General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
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


Related Insights

EBA Finalizes Guidelines on the STS Criteria in Securitization

EBA published the final guidelines that provide a harmonized interpretation of the criteria for a securitization to be eligible as simple, transparent, and standardized (STS) on a cross-sectoral basis throughout EU.

December 12, 2018 WebPage Regulatory News

OSFI Sets Domestic Stability Buffer for D-SIBs at 1.75%

OSFI set the level for the Domestic Stability Buffer at 1.75% of total risk-weighted assets, as calculated under the Capital Adequacy Requirements (CAR) Guideline.

December 12, 2018 WebPage Regulatory News

FSI Publishes Paper on Proportionality in Insurance Solvency Rules

FSI published a paper on proportionality in the application of insurance solvency requirements.

December 11, 2018 WebPage Regulatory News

BCBS Updates Framework for Pillar 3 Disclosure Requirements

BCBS published the updated framework for Pillar 3 disclosure requirements.

December 11, 2018 WebPage Regulatory News

EBA Issues Revised List of Validation Rules for Reporting

EBA revised the list of validation rules in its implementing technical standards on supervisory reporting.

December 11, 2018 WebPage Regulatory News

IMF Reports Assess the Stability of Financial System in Brazil

IMF published a report on the results of the Financial System Stability Assessment (FSSA) on Brazil.

December 11, 2018 WebPage Regulatory News

FED Governor Examines Pros of Imposing Capital Buffers on Large Banks

At the Peterson Institute for International Economics in Washington D.C., the FED Governor Lael Brainard summarized the financial stability outlook, highlighted areas where financial imbalances seem to be building, and touched on the related policy implications.

December 07, 2018 WebPage Regulatory News

US Agencies Propose Rule on Appraisals for Real Estate Transactions

US Agencies (FDIC, FED, and OCC) proposed a rule to increase the threshold level at or below which appraisals would not be required for the residential real estate transactions from USD 250,000 to USD 400,000. Comments will be accepted for 60 days from publication in the Federal Register.

December 07, 2018 WebPage Regulatory News

EBA Single Rulebook Q&A: First Update for December 2018

This week one answer was published as part of the Single Rulebook Questions and Answers (Q&A).

December 07, 2018 WebPage Regulatory News

FED Updates Reporting Form and Instructions for FR Y-14Q

FED published the updated reporting form FR Y-14Q for Capital Assessment and Stress Testing, along with the associated instructions.

December 06, 2018 WebPage Regulatory News
RESULTS 1 - 10 OF 2325