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 Articles
News

ESAs Amend Technical Standards on Mapping of ECAIs Under CRR

ESAs published a second amendment to the implementing technical standards on the mapping of credit assessments of External Credit Assessment Institutions (ECAIs) for credit risk under the Capital Requirements Regulation (CRR).

May 20, 2019 WebPage Regulatory News
News

OCC Consults on Information Collection for Home Mortgage Disclosures

OCC is soliciting comment on the revision of the information collection titled “Regulation C—Home Mortgage Disclosure.” OCC also notes that it has sent the collection to OMB for review.

May 20, 2019 WebPage Regulatory News
News

EIOPA Updates Q&A on Regulations in May 2019

EIOPA published additional questions and answers (Q&A) on guidelines, directives, and regulations applicable to insurers in Europe.

May 17, 2019 WebPage Regulatory News
News

FSB Publishes Update on Meeting of RCG for Americas

FSB published a summary of the meeting of its Regional Consultative Group (RCG) in Americas.

May 17, 2019 WebPage Regulatory News
News

IASB Issues Work Plan and Meeting Updates for May 2019

IASB published an updated work plan, along with the update of its meeting in May 2019.

May 17, 2019 WebPage Regulatory News
News

FCA Publishes Its Business Plan for the Coming Year

FCA published its Business Plan, which sets out the main areas of focus and priorities for 2019/20.

May 17, 2019 WebPage Regulatory News
News

CFTC Proposes to Amend Derivatives Clearing Organization Regulations

CFTC proposed amendments to certain regulations applicable to registered derivatives clearing organizations (DCOs) under Part 30 of the CFTC regulations.

May 16, 2019 WebPage Regulatory News
News

APRA Licenses Societe Generale As Foreign Deposit-Taking Institution

APRA granted Societe Generale a license to operate as a foreign authorized deposit-taking institution under the Banking Act of 1959.

May 16, 2019 WebPage Regulatory News
News

EBA Provides Updates on Its Work on Basel III Impact Assessment in EU

EBA is working to finalize the impact assessment on implementation of Basel III standards, in response to the EC call for advice, which was received on May 04, 2018.

May 16, 2019 WebPage Regulatory News
News

ISDA Publishes Two Consultations on Benchmark Fallbacks

ISDA published two consultations on benchmark fallbacks, the comment periods for which expire on July 12, 2019.

May 16, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3097