The determinants of banks’ liquidity buffers and the role of liquidity regulation
Clemens Bonner, Iman van Lelyveld, Robert Zymek, 1 November 2013
What are the determinants of banks’ liquidity holdings and how are these reshaped by liquidity regulation? Based on a sample of 7,000 banks in 30 OECD countries, this column argues that banks’ liquidity buffers are determined by a combination of both bank- and country-specific variables. The presence of liquidity regulation substitutes for most of these determinants while complementing the role of size and institutions’ disclosure requirements. The complementary nature of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation.
Until recently, liquidity risk was not the main focus of banking regulators. However, the 2007–2009 crisis showed how rapidly market conditions can change, exposing severe liquidity risks for some institutions. Although capital buffers were effective in reducing liquidity stress to some extent, they were not always sufficient.
Topics: Financial markets, Microeconomic regulation
Tags: banking, disclosure, liquidity, regulation, Too big to fail, transparency
A game changer: The EU banking recovery and resolution directive
Thomas Huertas, María J Nieto, 19 September 2013
To end moral hazard, investors, not taxpayers, should bear the loss associated with bank failures. Recently, the EU took a major step in this direction with the Banking Recovery and Resolution Directive. This column argues that this is a game changer. It assures through the introduction of the bail-in tool that investors, not taxpayers, will primarily bear the cost of bank failures, and it opens the door to resolving banks in a manner that will not significantly disrupt financial markets.
To end moral hazard and “too big to fail”, investors, not taxpayers, should bear the loss associated with bank failures. Recently, ECOFIN took a major step in this direction. It agreed a common position with respect to the Banking Recovery and Resolution Directive. If confirmed in the trialogue with the Commission and the European Parliament, the Directive will:
Topics: Financial markets
Tags: banks, moral hazard, Too big to fail
Is there a future for international banks?
Dirk Schoenmaker, 25 August 2013
After the financial crisis, there was a shift from international to multinational banks due to supervisors’ increasingly national approach. This column provides an alternative solution that aims to keep international banking alive. What is key is that, first, national supervisors are internationally coordinated and, second, that the whole system is supported up by an appropriate fiscal backstop.
The international, centralised, business model of banks has come under pressure after the global financial crisis. Supervisors are leaving their traditional consolidated approach, under which a bank as a whole is assessed. Instead, they are moving towards a stand-alone approach, under which the national subsidiaries are supervised separately.
Topics: Global crisis, International finance
Tags: banking, Eurozone crisis, international banks, Too big to fail
Big banks and macroeconomic outcomes
Franziska Bremus, Claudia M. Buch, Katheryn Russ, Monika Schnitzer, 10 July 2013
The regulation of big banks has been in the spotlight for many reasons. This column adds to the list. Examining evidence for more than 80 countries for the years 1995-2009, banking systems are shown to be highly concentrated. In many cases, the banks are so big that bank-specific credit-growth fluctuations affect the macroeconomy.
Does the mere presence of big banks affect macroeconomic outcomes?
Topics: International finance
Tags: banking, Too big to fail
Hair of the dog that bit us: New and improved capital requirements threaten to perpetuate megabank access to a taxpayer put
Edward J Kane, 30 January 2013
Do financial institution managers only owe enforceable duties of loyalty, competence and care to their stockholders and explicit creditors, but not to taxpayers or government supervisors? This column argues that in the current information and ethical environments, regulating accounting leverage cannot adequately protect taxpayers from regulation-induced innovation. We ought to aim for establishing enforceable duties of loyalty and care to taxpayers for managers of financial firms. Authorities need to put aside their unreliable, capital proxy: they should measure, control, and price the ebb and flow of safety-net benefits directly.
This column is a lead commentary in the VoxEU Debate "Banking reform: Do we know what has to be done?"
Topics: International finance
Tags: banks, Finance, financial regulation, global crisis, taxpayers, Too big to fail
Have we solved 'too big to fail'?
Andrew G Haldane, 17 January 2013
The Subprime Crisis became the Global Crisis when one too-big-to-fail bank was allowed to fail. This column argues that too-big-to-fail is far from gone despite years of reform efforts. It is important that it not be forgotten. Further analytical work, weighing the costs and benefits of different structural reform proposals, would help keep memories fresh and policies on the right track.
Topics: Financial markets
Tags: bank regulation, Too big to fail
Macroeconomic adjustment and the history of crises in open economies
Joshua Aizenman, Ilan Noy, 21 November 2012
Are countries that have previously experienced banking crises less vulnerable to them in the future? This column argues that, in fact, previous crises might make future crises more likely. There isn’t much evidence of a learning process from past mistakes because the regulator often lags behind banking’s pace of innovation. Preparing to prevent the last crisis does not prevent the next and it seems that the ‘too big to fail’ doctrine provides cover for banks, delaying the day of adjustment.
Looking at recent banking crises, Gourinchas and Obstfeld (2012) have identified domestic-credit booms and real currency appreciation as the most significant predictors of future banking crises in both advanced and emerging economies1. An optimistic conjecture is that countries that previously experienced banking crises will tend to be more cautious.
Topics: Financial markets, Institutions and economics
Tags: Banking crisis, regulation, Too big to fail
Destabilising market forces and the structure of banks going forward
Arnoud Boot, 25 October 2011
The financial sector has become increasingly complex in terms of its speed and interconnectedness. This column says that market discipline won’t stabilise financial markets, and complexity makes regulating markets more difficult. It advocates substantial intervention in order to restructure the banking industry, address institutional complexity, and correct misaligned incentives.
The financial services sector has gone through unprecedented turmoil in the last few years. We see fundamental forces that have affected the stability of financial institutions. In particular, information technology has led to an enormous proliferation of financial markets, but also opened up the banks’ balance sheets by enhancing the marketability of their assets.
Topics: Financial markets, International finance
Tags: complexity, macroprudential regulation, systemic risk, Too big to fail
Incentive pay and bailouts
Tim Besley, Maitreesh Ghatak, 27 August 2011
As we approach three years since the fall of Lehman Brothers, the incentives that led the financial sector to take on too much risk still exist. This column argues that they will remain so long as governments continue to provide an implicit guarantee that banks will be bailed out. To tackle this, the authors dare to propose a tax on bonuses.
While it seems that the worst of the financial crisis of 2008 is over, most of the structural issues that lay behind it remain unresolved. This includes distortions in incentive pay due to government protection of investors from downside risk.
Topics: Global crisis, Global governance, International finance, Politics and economics
Tags: Bailouts, financial regulation, Too big to fail
Too much finance?
Jean-Louis Arcand, Enrico Berkes, Ugo Panizza, 7 April 2011
Over the last three decades the US financial sector has grown six times faster than nominal GDP. This column argues that there comes a point when the financial sector has a negative effect on growth – that is, when credit to the private sector exceeds 110% of GDP. It shows that, of the advanced countries currently suffering in the fallout of the global crisis were all above this threshold.
The idea that a well-working financial system plays an essential role in promoting economic development dates back to Bagehot (1873) and Schumpeter (1911). Empirical evidence on the relationship between finance and growth is more recent.
Topics: Financial markets, Global crisis, Macroeconomic policy
Tags: banking sector, financial regulation, systemic risk, Too big to fail