Featured Product

    Don Kohn of BoE Examines Lessons from Last Global Financial Crisis

    September 07, 2018

    Don Kohn of BoE spoke at the 200th Anniversary of Danmarks Nationalbank in Copenhagen. In his speech, Don Kohn examines the lessons that can be learned from the last global financial crisis. He believes that complacency in good times can ultimately store up problems for the global economy and financial system. He also emphasized that macro-prudential policy is a promising addition to the regulatory toolkit and that public understanding and support are critical to sustaining effective policy—and that includes countercyclical macro-prudential policy.

    Macro-prudential policy tries to assure that the financial system does not amplify shocks and will continue to deliver its essential services, even after severe, unexpected developments. In this context, he discussed the contribution of the countercyclical capital buffer (CCyB) of Basel III. increases in this buffer have come to be used in a number of jurisdictions, as economies and banking systems have recovered from the crisis, including in the UK. Setting this requirement does have its challenges, including identifying and scaling vulnerabilities in environments in which, as is often the case, indicators are giving mixed signals, and then calibrating the appropriate CCyB setting. A second challenge to macro-prudential policy more generally is identifying and dealing with financial vulnerabilities outside the banking system, where they could be lodged in lightly regulated entities and markets. A third challenge is avoiding arbitrage across geographical jurisdictions that simply pushes risk around globally integrated financial markets. According to Mr. Kohn, progress has been made on all three of these fronts since the global crisis, but more remains to be done. Despite these challenges, global financial stability would be better assured if more jurisdictions, including the U.S., adopted a more active use of the CCyB—making sure that banks and other intermediaries retained enough capital in the upswing now going on to safeguard their ability to deliver essential services at reasonable prices in the next downswing.

    He said that stress tests are a critical building block for gauging the appropriate level of countercyclical capital. Stress tests should be a key input into a decision about the CCyB, but they are not a substitute for explicitly setting CCyBs. However, the CCyB alone will not be the most efficient or even a sufficient way to mitigate many financial stability risks. For example, mortgage lending against residential real estate has been the culprit in quite a few financial sector problems in many jurisdictions. The externality from troubled housing markets can come from the cutbacks in spending by borrowers who are struggling to service their debt as well as from lenders. The ability to set minimum standards for mortgage lending should be in the tool kit of every macro-prudential authority and that authority should be willing to use it countercyclically. He mentioned that, in this regard, the U.S. falls short of even having the typical macro-prudential tools, much less of an intention to use what controls there are to foster financial stability. Under most circumstances, macro-prudential tools of the sort we have been discussing are likely to be far more effective dealing with financial stability risks than would be the interest rate tools of monetary policy, whose comparative advantage is countering real and price shocks.

    As per Mr. Kohn, tightening regulation in good times when the financial system is perceived to be strong, and easing requirements when developments threaten to weaken it, will not be intuitive to many people. Banking lobbies will be opposed to increases in capital requirements or greater restrictions on loan terms; they will try to rally the public to their perspective by citing increased costs of credit. People worried about protecting taxpayers and deposit insurance funds will be hesitant to buy into any relaxation when the cycle turns. Thus, he concluded that “we” need to be active now in explaining to the general public as well as to their elected representatives the public benefits of countercyclical macro-prudential policy and reminding them of the lessons learned about increasing complacency in good times leading to the kinds of serious economic deprivations that were experienced not so many years ago.

     

    Related Link: Speech

    Keywords: Europe, UK, Banking, Basel III, CCyB, Macro-prudential Policy, FPC, BoE

     

    Featured Experts
    Related Articles
    News

    EBA Analyzes Impact of Unwind Mechanism of Liquidity Coverage Ratio

    EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.

    November 19, 2020 WebPage Regulatory News
    News

    ECB Outlines Views on Possible Changes to AnaCredit Rule and TLTROs

    In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.

    November 19, 2020 WebPage Regulatory News
    News

    IASB Begins First Phase of Post-Implementation Review of IFRS 9

    IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Report Examines Progress in Resolvability of Systemic Institutions

    FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.

    November 18, 2020 WebPage Regulatory News
    News

    EBA Benchmarks National Insolvency Frameworks Across EU

    EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Reports Assess Impact of Pandemic on Financial Stability

    FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.

    November 17, 2020 WebPage Regulatory News
    News

    RBNZ Consults on Implementation of Capital Review Changes

    RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.

    November 17, 2020 WebPage Regulatory News
    News

    IASB Announces Andreas Barckow as the New Chair from July 2021

    The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.

    November 17, 2020 WebPage Regulatory News
    News

    HKMA Consults on Capital Rules for Bank Equity Investments in Funds

    HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.

    November 17, 2020 WebPage Regulatory News
    News

    ESRB Supports Extension of Macro-Prudential Measure by Swedish FSA

    ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).

    November 17, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6153