Higher capital requirements: The jury is in

Stephen Cecchetti 17 December 2014

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During the Basel III debate, a key concern was that higher capital requirements might damage economic growth. By forcing banks to increase their capitalisation, long-run growth would be permanently lower and the adjustment itself would put a drag on the recovery from the Great Recession. Unsurprisingly, the private sector saw catastrophe, while the official sector was more sanguine. The Institute of International Finance (2010) is the most sensationalist example of the former, and the Macroeconomic Assessment Group (2010a and 2010b) one of the most staid cases of the latter.1

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Topics:  Financial markets

Tags:  bank capital, BASEL III, capital requirements, Macroprudential policy, capital buffers, countercyclical capital buffers, bank lending

The jury is in

Stephen Cecchetti,

Date Published

Wed, 12/17/2014

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http://www.cepr.org/sites/default/files/policy_insights/PolicyInsight76.pdf

Vox readers can download CEPR Policy Insight 76 for free here.

Tags
bank capital, BASEL III, capital requirements, Macroprudential policy, capital buffers, countercyclical capital buffers, bank lending

A safe asset for Eurozone QE: A proposal

Luis Garicano, Lucrezia Reichlin 14 November 2014

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As Europe moves closer to deflation, the ECB is gradually inching towards outright quantitative easing (QE) – increasing the monetary base through purchases of government bonds (Draghi 2014). But undertaking such purchases confronts a problem. There is no Eurozone ‘government bond’ to purchase. Were the ECB to purchase the debt of all member countries, it would end up with a large amount of debt on its balance sheet, making it impossible for a country to default without triggering very large redistribution.

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Topics:  Macroeconomic policy Monetary policy

Tags:  Eurozone QE, Safe Market Bonds, ECB, quantitative easing, unconventional monetary policy, diabolic loop, doom loop, sovereign debt, safe assets, savings glut, risk weights, bank capital

Are banks too large?

Lev Ratnovski, Luc Laeven, Hui Tong 31 May 2014

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Large banks have grown significantly in size and become more involved in market-based activities since the late 1990s. Figure 1 shows how the balance-sheet size of the world’s largest banks increased two- to four-fold in the ten years prior to the crisis. Figure 2 illustrates how banks shifted from traditional lending towards market-oriented activities.

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Topics:  Financial markets

Tags:  regulation, economies of scale, bank regulation, banking, Too big to fail, systemic risk, BASEL III, bank resolution, bank capital

How to loosen the banks-sovereign nexus

Paolo Angelini, Giuseppe Grande 08 April 2014

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Sovereign debtors and their national banking systems are closely linked through a range of direct and indirect channels. These include banks’ claims on sovereigns, semi-automatic links between sovereign and bank credit ratings, public backstops, collateral in banks’ operations, and the effects of fiscal distress on the overall economy – and thus the quality of bank loans (CGFS 2011, Bank of Italy 2013a).

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Topics:  EU institutions Financial markets

Tags:  bank regulation, capital requirements, home bias, bank capital

Estimating the impact of changes in aggregate bank capital requirements during an upswing

Joseph Noss, Priscilla Toffano 06 April 2014

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The recent financial crisis and economic contraction that followed highlighted the crucial role that banks play in facilitating the extension of credit and enabling economic growth. This underlies the economic rationale for imposing regulations on the banking industry, including minimum capital requirements designed to mitigate risks banks would not otherwise account for in their behaviour.

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Topics:  Financial markets

Tags:  regulations, bank regulation, banking, capital requirements, banks, BASEL III, credit, Macroprudential policy, bank capital

The puzzling pervasiveness of dysfunctional banking

Charles W Calomiris interviewed by Romesh Vaitilingam,

Date Published

Fri, 03/21/2014

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See Also

Calomiris, C W and S H Haber (2014), Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton University Press.

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Topics

Financial markets
Tags
credit booms, banking, banks, systemic risk, recapitalisation, Eurozone crisis, Bank credit, bank capital

Related Article(s)

The limits to partial banking unions The AQR and stress testing the European banking system Banking union for Europe – where do we stand? Eastern European credit crunch and foreign bank funding Bank credit during the global crisis: A cross-country comparison
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The AQR and stress testing the European banking system

Viral Acharya interviewed by Viv Davies,

Date Published

Fri, 03/14/2014

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See Also

Acharya, V and S Steffen (2014) "Falling short of expectations? Stress-testing the European banking system", VoxEU.org, 17 January.

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Topics

Financial markets
Tags
banking, banks, systemic risk, recapitalisation, Eurozone crisis, banking union, bank capital, Asset Quality Review, stress testing

Related Article(s)

Banking union for Europe – where do we stand? Stress tests: a success for cooperation and transparency – and also very good for Spain A call for liquidity stress testing Bank resolution: from Cinderella to centre stage The urgent need to recapitalise Europe’s banks How much capital do European banks need?
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Falling short of expectations? Stress-testing the European banking system

Viral Acharya, Sascha Steffen 17 January 2014

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The Eurozone is mired in a recession. In 2013, the GDP of the 17 Eurozone countries fell by an average of 0.5%, and the outlook for 2014 shows considerable risks across the region. To stabilise the common currency area and its (partly insolvent) financial system, a Eurozone banking union is being established. An important part of the banking union is the Single Supervisory Mechanism, which will transfer the oversight of Europe’s largest banks to the ECB (Beck 2013).

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Topics:  Financial markets

Tags:  banking, banks, systemic risk, recapitalisation, Eurozone crisis, banking union, bank capital, Asset Quality Review, stress testing

Bank capital requirements: Risk weights you cannot trust and the implications for Basel III

Jens Hagendorff, Francesco Vallascas 16 December 2013

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One of the primary purposes of bank capital is to absorb losses. Where bank capital holdings are insufficient to absorb losses, banks will either fail or – if bank failure is deemed too costly for the economy – be bailed out. In practice, banks frequently receive public funds where capital holdings are insufficient to cover losses in order to prevent bank failure. Whether or not bank capital holdings are sufficient and in line with the risk of bank portfolios is therefore an important question that is hotly debated among policymakers and in the press.

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Topics:  Financial markets Microeconomic regulation

Tags:  Basel II, financial crisis, capital requirements, BASEL III, Basel, bank capital, risk weighting, capital adequacy

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