Featured Product

    ECB Publishes Sixth Issue of Macroprudential Bulletin in October 2018

    October 02, 2018

    ECB published Issue 6 of the Macroprudential Bulletin. The Bulletin provides an overview of the macro-prudential policy measures that apply in euro area countries as of August 01, 2018 and highlights that most of these measures will be fully phased in from January 01, 2019. Additionally, this issue includes three articles on key macro-prudential topics: the leverage ratio, the framework for global systemically important banks (G-SIBs), and the potential macro-prudential tools for investment funds.

    The first article analyzes the leverage ratio and its links with the repo markets. This article looks into the implications of removing repo assets from the leverage ratio. The findings suggest that granting such an exemption may have adverse effects on the stability of the financial system, even when measures are introduced to compensate for the decline in capital required by the leverage ratio framework. Against the background of a pronounced increase in the median default probabilities for large, systemically relevant banks, an exemption of repo assets could considerably weaken the leverage ratio for some banks and may have adverse effects from a financial stability perspective. Consequently, such a change in treatment could lead to the re-emergence of risks related to the build-up of excessive leverage and over-reliance on short-term wholesale funding in financial markets. Overall, therefore, the analysis does not support a more lenient treatment of repo assets in the leverage ratio framework.

    The second article focuses on the regulatory framework for G-SIBs, which BCBS developed to address the negative externalities that a failure of these large banks could exert on the financial sector and the economy. This article presents evidence that some G-SIBs and other banks with reporting obligations tend to reduce their risk category scores at the end of a year, relative to other quarters. A possible explanation for this “window dressing” is that these banks aim to increase the probability of being allocated to a lower bucket with less stringent requirements. Window-dressing behavior could have detrimental effects on financial stability, as it may imply that banks’ overall systemic importance has been underestimated and, as a result, the relative ranking and higher loss absorbency requirement of G‑SIBs may be distorted. Additionally, the resulting reduction in the provision of certain services, which are captured by the indicators in the G-SIB framework at the end of a year, could adversely affect overall market functioning. The article suggests further investigating whether an alternative metric for calculating the risk score—based on averaging rather than year-end data—can help to avoid these unintended consequences of the G-SIB framework.

    The third and last article aims to facilitate the discussion on potential macro-prudential liquidity instruments for investment funds by providing a preliminary assessment of the effectiveness and efficiency of several instruments. ESRB has identified the need to develop macro-prudential instruments that address liquidity mismatches in funds as a key priority for the short to medium term. FSB has also recommended that authorities should consider providing direction on fund managers’ use of liquidity management tools in exceptional circumstances. This article reviews various options for macro-prudential liquidity tools, assesses their potential effectiveness and efficiency, and provides some suggestions in this regard. One of the suggestions is that structural requirements, such as “redemption duration restrictions,, should be explored further. The article also suggests that authorities should have the necessary powers and guidance to suspend redemptions to halt runs in exceptional circumstances.


    Related Link: Macroprudential Bulletin  

    Keywords: Europe, EU, Banking, Leverage Ratio, Repo, G-SIB Framework, Liquidity Tools, Macroprudential Bulletin, ECB

    Featured Experts
    Related Articles
    News

    APRA Publishes Proposal to Increase Transparency of Banking Data

    APRA proposed to substantially increase the volume and breadth of data it makes publicly available on authorized deposit-taking institutions, including banks, credit unions, and building societies.

    December 05, 2019 WebPage Regulatory News
    News

    ESMA Consults on Guide to Internal Controls for Credit Rating Agencies

    ESMA launched a consultation on the guidelines on internal controls for credit rating agencies (CRAs).

    December 05, 2019 WebPage Regulatory News
    News

    EU Finalizes Directive and Prudential Rules for Investment Firms

    EU published, in the Official Journal of the European Union, the Directive (2019/2034) and Regulation (2019/2033) on the prudential requirements and supervision of investment firms.

    December 05, 2019 WebPage Regulatory News
    News

    OSFI Revises Guideline on Principles for Management of Liquidity Risk

    OSFI finalized Guideline B-6 on the principles for the management of liquidity risk.

    December 05, 2019 WebPage Regulatory News
    News

    PRA Consults on Framework to Manage Outsourcing and Third-Party Risk

    PRA published a consultation paper CP30/19 that sets out proposals to modernize the regulatory framework on outsourcing and third-party risk management.

    December 05, 2019 WebPage Regulatory News
    News

    BoE, PRA, and FCA Consult to Strengthen Operational Resilience

    BoE, PRA, and FCA published a shared policy summary and coordinated consultation papers on new requirements to strengthen operational resilience in the financial services sector.

    December 05, 2019 WebPage Regulatory News
    News

    EC Amends Rule on Mapping of External Credit Assessment Institutions

    EC published the implementing regulation (EU) 2019/2028, which amends Regulation 2016/1799, regarding the mapping tables specifying correspondence between the credit risk assessments of external credit assessment institutions (ECAIs) and the credit quality steps set out in the Capital Requirements Regulation.

    December 04, 2019 WebPage Regulatory News
    News

    EBA Issues Second Part of Advice on Implementation of Basel III in EU

    EBA published the second part of its advice on the implementation of Basel III in EU, which complements the report published on August 05, 2019.

    December 04, 2019 WebPage Regulatory News
    News

    EU Approves European Council Proposal on CCP Recovery and Resolution

    EU ambassadors approved the position of European Council on a proposed framework for clearing houses and their authorities to prepare for and deal with financial difficulties.

    December 04, 2019 WebPage Regulatory News
    News

    OSFI Releases Guideline on Foreign Bank Branch Deposit Requirements

    OSFI released the final version of Guideline A-10 on foreign bank branch deposit requirements, along with guideline impact analysis statement.

    December 04, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 4268