On 21 March 2017 the BSB held a morning event entitled Worthy of trust? Law, ethics and culture in banking, kindly hosted by the Bank of England. This panel discussion was chaired by BSB Chairman Dame Colette Bowe, and brought together three eminent speakers: Governor of the Bank of England Mark Carney, President and Chief Executive Officer of the Federal Reserve Bank of New York William C Dudley and the Rt. Hon. the Lord Thomas of Cwmgiedd, Lord Chief Justice of England and Wales, to explore an issue of shared importance; the relationship between law, ethics and culture in creating a banking sector that is worthy of trust.
Research by the Bank for International Settlements finds evidence for asymmetric information in the securitization market, but not to levels that compromise credit standards. Securitized loans overall show higher quality than non-securitized loans.
The International Monetary Fund’s involvement in the euro area crisis has raised a lot of controversy. According to a widespread conventional view, the “Troika” of creditor institutions—the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB)—demanded excessive fiscal austerity of Greece and other errant countries in return for their assistance, and this stance not only failed to restore Greek public credit but also prolonged economic weakness in other countries, including Portugal and Italy. Instead of calling for austerity, according to this view, the IMF should have forced a reduction of Greece’s debt (in other words, engineered an orderly default) from the start of its involvement in the spring of 2010. The IMF is also blamed for ignominiously forcing Ireland to bail out senior bondholders of its failed banks in November 2010 under orders from a dogmatic ECB, itself captured by European financiers.
William Coen, secretary-general of the Basel Committee on Banking Supervision, told members of the European Parliament that the panel will continue with its controversial plans to revise bank capital rules, which could bolster capital requirements. The committee is also planning to limit lenders’ holdings of bank bonds as part of its efforts to redistribute the risk.
Global asset prices are too high given their less-than-stable foundations, the Bank for International Settlements warned in its quarterly review. “The apparent dissonance between record low bond yields, on the one hand, and sharply higher stock prices with subdued volatility, on the other, cast a pall over such valuations,” according to the report.
Active wholesale financial markets help reallocate deposits across heterogeneous banks. Because of incentive problems, these flows are constrained and collateral is needed. Both the volume, the value, and the composition of collateral matter. We make a distinction between “outside collateral” and “inside collateral”. The use of inside assets, such as loans, creates a “collateral pyramid”, in that cash flows from one loan can be pledged to secure another. Through collateral pyramids the financial sector creates safe assets, but at the cost of exposing the economy to systemic panics. Outside collateral, such as treasuries, serves as foundation of, and stabilises, the pyramid. There is a threshold for the volume of treasuries, below which investors panic, the pyramid collapses, and there is not enough safe assets to support wholesale market activity; a situation that we call “collateral trap”. Read more
The Bank for International Settlements has reported a broad drop in over-the-counter derivatives activity for the second half of 2015 compared with the first half. The value of replacing outstanding OTC derivatives at the end of last year reached the lowest level since the financial crisis, according to the BIS. However, a greater percentage of credit default swaps was cleared during the second half of the year.
This presentation suggests an alternative lens through which to view the global economy’s struggle to achieve sustainable and balanced growth, reflecting a failure to prevent the build-up and collapse of hugely damaging financial booms and busts. A symptom of the current malaise can be seen in interest rates that have been exceptionally low for an exceptionally long time, with a record high amount of global sovereign debt trading at negative yields. To break out of this trap, there is a need to take a longer-term view and rebalance policies towards structural measures, abandoning the debt-fuelled growth model that has brought us to the current predicament.
Speech by Mr Claudio Borio, Head of the Monetary and Economic Department of the BIS, at the FT Debt Capital Markets Outlook, London, 10 February 2016.
- Presentation slides (27 pages, 501 kb)
Fixed income markets are in a state of transition. Dealers have continued to cut back their market-making capacity in many jurisdictions. Demand for market-making services, in turn, continues to grow. This report – prepared by a Study Group chaired by Denis Beau (Bank of France) – explores recent trends in fixed income market liquidity, following up on earlier analysis by the CGFS (see CGFS Publications, no 52).
