Featured Product

    IMF Report on the 2017 Article IV Consultation with United States

    July 27, 2017

    IMF published its staff report on conclusion of the 2017 Article IV consultation with the United States. Directors observed that the financial system is generally healthy. They urged the authorities to closely monitor the rising vulnerabilities in corporate and household credit markets and implement the remaining recommendations of the 2015 Financial Sector Assessment Program (FSAP). Directors noted that important gains have been made since the global financial crisis in strengthening the financial oversight structure. They concurred that some aspects of the system can be fine-tuned further and the regulatory structure simplified, as has been proposed by the authorities. Directors emphasized, however, that the thrust of the current risk-based approach to regulation, supervision, and resolution should be preserved to safeguard financial stability while facilitating economic growth. In this context, they welcomed the authorities’ commitment to maintain a leading role in financial regulatory discussions in international forums.

    The staff report highlights that capital position of U.S. banks is strong and bank asset quality continues to be good, as evidenced by the results of the FED’s most recent Comprehensive Capital Analysis and Review or CCAR. Over the past year, money market fund reform—that required institutional funds to have a floating net asset value and allowed them to impose liquidity fees and redemption gates—led investors to smoothly rotate more than USD 1 trillion out of prime funds (holding commercial paper) and into government bond funds. However, a number of the shortcomings in financial stability oversight, which were highlighted in the 2015 FSAP, remain unaddressed. These include data blind spots (especially for nonbanks) that preclude a full understanding of the nature of financial system risks, residual vulnerabilities in repo markets and money market funds, the absence of harmonized national standards or consolidated supervision for insurance companies, the complex institutional structure for financial regulation, a housing finance system that remains in limbo with little progress in reforming the government sponsored enterprises, and an incomplete picture of financial interlinkages and interconnections in the financial system. There is also a continuing need to remove impediments to data sharing among regulatory agencies. Cyber risks to the financial system are on the rise and potentially systemic. Although the U.S. is steadily improving its regulatory framework to strengthen the resilience of the financial system, the lack of a comprehensive picture and the fast-evolving nature of these vulnerabilities make any assessment of the size of systemic risks and their potential economic costs highly uncertain.

    Over the past several years, a series of decisive measures was put in place to lessen the potential for financial stability risks, including enhanced capital and liquidity requirements, better underwriting standards in the housing sector, greater transparency to mitigate counterparty risks, and limits on proprietary trading. Important regulatory measures have been, or are being, implemented, including liquidity risk requirements for money market and mutual funds; standardization of derivatives products and markets; measures that reduce banks’ medium-term asset-liability mismatch (through the net stable funding ratio or NSFR); and a framework for bank recovery and resolution (that is, rules on “living wills” and bail-in-able debt). In addition, the U.S. Treasury has proposed a range of reforms to the financial oversight of depository institutions. These include refocusing existing standards in terms of changes to regulatory thresholds (increasing total asset threshold for banks subject to stress testing); a more conservative liquidity coverage ratio (LCR) measure; a less binding calculation of the supplemental leverage ratio (SLR); risk-based capital surcharges (including revisiting the calculation of total loss-absorbing capacity (TLAC) for global systemically important banks, or G-SIBs, and delay in implementation of trading book capital rules and NSFR); exemption, from Volcker Rule, of banks with less than USD 10 billion in assets and narrowed definition of proprietary trading. To lessen the regulatory burden, the Treasury report proposes moving the FED’s stress testing process to a two-year frequency. 

    The staff recommends that the current risk-based capital framework should not be replaced with a simple leverage ratio. On a system-wide basis, the incremental capital needed to meet a 10% leverage ratio is estimated to be close to USD 200 billion. While this may be unduly costly for many banks, the existence of such an “off ramp” may give banks counterproductive incentives to increase capital but place more capital into risky activities. It would be particularly problematic to allow banks to self-select into a less demanding regulatory and supervisory regime, regardless of the underlying systemic risk of their operations. The maintenance of a robust financial regulatory regime in the U.S. has positive spillovers to other economies. These have manifested both through reducing financial stability risks in the U.S. and the knock-on effects from encouraging progress to strengthen the global regulatory framework. To this end, delayed implementation of trading book capital rules, NSFR, and TLAC rules runs the risk of eroding efforts to complete this and other areas of the international reform agenda.

    Related Link: Staff Report (PDF)

    Keywords: Americas, US, Banking, Securities, Dodd-Frank Act, Stress Testing, Article IV, FSAP, IMF

    Featured Experts
    Related Articles
    News

    BCBS Consults on Revised Disclosures for Market Risk Framework

    BCBS launched a consultation on the revised disclosure requirements for the market risk framework for banks.

    November 14, 2019 WebPage Regulatory News
    News

    FSB Examines Implementation of Resolution Regimes in Financial Sector

    FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions and sets out plans for further work.

    November 14, 2019 WebPage Regulatory News
    News

    PRA Publishes Final Policy on Maintenance of TMTP Under Solvency II

    PRA published the policy statement (PS25/19) that contains the final supervisory statement (SS6/16) on maintenance of the transitional measure on technical provisions (TMTPs) under Solvency II.

    November 14, 2019 WebPage Regulatory News
    News

    BCBS Consults on Disclosure Templates of Sovereign Exposures of Banks

    BCBS published a consultation on the voluntary disclosure templates related to sovereign exposures of banks.

    November 14, 2019 WebPage Regulatory News
    News

    IAIS Adopts ComFrame, ICS, and Holistic Framework for Systemic Risk

    IAIS adopted a comprehensive set of reforms—Common Framework (ComFrame), Insurance Capital Standard (ICS) Version 2.0, and Holistic Framework for Systemic Risk—that will enable effective cross-border supervision of insurance groups and contribute to global financial stability.

    November 14, 2019 WebPage Regulatory News
    News

    PRA Publishes Templates for Statistical Disclosures Under Solvency II

    PRA published templates for statistical disclosures, as required under Article 31(2) of the Solvency II Directive.

    November 14, 2019 WebPage Regulatory News
    News

    FASB Proposes Improvements to Derivatives and Hedging Standard

    FASB proposed an Accounting Standards Update, on codification improvements to hedge accounting under Topic 815, to clarify certain sections of the 2017 hedge accounting standard (Update 2017-12).

    November 13, 2019 WebPage Regulatory News
    News

    FASB Approves Guidance to Assist in Transition to New Reference Rates

    FASB approved an Accounting Standards Update (Topic 848) to provide temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the reference rate reform on financial reporting.

    November 13, 2019 WebPage Regulatory News
    News

    BIS and MAS Launch Innovation Hub in Singapore

    BIS and MAS launched the BIS Innovation Hub Center in Singapore.

    November 13, 2019 WebPage Regulatory News
    News

    MAS and Industry to Create Framework for Adoption of Responsible AIDA

    MAS announced that it is working with financial industry partners to create a framework for financial institutions to promote the responsible adoption of Artificial Intelligence and Data Analytics (AIDA).

    November 13, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 4142