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- IstEin Financial Regulation Review No. 182 (15 December 2016 - 18 January 2017)
- IstEin Financial Regulation Review No. 181 (1 - 14 December 2016)
- IstEin Financial Regulation Review No. 180 (17 - 30 November 2016)
- IstEin Financial Regulation Review No. 179 (03 - 16 November 2016)
- IstEin Financial Regulation Review No. 178 (20 October - 02 November 2016)
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The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) published their joint report on the functioning of the Capital Requirements Regulation (EU) No 575/2013 (CRR) with the European Market Infrastructure Regulation (EU) No 648/2012 (EMIR). The report calls for the requirements for credit, market, and counterparty credit risk in the CRR to be clarified. This clarification should ensure that only risks not already covered by specific financial resources for activities not related to clearing are to be covered by CRR requirements. This exclusion should also be extended to activities covered by interoperability arrangements.
See also: press release
Early warning and systemic risk in core global banking: balance sheet financial network and market price-based methods
Authors analyse systemic risk in the global banking system using market price-based methods and the asset-liability network approach. For the latter they use the BIS consolidated data for exposures of 18 national banking systems to the banking sector debt of the same countries relative to their respective equity capital over the period 2005Q4- 2014Q4. The network based Systemic Risk Index (SRI) extends the spectral eigen-pair method of Markose (2012) and Markose et al. (2012), which treats network failure as a dynamical system stability problem.
Prior to the Great Depression, regulators used extended liability to encourage conservative banking and enhance depositor protection. Using a difference-in-difference setup, authors study how extended liability affected deposit withdrawals during the panic of 1893. Authors compare the capital and portfolio management of national banks that were subject to double liability (limited liability) to that of state banks that were subject to unlimited liability. They find that banks with stricter shareholder liability targeted a lower level of default risk and experienced smaller liquidity shocks. State banks held more secured loans and used less leverage than national banks. State banks also experienced less deposit withdrawals during the panic. Findings show that extended liability contributed to financial stability by discouraging risky activities and mitigating runs.
This paper studies optimal financial market interventions during a persistent global liquidity trap. Authors provide a tractable multi-country framework of an imperfectly financially integrated world, in which equilibrium interest rates are low and monetary policy is occasionally constrained by the zero lower bound. Idiosyncratic shocks generate capital flows and asymmetric liquidity traps across countries. Due to a domestic aggregate demand externality, it is optimal for governments to implement countercyclical macroprudential policies, taxing borrowing in good times, as a precaution against the risk of a future liquidity trap triggered by a negative shock. The key insight of the paper is that this policy is inefficient from a global perspective, because it depresses global rates and deepens the recession in the countries currently stuck in a liquidity trap.
Commission Delegated Regulation (EU) 2017/72 of 23 September 2016 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council (CRR) with regard to Regulatory Technical Standards specifying conditions for data waiver permissions has been published in the Official Journal of the EU.
This Regulation shall enter into force on 3 February 2017.
The European Central Bank (ECB) published the outcome of its second Supervisory Review and Evaluation Process (SREP) in 2016. The aggregate capital demand for 2017 for the directly supervised banks remains comparable to 2016 – at an average and median of around 10% Common Equity Tier 1 (CET1). CET1 is a bank’s highest quality capital, mostly consisting of common stock, and measures a bank’s capital strength.
See also: press release
The European Central Bank (ECB) published its 2017 priorities for supervising significant banks in the euro area. The main focus is on the key risks currently faced by banks, such as the need to adapt to financial conditions such as lacklustre economic growth in the euro area and geopolitical uncertainties, while at the same time addressing legacy assets. As a result, ECB Banking Supervision will focus on business model and profitability risks as well as credit risk – with a focus on non-performing loans – and risk management. These were also priorities in 2016 but supervisors will now focus on new areas within each risk.
See also: press release
The European Systemic Risk Board (ESRB) published a periodical update of its Risk Dashboard. It is structured according to a set of risk categories comprising interlinkages and composite measures of systemic risk, macroeconomic risk, credit risk, liquidity and funding risk, market risk, solvency and profitability risk, and structural risk.
Findings: 1) systemic risks as indicated by market indicators have shown a decreasing trend over the last quarter; 2) GDP growth across the European Union remained stable in the third quarter of 2016; 3) elevated debt levels remain a persistent issue in most EU countries; 4) bank lending to both households and the non‐financial corporate sector (NFCs) continued on a path to gradual recovery; 5) banks’ profits remained broadly stable in the third quarter of 2016 compared with the previous quarter and compared with a year ago; 6) the total assets of credit institutions, investment funds and other financial institutions (OFIs), and insurance corporations and pension funds increased in the second quarter of 2016.
The European Banking Authority (EBA) published a periodical update of its Risk Dashboard summarising the main risks and vulnerabilities in the EU banking sector by a set of Risk Indicators in Q3 2016. Together with the Risk Dashboard, the EBA published the results of a Risk Assessment Questionnaire, which was conducted among banks and market analysts between October and November this year.
In Q3 2016, EU banks' ratio of common equity tier 1 (CET1) reached new highs, increasing by 50 bps to 14.1%. This effect is simultaneously explained by the growth in capital (mainly driven by higher ‘retained earnings') as well as a decrease in RWAs.
See also: press release
Authors study the transmission mechanisms of liquidity and capital regulations as well as their effects on the economy and welfare. Authors propose a macro-economic model in which a regulator faces the following trade-off. On the one hand, banking regulations may reduce the aggregate supply of credit. On the other hand, they promote the allocation of credit to its best uses. Accordingly, in a regulated economy there is less, but more productive lending. Based on a version of the model calibrated on US data, authors find that both liquidity and capital requirements are needed, and must be set relatively high.
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