanded a powerful new supervisory board to replace the Bank’s existing 12-member court, which reviews policy and monitors Bank action on interest rates, credit and financial regulation. In October Alistair Darling, the former chancellor, described the Bank governor as a “Sun King around whom the court revolves”.

In written evidence published on Tuesday, Sir Mervyn instead proposed a new court oversight subcommittee to report occasionally – and then only on the processes by which the Bank regulates financial stability.

“It is vital that the oversight committee does not seek to second-guess the decisions of policymakers themselves,” Sir Mervyn argued. “The passing of such judgments could threaten the relationship of trust that is necessary between policymakers and the oversight committee.”

The Bank did, however, accept that future governors should be appointed to a single eight-year term rather than the current renewable five-year terms.

An external member of the Bank’s new financial stability regulator, the Financial Policy Committee, also accepted that it was difficult to balance the Bank’s powers. Michael Cohrs told MPs: “The governor is right that you don’t want to second-guess the [Bank’s rate-setting Monetary Policy Committee], but you are absolutely right that just looking at process is a bit too sterile.”

Independent corporate governance experts were critical of the Bank’s unwillingness to accept greater internal scrutiny. Bob Garratt, professor at Cass business school, said that only allowing an oversight committee to examine the process of policymaking, but not Bank policy, was “crazy”. “That is madness,” he added. “The whole point of such a committee is to help [the policymakers] make those decisions in the first place.”

The Bank’s proposed oversight committee would not have access to transcripts of policy meetings. Unlike the US Federal Reserve, which publishes its meeting transcripts with a five-year delay, Bank transcripts are destroyed once the formal minutes are agreed.

The Treasury said on Tuesday night that it had not yet decided if it would side with the Bank or MPs when it drafted Bank reform legislation due by the end of the month. But ministers are expected to back Sir Mervyn, potentially complicating the bill’s passage.

What if, Jamie Dimon, the chief executive of JPMorgan Chase is not just blowing smoke when he complains that the country — and, indeed, the world — has imposed so many new rules on the banking industry, some of them overlapping, others seeming to contradict each other, yet others whose sole purpose seems to be to weigh down the industry, that they threaten to do as much harm as good? Last summer, you’ll recall, Dimon confronted Ben Bernanke, the Federal Reserve chairman, at a conference and asked him: “Has anyone bothered to study the cumulative effect of these things?” Just last week, during JPMorgan’s earnings call with analysts, Dimon complained that Europe’s “regulatory policy, government policy, central bank policy — it’s not coordinated. It’s making the situation worse, not better.”

Like most nonbankers, I’ve tended to roll my eyes at Dimon’s continuous lamentations. Surely, given all the harm the banks did to the country, regulations aimed at preventing a repeat of the financial crisis struck me as being worth whatever cost they imposed on the industry. And, yes, I admit to a little schadenfreude as well. (To be fair to Dimon, he is not completely opposed to all the new regulations. He just comes across that way when he’s in rant mode.)

What has caught me up short recently is the emergence of a new critic of the banking regulations that have been pouring forth from Washington and Europe. Her name is Karen Petrou, and she is the managing partner of Federal Financial Analytics, a consulting firm that, among other things, analyzes bank regulations for clients.

Unlike many in the banking industry, Petrou is not ideologically opposed to regulation. For instance, she was a critic of the lack of regulation that allowed so many sleazy subprime mortgage originators to emerge from the precrisis ooze. Yet, now, she’s worried about something different: that the hundreds of new mandates required by the Dodd-Frank law are creating a new kind of risk. She calls it “complexity risk.” As she put it in a speech she delivered last week in New York: “If we don’t understand the cross-cutting effects and inherent contradictions in all of the stringent standards now being written into final form, we risk doing real damage to the sound, stable and — yes — profitable financial industry regulators say they support and the economies sorely need.”

In a paper she wrote in November, Petrou laid out a number of examples of new regulatory proposals that were either mind-bogglingly complex or contradictory — or both. For instance, she told me recently, bank board directors will have 184 more things they will have to acknowledge responsibility for under the latest systemic standards. “I think boards have to be responsible for what happens at their institutions,” she said, “but requiring them to be on the front lines of forward-looking cash flow is ridiculous.”

