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

How insurers differ from banks: Implications for systemic regulation

Christian Thimann 17 October 2014

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Regulation of the insurance industry is entering a new era. The global regulatory community under the auspices of the Financial Stability Board (FSB) is contemplating regulatory standards for insurance groups that it deems to be of systemic importance. Nine insurance groups received this FSB classification in 2013, and the design of systemic regulation for these groups is now in progress.

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Topics:  Financial markets

Tags:  insurance, reinsurance, banking, financial intermediation, regulation, systemic risk, maturity transformation, BASEL III, investment, capital, capital requirements, bail-in, loss absorption

Corporate governance of banks: Risk appetite as a pre-commitment mechanism

Patricia Jackson 13 October 2014

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Since the Global Crisis the authorities have been focusing on how to make banks safer, with changes to capital and liquidity requirements. Corporate governance of banks and the wider risk culture are also in the frame. Laeven and Ratnovski (2014) look at governance and raise three aspects: better risk management, regulation of pay, and enhanced market discipline. Another lens is to consider the effectiveness of the board and in particular its independence. However, several papers (e.g. Erkens et al. 2012 and Adams 2012) have found that this is negatively related to outcomes in the Crisis.

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Topics:  Financial markets Global crisis

Tags:  global crisis, banking, capital requirements, liquidity requirements, risk management, corporate governance, Culture

Regulating the global insurance industry: Motivations and challenges

Christian Thimann 10 October 2014

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The Financial Stability Board (FSB) has completed its framework for the regulation of systemically important banks (FSB 2013a), and is now turning to the insurance industry. Its approach is inspired by the banking framework, under which 29 banking groups have been classified as systemically important. These banks are subject to a three-pronged framework consisting of enhanced supervision, the preparation of risk- and crisis-management plans, and the application of capital surcharges.

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Topics:  Financial markets Global crisis

Tags:  systemic risk, insurance, global crisis, AIG, regulation, capital requirements, Bailouts, bail-in, financial intermediation, accounting standards, mark-to-market, risk management

Where danger lurks

Olivier Blanchard 03 October 2014

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Until the 2008 global financial crisis, mainstream US macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment.

The benign view reflected both factors internal to economics and an external economic environment that for years seemed indeed increasingly benign.

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Topics:  Macroeconomic policy Monetary policy

Tags:  macroeconomics, global crisis, great moderation, rational expectations, nonlinearities, fluctuations, business cycle, monetary policy, inflation, bank runs, deposit insurance, sudden stops, capital flows, liquidity, maturity mismatch, zero lower bound, liquidity trap, capital requirements, credit constraints, precautionary savings, housing boom, Credit crunch, unconventional monetary policy, fiscal policy, sovereign default, diabolical loop, deflation, debt deflation, financial regulation, regulatory arbitrage, DSGE models

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

Credit ratings and regulatory risk weights

Harold Cole, Thomas F Cooley 22 June 2014

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One of the casualties of the financial crisis has been the reputation of the major credit rating agencies. To many, the problem with the credit ratings business seems obvious:

  • The ‘issuer-pays’ market structure, in which the issuers pay the agencies to rate their debt instruments, distorts incentives.

The issuers want higher ratings to lower their cost of borrowing, and can shop among raters to get higher ratings (Pagano and Volpin 2010). Seems obvious, right?

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Topics:  Financial markets Global crisis Microeconomic regulation

Tags:  regulation, credit rating agencies, capital requirements, risk weights, sub-prime crisis, reputation

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

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