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

Bank risk weights under basel are not comparable

This group of factors, which reflect intended risk weight variability, explains 56% of risk weight variance.

After controlling for risk, we investigate whether different implementation standards and supervisory practices (unintended risk weight heterogeneity) also matters. For this function, we add dummies for every country where the bank granting the loan is headquartered. Within an ideal world with equal implementation standards, these HQ fixed effects will be statistically zero.

Basel

African poverty falling faster than you think

Measuring African poverty

In recent research (Pinkovskiy and Sala-i-Martin 2010), we utilize the methodology of our previous paper (Pinkovskiy and Sala-i-Martin 2009), to mix the typical Penn World Tables GDP series with a thorough inequality database to estimate African income distribution for the time 1970-2006. For countries and years with inequality data, we compute the distribution of income by fitting a lognormal distribution to the inequality data, whereas for countries and years without inequality data, we interpolate inequality based on neighbouring years. If a country does not have any inequality data for the sample period, we interpolate based on the average inequality of countries with inequality data.

Banks

Bank resolution under t-lac the aftermath

Bank resolution under t-lac the aftermath

Bank Resolution under T-LAC: The Aftermath

Charles Goodhart 24 December 2014

The Financial Stability Board’s recent consultative document proposes dividing global systemically important banks into holding companies and operating subsidiaries to be able to insulate the latter from a significant loss. This column poses the question of exactly what will happen following the holding company is liquidated or on paper so as to recapitalise the operating subsidiary – a question up to now unanswered by the Financial Stability Board.

Basel

Africa, the trade crisis and wto negotiations

Africa, the trade crisis and wto negotiations

THE FANTASTIC Recession and the fantastic trade collapse

This sharp economic depression worldwide has resulted in an immense contraction in international trade.

  • African export volume growth is likely to decrease to 4% in ’09 2009, from a buoyant rate of 11% in 2008, translating right into a 45% loss in export value. 1
  • The largest slump is for middle-income countries, as their exports depend heavily on commodities (e.g. oil and gold and silver coins) whose prices and demand has been severely hit; their manufactures exports also have suffered.
  • Oil and gold and silver coins were affected mainly by a slump in global commodity prices, while manufactures suffered because of contraction popular as the true sector in key markets shrunk.
  • Low-income countries show some resilience, due to the fact their exports are in “soft” commodities – such as for example tea, coffee, etc. – which didn’t experience a drastic decline in prices or demand on the global market.

This chapter discusses the trade situation in Africa in key global markets and the impact of the global overall economy on different income groups and sectors. Furthermore to advertise access issues, the paper highlights the need for initiatives such as for example “Aid for Trade” in assisting African countries realize the entire gains from trade liberalization.

Trade collapse amid the financial meltdown in major markets

The slowdown in major trading partners, in conjunction with Africa’s undiversified exports has severely affected the continent’s trade. That is exemplified by the drastic fall in exports to the united states, which fell by a lot more than 50% between August 2008 and August 2009, from $8,525 million to $4,017 million (Figure 1).

Banks

A ‘sovereign subsidy’ – zero risk weights and sovereign risk spillovers

A ‘sovereign subsidy’ – zero risk weights and sovereign risk spillovers

Josef Korte, Sascha Steffen 07 September 2014

European banking regulation assigns a risk weight of zero to sovereign debt issued by EU member countries, rendering it an attractive investment for European banks. This column defines a ‘sovereign subsidy’ as a fresh measure quantifying from what extent banks are undercapitalised as a result of zero risk weights. Using recent sovereign debt exposure data, the authors describe the build-up of the subsidy for both domestic and cross-country exposures.