She also points to a contradiction in the way the Too Big to Fail institutions are being dealt with. On the one hand, Dodd-Frank is very clear that if a big bank becomes insolvent, there can be no taxpayer bailout. It must be wound down, just like any other bank. Yet, at the same time, she says, the federal and international regulators are adding a host of special Too Big to Fail capital requirements and rules. “They are acting as if these institutions are still too big to fail. The two thrusts are incompatible.”

Why does complexity risk matter? One reason is that the more complex the rules are, the greater the likelihood that smart bankers will find ways to game them. Another is that contradictory regulations, however well meaning, simply don’t make the system safer. But the most important reason is that complexity risk is having an effect on business — and that’s not helping the still-fragile economy.

Petrou says that in her own practice she has seen deals fall through — especially in the mortgage industry — because nobody can figure out how the new rules will be applied. Given how badly the country needs a revived housing industry, this is nothing short of tragic.

In her paper, Petrou offers a series of solutions, revolving around simpler regulations, a reliance on market discipline and transparency. She also calls for the regulators themselves to be held accountable, something that is nowhere to be found in Dodd-Frank, despite their obvious shortcomings in the years leading to the financial crisis.

However you feel about banks — and I know that many people harbor enormous, justifiable anger at what they did — our economy can’t function without them. And they needed to be regulated. But three years ago, overly complex securities were one of the root causes of the crisis. So why, then, do we have faith that overly complex regulations will prevent the next crisis? Sad but true: they won’t.

Source: New York Times

European Banking Authority Work Programme 2012

In accordance with the Regulation establishing the European Banking Authority (EBA), the annual work programme describes and summarises the main objectives and deliverables of the EBA in the forthcoming year derived from the tasks specified in the Regulation and from the relevant EU banking sector legislation.

The year of 2012 will be the second year of operation for the EBA as a fully-fledged EU Authority in the new European System of Financial Supervision (ESFS). Therefore, a strong emphasis still needs to be laid on the overall development and strengthening of the EBA’s institutional capabilities. In addition, there are significant new legislative proposals in European banking regulation which will have a major impact on the amount and priorities of specific tasks the EBA will be carrying out in 2012 and thereafter. Continued tensions in financial markets, and their adverse effects on the European banking system, also create an additional burden on the EBA as they accelerate the build-up of an appropriate risk assessment framework and increase the profile of the EBA in coordinating EU-wide supervisory action.

The work programme identifies four areas of EBA’s activities and aims to define the main objectives and corresponding priorities for 2012. The first three areas, Regulation, Oversight, and Consumer Protection are representing the core functions of the EBA that are laid down by the EBA regulation. The support functions summarised as Operations are playing a critical role in ensuring that the EBA can perform its core functions, and thus, their main working objectives are also summarised.

The main objective of the EBA in the regulatory policy area is to play a leading role in the creation of the single rule book for the EU banking system. Based upon the current CRD IV/CRR proposals, to be adopted in the course of 2012, about 200 deliverables will be expected from the EBA. Most products are expected to be finalised by 2013-2014, thus, the concentration of EBA’s regulatory work will be very high in the course of 2012. Based upon the capacity available at both the EBA and at the national authorities, the following policy areas have been identified as priority: capital and capital buffers, liquidity, remuneration, leverage ratio. In the context of crisis prevention and crisis resolution, the EBA is expected to set further technical standards but also to coordinate and, where applicable, to actively participate in the management of cross border crisis events. The legislative proposals from the EU Commission are expected soon, with high priority tasks to be undertaken by the EBA.

The main two objectives of the EBA’s regulatory oversight activities in 2012 are:
(i) to deliver independent and high quality analysis of EU banks and the EU banking sector. In the area of risk assessment, in addition to the regular work on monitoring and assessing risks and vulnerabilities from a micro-prudential perspective, the EBA will follow up its Recommendations post 2011 EU-wide stress tests and on banks’ recapitalisation.
(ii) to promote supervisory convergence and assist National Supervisory Authorities to ensure that colleges are run consistently and efficiently with substantive discussions leading to material decisions being taken which strengthen the resilience of EU cross border banks and prepare them better for crises.

