Uno momento BIS
Augustin Carstens, who was set to take the helm of the BIS in October 1, has pushed back his start date to December 1. Carstens was planning to vacate his current position as the governor of the Bank of Mexico in June, but Mexican President Enrique Pena Nieto asked Carstens to extend his term to help manage the impact the new policies of US President Donald Trump are expected to have on Mexico and its economy. It seems like a few extra months won’t be enough to tackle that challenge, but either way, buena suerte con eso Senor Carstens.
The Basel Committee has fun with FAQs
The Basel Committee on Banking Supervision issued FAQs on the Net Stable Funding Ratio (NSFR). Most of the questions and answers were thoughtful and informative; such as a question about margining that drew an affirmation from the BCBS that the current treatment of 85% stable funding requirement would be maintained. However, other questions were comically elementary, so it appears the Committee decided to have a bit of fun:
Question: To which category (financial or non-financial) do insurance companies and investment companies belong?
Answer: Consistent with paragraph 131(d) and (e) of the LCR standard and paragraph 16 of the NSFR standard, banks, securities firms, insurance companies, fiduciaries (defined in this context as a legal entity that is authorised to manage assets on behalf of a third party, including asset management entities such as pension funds and other collective investment vehicles), and beneficiaries (defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract) are considered as financial institutions for the application of the NSFR standard.
The Basel Committee’s answer above equates to a sarcastic, “Uhhh … Did you even bother to read the LCR and NSFR standards before you asked that question?” So let’s hope that particular “frequently asked question” wasn’t actually asked all that frequently.
Regulators wilt on Big Bang derivatives enforcement
Regulators in the US and Europe announced they would only look to see efforts being made to comply – rather than actual compliance – when it comes to the new “Big Bang” rules covering bespoke over-the-counter swaps used to hedge risk in derivatives portfolios that are set to take effect March 1. The rules are part of Basel reforms aimed at increasing transparency in the swaps market. While agreeing to ease their approach, European regulators made it clear they were none too happy with the effort industry participants have made thus far:
“The timeline for implementation has been known in EU since 2015, and it is unfortunate that the financial industry has not managed to prepare for the implementation. Furthermore, a delay of 9 months was already granted by BSBC-IOSCO in 2015 on the basis of similar arguments from the industry.
That delay was agreed with the clear expectation that the financial industry would be ready to prepare the implementation within two years.”
The Financial Times reports that according to ISDA, despite the lead time outlined by the European regulators, just 15% of the 159,000 affected contracts have thus far been updated in preparation for the new rules. I guess the Big Bang remains just a theory at this point.
Did central banks pour gas on the fire that was the financial crisis?
Anatoli Segura from the Bank of Italy looks at how many banks rescued their structured investment vehicles during the financial crisis, even though they had no contractual obligation to do so. This is all a bit academic because the Volcker Rule in the US and proposals from the Vickers Commission in the UK would ban such rescues in the future. Nevertheless, I found one of Segura’s conclusion’s particularly interesting.
Segura highlights the move by the US Federal Reserve and the European Central Bank to establish an emergency currency swap line so the ECB could lend dollars to European banks that had lost access to interbank markets denominated in dollars. The European banks needed those dollars to save their SIVs, but Segura posits that the senior nature of those central bank dollars actually helped spread contagion throughout the banking system.
“I find that when the aggregate financial sector is insolvent this relative seniority is key for the nature of the equilibrium. When new financing is junior, banks try to rescue their vehicles but investors refuse to supply the additional funds, rescues are not completed and vehicles fail. However, when new financing is senior, banks obtain financing for the rescues in a first stage but then they are not able to refinance their own debt, leading to a systemic collapse.”
Segura goes on to conclude:
“The result shows that central banks may play an instrumental role for the contagion of distress from the shadow banking system to the regulated banking system and calls for these institutions to closely monitor banks’ use of the funds they provide during liquidity crises.”
Ouch! Central bankers experienced kudos and criticism for some of the extraordinary measures they deployed in the heat of the financial crisis. Some people think they saved the financial system, while others think they did too much to save the banks. However, I rarely see research conclude that actions by central bankers amounted to pouring gas on the fire and actually spread the pain across the banking sector.
On banks and tax policy
In an era where some policymakers are proposing corporate tax reforms that stand to have a massive impact on how banks structure their liabilities, this BIS Working Paper from Leonardo Gambacorta (BIS and CEPR), Giacomo Ricotti (Bank of Italy), Suresh Sundaresan (Columbia University) and Zhenyu Wang (Indiana University) is particularly timely. The group looked at how banks respond to various changes in tax policies, particularly when their tax liabilities decrease.
“Most importantly, we provide both theoretical and empirical results on the effects of taxes on bank liability structure and bank funding costs. We also provide some evidence that the capitalization status of banks may play a role in how banks respond to variations in tax rates. In response to a drop in tax rate, more capitalized banks tend to increase their loan/investment portfolio, whereas less capitalized banks do not. Weaker banks tend to use the reduction in tax rates to spruce up their balance sheets. Collectively, our results stress the importance of fiscal policy on banks’ liability structure, leverage, and loan portfolios.”
Fiscal policy improvements have been the missing link in the economic recovery for numerous countries since the financial crisis. With some countries’ fiscal policymakers finally poised to act, it will be interesting to see if the banks in those countries respond in the way this paper predicts. If they do, it will reveal how accurate – or inaccurate – exercises like stress tests have been in places like the US and Europe.
Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, on the infrastructure of the financial system.
S.S. Mundra, Deputy Governor of the Reserve Bank of India, on the future of FinTech.
Philip Rowe, Governor of the Reserve Bank of Australia, dissects commodities landscape and sounds alarm on housing bubble.