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 Articles
News

BCBS Publishes Results of Survey on Proportionality in Bank Regulation

BCBS published a report presenting the results of a survey conducted on proportionality practices in bank regulation and supervision.

March 19, 2019 WebPage Regulatory News
News

US Agencies Adopt Interim Rule to Facilitate Transfers of Legacy Swaps

US Agencies (FCA, FDIC, FED, FHFA, and OCC) are adopting and inviting comments on an interim final rule.

March 19, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Third Update for March 2019

EBA published answers to seven questions under the Single Rulebook question and answer (Q&A) updates for this week.

March 15, 2019 WebPage Regulatory News
News

OCC Updates Recovery Planning Booklet of the Comptroller's Handbook

OCC updated the Recovery Planning booklet of the Comptroller’s Handbook.

March 15, 2019 WebPage Regulatory News
News

EBA Publishes Report on Convergence of Supervisory Practices Across EU

EBA published annual report on the convergence of supervisory practices in EU.

March 14, 2019 WebPage Regulatory News
News

CPMI-IOSCO Publish Update to Level 1 Assessment of PFMI Implementation

CPMI and IOSCO jointly updated the Level 1 Assessment Online Tracker on monitoring of the implementation of the Principles for financial market infrastructures (PFMI).

March 14, 2019 WebPage Regulatory News
News

Agustín Carstens of BIS Speaks About New Role of Central Banks

While speaking at the 20th anniversary conference of the Financial Stability Institute (FSI), Agustín Carstens, the General Manager of BIS, highlighted the need for regulatory actions in light of the continued evolution of financial technology.

March 14, 2019 WebPage Regulatory News
News

ESMA Analyzes Impact of Regtech and Suptech for Markets and Regulators

ESMA published the results of its analysis of the regulatory and supervisory technologies—also known as regtech and suptech—being developed in response to various demand and supply drivers in the financial sector.

March 14, 2019 WebPage Regulatory News
News

PRA Publishes Policy Statement on Group Supervision Under Solvency II

PRA published a policy statement (PS9/19) that provides feedback on responses to the consultation paper CP15/18 and the final supervisory statement SS9/15 (Appendix) on group supervision under Solvency II.

March 14, 2019 WebPage Regulatory News
News

ECB Announces Start Date for Euro Short-Term Rate

ECB announced that it will start publishing the euro short-term rate (€STR) as of October 02, 2019, reflecting the trading activity of October 01, 2019.

March 14, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2759