The impact of capital requirements on bank lending

Jonathan Bridges, David Gregory, Mette Nielsen, Silvia Pezzini, Amar Radia, Marco Spaltro 02 September 2014

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The financial crisis has led to widespread support for greater use of time-varying capital requirements on banks as a macroprudential policy tool (see for example Yellen 2010 and Hanson et al. 2011). Policymakers aim to use these tools to enhance the resilience of the financial system, and, potentially, to curb the credit cycle. Under Basel III, national regulatory authorities will be tasked with setting countercyclical capital buffers over the economic cycle.

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Topics:  Financial markets

Tags:  Macroprudential policy, capital requirements, regulation, bank regulation, BASEL III, Bank of England, financial crisis, bank lending, UK

Corporate governance of banks and financial stability

Luc Laeven, Lev Ratnovski 21 July 2014

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Corporate governance is the practice of shareholders exercising control over managers so that they act in shareholders’ interests. In non-financial firms, this maximises firm efficiency. Such efficiency effects also exist in banks. For example, banks that face more active takeover markets are more cost-efficient (Brook et al. 1998).

Unlike non-financial firms, bank operations have another relevant dimension besides efficiency: risk. Banks are prone to risk-taking, due to:

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Topics:  Financial markets

Tags:  corporate governance, bank regulation, systemic risk

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

Have we solved 'too big to fail'?

Andrew G Haldane 17 January 2013

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No.

That is not my pessimistic verdict; it is the market’s. Prior to the crisis, the 29 largest global banks benefitted from just over one notch of uplift from the ratings agencies due to expectations of state support. Today, those same global leviathans benefit from around three notches of implied support. Expectations of state support have risen threefold since the crisis began.

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Topics:  Financial markets

Tags:  bank regulation, Too big to fail

Bank governance and regulation

Luc Laeven 25 October 2011

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Regulations for banks are being rewritten in response to the global financial crisis. The Basel III framework is being adopted, capital requirements are being increased, and safety nets have expanded in scope and size, all with the aim of making banks safer. These financial reforms and re-regulations, however, ignore bank governance – the ownership of banks and the incentives and conflicts that arise between bank owners and managers. But what if the governance structure of banks is intrinsically linked to bank risk?

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Topics:  Financial markets International finance

Tags:  bank regulation, banking, bank governance, principal-agent problem

Do not be detoured by bankers and their friends; our future financial salvation lies in the direction of Basel

Avinash Persaud 23 September 2011

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For the past decade I have been a trenchant critic of the international banking rules developed in Basel. Nine years ago, I wrote an editorial in The Financial Times1 highlighting the perverse irony of bankers capturing their regulators and yet fashioning international banking regulation in a way that would lead them to systemic collapse.

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Topics:  Financial markets International finance

Tags:  bank regulation, global crisis, BASEL III

Tax banks to discourage systemic-risk creation, not to fund bailouts

Enrico Perotti 07 February 2010

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The burning issue of funding the bailout has finally led to the first policy action on financial taxation. The good news is that it is not a Tobin tax on all financial transactions, which would be a very crude and distortionary solution. Financial intermediaries have indeed grown too large, but discouraging all financial transactions suppresses activity and fails to target problematic practices.

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Topics:  Financial markets

Tags:  bank regulation, Pigouvian tax, Obama's bank reforms

Sudden financial arrest

Ricardo Caballero 17 November 2009

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“Sudden cardiac arrest (SCA) is a condition in which the heart suddenly and unexpectedly stops beating. When this happens, blood stops flowing to the brain and other vital organs…. SCA usually causes death if it’s not treated within minutes….”
– US National Institute of Health

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Topics:  Financial markets

Tags:  moral hazard, bank regulation, Sudden financial arrest

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