The EBA has an EU-wide responsibility for promoting transparency, simplicity and fairness in the market for consumer financial products. The main tasks of the EBA’s Consumer Protection work will be the collection, analysis and reporting on consumer trends; the review and coordination process of financial literacy and education initiatives by the competent authorities; the development of training standards and common disclosure rules for the industry; monitoring new and existing financial activities and where appropriate prepare guidelines and recommendations with a view to promoting the safety and soundness of markets and convergence of regulatory practice.

The overall objective of the institutional development of the EBA in 2012 will be the completion and further enhancement of the internal control environment in a period of intensive build-up and growth of the recently established EU institution.

A detailed list of EBA’s tasks is presented in the Annex with attached priorities.

Related Documents

EBA 2012 Work Programme in full
Annex to the Work Programme: EBA’s tasks and priorities

Source: European Banking Authority

Basel III liquidity standard and strategy for assessing implementation of standards endorsed by Group of Governors and Heads of Supervision

The Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, met on 8 January 2012. The main items of discussion were the Basel Committee’s proposals on the Liquidity Coverage Ratio (LCR) and its strategy for assessing implementation of the Basel regulatory framework more broadly.

The GHOS endorsed the Committee’s comprehensive approach to monitoring and reviewing implementation of the Basel regulatory framework. GHOS Chairman and Governor of the Bank of England Mervyn King noted that “the focus on implementation represents a significant new direction for the Basel Committee. The level of scrutiny and transparency applied to the manner in which countries implement the rules the Committee has developed and agreed will help ensure full, timely and consistent implementation of the international minimum requirements”.

The Committee will monitor, on an ongoing basis, the status of members’ adoption of the globally-agreed Basel rules. It will review the compliance of members’ domestic rules or regulations with the international minimum standards in order to identify differences that could raise prudential or level playing field concerns. The Committee will also review the measurement of risk-weighted assets to ensure consistency in practice across banks and jurisdictions.

Against this background, each Basel Committee member country has committed to undergo a detailed peer review of its implementation of all components of the Basel regulatory framework. In addition to Basel III, the Committee will assess implementation of Basel II and Basel II.5 (ie the July 2009 enhancements on market risk and resecuritisations). The GHOS also endorsed the Committee’s agreement to publish the results of the assessments. The Basel Committee will discuss and define the protocol governing the publication of the results. The GHOS also agreed that the initial peer reviews should assess implementation in the European Union, Japan and the United States. These reviews will commence in the first quarter of 2012.

Mr Stefan Ingves, Chairman of the Basel Committee and Governor of the Swedish Riksbank, noted that “the Committee’s rigorous peer review process is a clear signal that effective implementation of the Basel standards is a top priority. Raising the resilience of the global banking system, restoring and maintaining market confidence in regulatory ratios, and providing a level playing field will only be achieved through full, timely and consistent implementation”.

With respect to the Liquidity Coverage Ratio, GHOS members reiterated the central principle that a bank is expected to have a stable funding structure and a stock of high-quality liquid assets that should be available to meet its liquidity needs in times of stress. Once the LCR has been implemented, its 100% threshold will be a minimum requirement in normal times. But during a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement. The Basel Committee has been asked to provide further elaboration on this principle by clarifying the LCR rules text to state explicitly that liquid assets accumulated in normal times are intended to be used in times of stress. It will also provide additional guidance on the circumstances that would justify the use of the pool. The Basel Committee will also examine how central banks interact with banks during periods of stress, with a view to ensuring that the workings of the LCR do not hinder or conflict with central bank policies.

The GHOS also reaffirmed its commitment to introduce the LCR as a minimum standard in 2015. Members fully supported the Committee’s proposed focus, course of action and timeline to finalise key aspects of the LCR by addressing specific concerns regarding the pool of high-quality liquid assets as well as some adjustments to the calibration of net cash outflows. The modifications currently under investigation apply only to a few key aspects and will not materially change the framework’s underlying approach.

The GHOS directed the Committee to finalise and subsequently publish its recommendations in these three areas by the end of 2012. Governor King said, “The aim of the Liquidity Coverage Ratio is to ensure that banks, in normal times, have a sound funding structure and hold sufficient liquid assets such that central banks are asked to perform only as lenders of last resort and not as lenders of first resort. While the Liquidity Coverage Ratio may represent a significant challenge for some banks, the benefits of a strong liquidity regime outweigh the associated implementation costs.”

Source: Basel Committee on Banking Supervision