Thus far, the effects of diverging trends in the supply of and the demand for liquidity services have not manifested themselves in the price of immediacy services but rather they are reflected in possibly increasingly fragile liquidity conditions. Key drivers of current trends in liquidity include the expansion of electronic trading, dealer deleveraging, possibly reinforced by regulatory reform, and unconventional monetary policies. Given the transitional state of fixed income markets, regulators appear to be facing a short-term trade-off between less risk-taking by banks and more resilient market liquidity. Yet, in the medium term, measures to bolster market intermediaries’ risk-absorption capacity will strengthen systemic stability, including through a more sustainable supply of immediacy services. Overall, the report underscores the need for a close monitoring of liquidity conditions as well as an ongoing assessment of how new liquidity providers and trading platforms are affecting the distribution of risks among market participants.
The global economy finds itself at the centre of three major economic developments: disappointing economic growth, especially in emerging economies; large shifts in exchange rates; and a sharp fall in commodity prices. These should not be seen as one-off shocks or headwinds but manifestations of a major realignment of economic and financial forces.
Contingent convertible capital instruments (CoCos) are hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level. In this article, we go over the structure of CoCos, trace the evolution of their issuance, and examine their pricing in primary and secondary markets. CoCo issuance is primarily driven by their potential to satisfy regulatory capital requirements. The bulk of the demand for CoCos has come from small investors, while institutional investors have been relatively restrained so far. The spreads of CoCos over other subordinated debt greatly depend on their two main design characteristics – the trigger level and the loss absorption mechanism. CoCo spreads are more correlated with the spreads of other subordinated debt than with CDS spreads and equity prices.
Other Relevant Links
Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England,
Global liquidity conditions may have begun to tighten for emerging market economies (EMEs), according to updated data from the Bank for International Settlements. BIS General Manager Jaime Caruana detailed highlights from the latest global liquidity indicators, a measure of the ease of financing in global financial markets, in a lecture at the London School of Economics’ Systemic Risk Centre.
The stock of US dollar-denominated debt of non-banks outside the United States is an important gauge of global liquidity. That stock stood at $9.8 trillion at the end of September 2015, unchanged from the end of June. US dollar-denominated debt of non-banks in EMEs also held steady in the third quarter of 2015, at $3.3 trillion. Q3 marked the first time since 2009 that the measure, which is linked to the strength or weakness of the dollar, stopped increasing. Read more
The Financial Stability Board (FSB) today published two reports and a statement from the Enhanced Disclosure Task Force (EDTF). The 2015 Progress Report on Implementation of the EDTF Principles and Recommendations is the EDTF’s fourth report and third progress report on implementation of the EDTF recommendations; it covers 40 global or domestic systemically important banks. The FSB also published an EDTF report on the Impact of Expected Credit Loss Approaches on Bank Risk Disclosures which highlights issues with the implementation of new accounting standards on expected credit loss (ECL). Furthermore, the EDTF provided a statement on the treatment of emergency liquidity provision under the EDTF disclosure recommendations.
Solvency II is a transformative regulation for the European insurance industry, as it harmonizes the regulatory regime across all 28 member states of the EU and forces insurers to better manage the risks they face while also better protecting policyholders and shareholders. Adopted in 2009 and coming into effect on January 1, 2016, it has been a long, tough journey for many European insurers as they have worked hard to comply with the new regulations.
However, insurers all around the globe will also be watching carefully as Solvency II takes effect, to see whether the regulations meet their intended objectives and to learn from both the successes and failures. But it is a complex regulatory framework – and to benefit from the lessons learned in Europe, practitioners first need to understand the core principles and important details of the directive.
On Wednesday, October 14th featured speaker Luca Trussoni Senior Financial Engineer at Numerix, presented an introduction to Solvency II to help insurance practitioners around the world better understand the “big picture” of the directive.
Mr. Trussoni Addressed:
- Why Solvency?
