Banks

Banks’ disclosure and financial stability

Option of information

THE LENDER of England, in its December 2009 Financial Stability Report, discussed banks’ disclosure practices and said that “better information could have constrained excessive risk-taking behaviour in the run-up to the crisis” (Bank of England 2009). And it suggested that UK banks were behind their international peers in this regard. From the Report, we are able to identify five areas where significant improvements in reporting information will be desirable:

  • funding risk;
  • group structure;
  • valuation methods;
  • intra-annual information; and
  • financial interconnections. 1

Internationally, and recently, these areas are also highlighted by the Enhanced Disclosure Task Force (EDTF 2012), an exclusive sector initiative which recommendations have already been endorsed by the Financial Stability Board.

Banks

Basel risk weights can’t be trusted

Capital adequacy and the financial meltdown

The financial meltdown that were only available in 2007 illustrates that capital-adequacy rules have didn’t make sure that banks’ capital holdings are based on the riskiness of their assets. That is true despite numerous refinements and revisions during the last 2 decades (Goldstein 2012). From the onset of the financial meltdown, fears that banks hold insufficient capital have critically undermined the functioning of interbank markets. When banks aren’t at the mercy of regulatory capital requirements commensurate with their portfolio risk, bank solvency may very well be threatened by adverse shocks to the worthiness of bank asset portfolios.

Banks

Basel regulation and small business lending

Basel regulation and small business lending

By forcing banks to carry a disproportionately higher amount of capital against such loans, Basel can unintentionally harm lending to small private firms. It generates perverse incentives for finance institutions that flee to other asset classes where loans originated are less expensive to hold. Additionally, it could encourage more financing in the organization loans instead of in small company economy.

As explained in Basel Committee on Banking Supervision (2005), in preparing the administrative centre regulation, Basel could use historical data on corporate loans but had no usage of historical information on small company loans. Regulators made a decision to ignore this inconsistency and for the organization loans they estimated the regulatory formula predicated on the available historical data. Confronted with too little historical information on small company loans, regulators calibrated the formula for small company capital requirement so that it fit the administrative centre levels banks held before the regulation. In so doing, Basel regulators created precedence where one asset class (small company loans) is treated differently from others. This may have dire consequences for access of small company to finance.

Banks

Basel iii is an overdue step in the right direction

Basel III will probably be worth defending

Once one becomes a critic it is usually better to remain one (press and conference organisers enjoy it that way). But as the new accord on international banking, popularly referred to as Basel III, is definately not perfect, it is on the right course and requires defending against attempts by bankers and their friends to cut it down, dilute it, and postpone it.

Bankers want us to believe that weak bank lending pertains to tight and/or uncertain regulation. This is a seductive argument for politicians in Europe and the united states as growth dries up and elections loom. But lending is weak because many borrowers are repairing their balance sheets and repaying loans. Numerous others are no more creditworthy.

Banks

Basel iii europe’s interest is to comply

Basel iii europe’s interest is to comply

Basel III’s bite

Basel III changes financial regulation:

  • It makes this is of regulatory capital a lot more rigorous;
  • It does increase minimum capital requirements dramatically, from 2% to 7% for the main element ratio of common equity to risk-weighted assets;
  • It tightens the methodology to weigh the chance of assets;
  • It introduces the very least leverage ratio (capital to non-risk-weighted total assets) to mitigate the chance of manipulation of risk weights;
  • It introduces additional requirements according to the financial cycle and the systemic need for some banks;
  • And it introduces regulatory standards and ratios for banks’ liquidity profile.

The accord has been criticised from all sides of the financial regulatory debate. A lot of the banking community has argued that the upsurge in capital requirements would greatly impede growth and that the liquidity ratios would harm market functioning (IIF 2011). JP Morgan Chase’s head, Jamie Dimon, has lambasted the excess capital requirements for systemically important finance institutions, including his own, as ‘anti-American’. But third-party studies claim that bankers have already been exaggerating the negative impact, and that the standards’ undesireable effects could be more than compensated by the advantages of additional financial stability for the machine (Oliveira Santos and Elliott 2012).

Banks

Basel iii ‘the only game in town’

Basel iii ‘the only game in town’

Basel III: ‘The only game in town’

Hyun Song Shin interviewed by Viv Davies, 25 March 2011

Hyun Song Shin of Princeton University foretells Viv Davies about his current focus on global liquidity and highlights the paradox of the way the US, while being the biggest net debtor on earth, is also a considerable net creditor in the global bank operating system. In addition they discuss the Basel III requirements, bank capital ratios and the lending capacity of bank equity. Shin stresses the need for international coordination to the success of financial and regulatory reform. The interview was recorded in Washington DC in March 2011 at the IMF conference, ‘Macro and Growth Policies in the Wake of the Crisis’. [ Also browse the transcript ]

Banks

Bankers’ liability and risk taking

Bankers’ liability and risk taking

Peter Koudijs, Laura Salisbury, Gurpal Sran 06 October 2018

So as to protect the economic climate from excessive risk-taking, many argue that bank managers have to have more personal liability. However, if the liability of bank managers includes a significant influence on risk-taking can be an open question. This column studies a distinctive historical episode where similar bankers, operating in similar institutional and economic environments, faced different examples of personal liability, according to the timing of their marriages, and finds that limited liability induced bankers to take more risks.

Banks

Banque de france’s 1889 ‘lifeboat’ bank rescue

A forgotten rescue

Much research on financial crises targets policy failures, nonetheless it is vital that you identify successes aswell – including those beyond the well-studied Anglo-American examples. Inside our study of French central banking (Hautcoeur et al. 2014), we’ve recovered the annals of an incipient crisis in 1889, when the Banque de France formed a ‘lifeboat’ to rescue among the largest French banks from failing and inducing an over-all banking panic. The surroundings where this operation occurred is notable for just two reasons:

Banks

Banks’ home bias and public debt sustainability

Banks’ home bias and public debt sustainability

While acknowledging the current presence of both effects, we aimed to substantiate the latter effect, from your home bias to fiscal outcomes, by accounting for endogenity issues. 4

Our main findings broadly hold in robustness checks. For example, dropping outliers such as for example Greece and Japan from the united states sample will not change the empirical results. The findings are also generally robust to alternative regression methodologies aswell as to the utilization of different home bias measures. The only exception is that while we look for a negative relationship between our preferred home bias measure (holdings of domestic sovereign debt in accordance with total assets) and advanced markets borrowing costs, the partnership is positive for the house bias measure which has total public debt as the denominator. This finding isn’t surprising because this way of measuring home bias mainly reflects the diversification angle instead of banks’ preference for sovereign debt. 5

Banks

Banks, government bonds, and default

Banks, government bonds, and default

New evidence on banks and sovereign default risk

Regardless of the relevance of the phenomena, there is little systematic evidence on them. In recent work (Gennaioli et al. 2014b), we make an effort to fill this gap by documenting the hyperlink between public default, bank bondholdings, and loans. We utilize the BANKSCOPE dataset, which gives us with information on the bondholdings and characteristics of over 20,000 banks in 191 countries and 20 sovereign default episodes between 1998 and 2012. We address two broad questions:

1. Does banks’ contact with sovereign risk affect lending? Specifically, do the banks that hold more public bonds exhibit a more substantial fall in loans when their government defaults?