02-07-2016, 04:03 AM
Two of the country’s largest banks collapse. The subsequent panic brings the banking system to its knees and only a costly government bail-out prevents even greater catastrophe. A radical re-think of regulation is needed. No, it’s not London or New York in 2008. It is Berlin in the 1930s. It’s when risk-weighted capital regulation was born, notably to be used alongside a range of other tools; for example, liquidity requirements and such modern ideas as bonus deferrals and capital conservation. But the idea that no single regulatory measure is likely to be sufficient on its own was forgotten. In 2008 it had to be painfully re-learned making this episode a striking example of the importance of studying past financial crises.
From Berlin to Basel: what can 1930s Germany teach us about banking regulation? | Bank Underground
Specifically, the recommendations were: “shadow banks should be subject to the same limits on risk-taking as banks,” “shadow banks should be subject to the same capital standards as banks,” and “[s]tress test liquidity positions.” These were the central ideas for me then, and they are central ideas for me now. (Given how the liquidity stress tests have become one of the central attacks against Dodd-Frank, with whisper campaigns about how the LCR is causing “bond market liquidity,” I think we were on the right track.)
Why I (Still) Think Shadow Banking is Key to Financial Reform - Roosevelt Institute
These policy tools have not been used systemically in the past, so their impact and the FPC’s reaction function remain unclear. Moreover, in contrast to monetary policy, where price stability can be judged against inflation, the objective of macroprudential policymakers – the stability of the financial system – is inherently unobservable. Thus macroprudential policymakers face a high degree of uncertainty over the impact and effectiveness of their tools and a target variable they cannot perfectly observe.
Uncertainty is no excuse for not using macroprudential tools | Bank Underground
I’ve been on record since early days saying that too-big-to-fail is not the key issue, so that the fact that big banks remain big is, um, no big deal. The real question — or so I’d argue — is leverage within the financial sector, and in particular the kind of leverage with no safety net that characterizes shadow banking. So Matt O’Brien weighs in with evidence that leverage has in fact declined substantially, and continued to decline even as the economy expanded — probably because of Dodd-Frank. This is certainly right; the same decline shows up in other measures, as in the chart above showing financial sector debt securities as a percentage of GDP.
Half a loaf, financial reform edition - The New York Times
Bad loans are twice as big a problem for European banks as they are for banks in the US — despite lenders’ many efforts to clean up balance sheets in troubled eurozone hotspots such as Spain, Ireland to Greece. New official figures show that almost 6 per cent of European banks’ entire loan books are impaired, double the impairment rate of 3 per cent in the US. Bad loans remaining on the books of Europe’s banks are almost as big as the gross domestic product of Spain.