- Solvency I and Solvency II
- The Three Pillars of Solvency II
- Key Aspects of the Three Pillars
Luca Trussoni, FRM, Senior Financial Engineer, Numerix
Luca Trussoni is a senior member of the Financial Engineering team in Europe, and he works with clients to help solve their derivative pricing and risk management challenges. Before joining Numerix, Mr. Trussoni was a risk manager in bank and insurance groups in Italy (like Sanpaolo IMI, Fondiaria SAI and Banca Mediolanum), mainly working of quantitative aspect of risk management both in Basel and Solvency II contexts. He holds an MSc in Mathematics from University of Turin, an MA in Banking and Finance from CUOA Business School, and an FRM certification from GARP.
Moderator: Jim Jockle, Chief Marketing Officer
Mr. Jockle leads the company’s global marketing efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to customers in the largest global financial markets and to the Numerix partner network through the company’s branding, electronic marketing, research, events, public relations, advertising and relationship marketing.
Prior to joining Numerix, he served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, Mr. Jockle built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. He also oversaw the brand development of a new company dedicated to the enhancement of credit derivative and structured-credit ratings, products and services. Prior to Fitch, Mr. Jockle was a member of the communications team at Moody’s Investors Service.
This document sets out supervisory guidance on sound credit risk practices associated with the implementation and ongoing application of expected credit loss (ECL) accounting frameworks. The move to ECL accounting frameworks by accounting standard setters is an important step forward in resolving the weakness identified during the recent financial crisis that credit loss recognition was too little, too late. It is also consistent with the April 2009 call by G20 Leaders for accounting standard setters to “strengthen accounting recognition of loan loss provisions by incorporating a broader range of credit information”.
This guidance, which should be viewed as complementary to the accounting standards, presents the Committee’s view of the appropriate application of ECL accounting standards. It provides banks with supervisory guidance on how the ECL accounting model should interact with a bank’s overall credit risk practices and regulatory framework, but does not set out regulatory capital requirements on expected loss provisioning under the Basel capital framework.
The failure to identify and recognise increases in credit risk in a timely manner can aggravate underlying weaknesses in credit quality, adversely affect bank capital adequacy, and hinder appropriate risk assessment and control of a bank’s credit risk exposure. The bank risk management function’s involvement in the assessment and measurement of accounting ECL is essential to ensuring adequate allowances in accordance with the applicable accounting framework.
Financial intermediation in emerging market economies (EMEs) has been transformed over the past decade: a higher volume of bond financing has gone hand-in-hand with a growing internationalization of financial markets and significant changes to the balance sheets of banks. The 2015 Deputy Governor meeting examined three interrelated aspects of the new forms of financial intermediation in EMEs: (a) the role of banks; (b) the role of debt securities markets; and (c) implications of recent changes in financial intermediation for monetary policy.
One conclusion is that greater access of households to bank credit and of EME corporations to domestic and external bond markets is a double-edged sword. On the one hand, it has helped foster financial development, diversifying funding sources and reducing credit risk concentration. On the other hand, it has also been accompanied by increased risks and vulnerabilities – as the financial market turbulences of 2015 illustrated. Domestic bond markets now react more strongly to global forces. Larger foreign currency debt has made many companies more vulnerable to exchange rate shocks. Credit cycles have also become more pronounced. These developments raise questions about the appropriate instruments for EME monetary authorities as they seek to contain monetary and financial stability risks.
Full, timely and consistent implementation of Basel III remains fundamental to building a resilient financial system, maintaining public confidence in regulatory ratios and providing a level playing field for internationally active banks. This report updates G20 Leaders on progress in the implementation of the Basel III regulatory reforms since November 2014, when the Basel Committee last reported to the G20.
The report summarises the steps taken by Basel Committee member jurisdictions to adopt the Basel III standards, banks’ progress in bolstering their capital and liquidity positions, the consistency of implementation in jurisdictions assessed since the Committee’s last report and the Committee’s implementation work plan. It is accompanied by a separate report from the Committee to G20 Leaders on finalising the post-crisis reforms.