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For those interested in how regulatory prudential policy interacts with monetary policy around the world, you could do worse than go to a new paper produced by the Monetary and Economic Department of the BIS.
Introductory paragraphs:
It has long been recognised that that there is a strong complementarity between monetary and prudential policies. A sound financial system is a prerequisite for an effective monetary policy; just as a sound monetary environment is a prerequisite for an effective prudential policy. A weak financial system undermines the efficacy of monetary policy measures and can overburden the monetary authorities; a disorderly monetary environment can easily trigger financial instability and render void the efforts of prudential authorities. Economic history attests to this, as illustrated by the anatomy and consequences of the financial crises that have affected the industrialised and developing world, going back to previous centuries.
So much is agreed. What is more contentious is the view that some fundamental changes in the economic environment over the last quarter of a century may actually have tightened the interdependence between monetary and prudential policies, potentially calling for significant refinements in policy frameworks. In some research at the BIS in recent years we have been exploring this possibility in some detail.
I, personally would disagree with what is “agreed” above - to me, the contrast between “weak” and “sound” is a false one - a “sound” prudential policy can also be a “weak” one, such as using a free banking paradigm and allowing competitive non-state regulators. The “agreement” here is more likely to be amongst regulators and others in the regulatory industry.
That said, within the confines of the current system this is a very useful paper, even if it needs a little bit more proof-reading*. The authors’ access to data and people looks very good and the conclusions they have drawn out of the data and their references look useful.
The real “meat” here, though, is in the tables starting on page 20 - the analysis of the response of regulatory authorities to various financial events over the last 10 to 15 years. The last column in the table could be fuel for weeks of blog posts and discussion. The annex is also useful, being a “first pass” at assessing the impact of the measures taken. Again, for those interested in the area, this stuff is highly contentious, but this analytical framework is a useful one - comparing those countries with took both prudential and monetary approaches to tackling what was viewed as an imbalance to those which only took a prudential measures and looking at the results.
I am not strong enough in statistics to fully evaluate the results, but the methodology looks sound. If you are interested give it a look - and if your stats knowledge is better than mine feel free to give some feedback.
*Last time I checked it was the United States that had an S&L crisis, not the “Untied States”.
Just a quick note to welcome the (sort of) full implementation of Basel II in Australia - and its full implementation in most other jurisdictions (apart from, of course, the USA).
I say sort of in Australia as a few banks are staying on Basel I for some things, not others. The usual sort of “phased implementation” (AKA foul-up) you often get with major changes like this. Anyway, welcome Basel II.
The sideline on liquidity risk is to note that the one area that has caused the recent problems has been liquidity, not a lack of capital or other problems. Liquidity is the one area that is not really covered by international standards, with all differing regulators following different mechanisms (as noted below). The next project of the BCBS really should be to establish some standards in this area, and it looks like (thanks GRR) this is underway. While not a great fan of regulation, common standards I always believe to be useful, so perhaps some principles-based standards would be a very useful thing here.
Anyway, happy new year. My wishes for this year are:
- May we get better risk management from our banks;
- Less regulation from the regulators; and
- More principles-based standards to follow.
I also believe porcine aviation will make great leaps this year. If you have any similar wishes, feel free to add them in.
Interesting publication from the Markets Committee of the BIS yesterday. It does a pretty full comparison of the practices of 16 of the major world central banks, covering what their targets are, how they carry out any prudential functions they have and lots of information on how they carry out their other duties.
The 16 covered are the members of the committee: Reserve Bank of Australia, Central Bank of Brazil, Bank of Canada, People’s Bank of China, Eurosystem (European Central Bank plus the national central banks of Belgium, France, Germany, Italy, the Netherlands and Spain), Hong Kong Monetary Authority, Reserve Bank of India, Bank of Japan, Bank of Korea, Bank of Mexico, Monetary Authority of Singapore, Sveriges Riksbank, Swiss National Bank, Bank of England and Federal Reserve Bank of New York.
It is a very useful start for anyone researching the operations of the central banks and for general information on them.
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(Updated - link changed so you do not have to go hunting through the site from the press release. Thanks Sadashiv)
Malcolm Knight, General Manager of the Bank of International Settlements, gave a speech last Thursday to the 2nd Islamic Financial Services Board Forum, outlining how the IFSB, the BIS and the BCBS are working together on developing the institutional framework for the globalisation of Islamic Finance. He emphasises the areas the conventional and Islamic finance have in common - the needs for sound risk management, corporate governance and capital adequacy.
All I can do is encourage those interested in the area to read it.
Abstract:
Although there are differences between Islamic banking and “conventional” banking, there are some fundamental principles that apply equally to both. In particular, rigorous risk management and sound corporate governance help to ensure the safety and soundness of the international banking system. In the light of the growing importance of Islamic banks and Sharia-compliant financial innovation, the increasing integration of Islamic financial services into global financial markets serves to strengthen this point.
The Basel II framework improves the risk sensitivity and accuracy of the criteria for assessing banks’ capital adequacy. This framework is fundamentally about stronger and more effective risk management grounded in sound corporate governance and enhanced financial disclosure, the importance of which has been underscored by the recent problems that have arisen in the banking industry worldwide. The guidance provided by the Islamic Financial Services Board (IFSB) is a useful contribution to the realisation of these global goals. It will support the establishment of resilient financial market infrastructures and sound and robust core Islamic financial institutions operating according to safe and sound risk management practices.
For those who want to see who we can blame thank for the various pronouncements of the Bank of International Settlements - and actually see what the buildings look like etc. - go here.
I am glad to see someone takes me seriously. Amir from Austrolabe took my suggestion on a Google Maps mash-up and ran with it. The result can be seen here.
He has taken up to nine news feeds and the map then takes a pretty fair guess at where the story relates to. The locations are not always perfect, but most are spot on. The feeds are user selectable, with the BIS feed being the default.
If you have any feedback, suggestions etc., feel free to email using the link on the page or just post them here. If you know of good news links with reliable place names embedded within them he may be open to adding them in.
In the mean time, enjoy - if you find it useful, bookmark it.
Update
First one to work out what building the map considers to be the centre of the world and identify it here in a comment wins a prize.
/Update
For those of us who inhabit regularly visit the Bank of International Settlements (BIS) website, today is an exciting day - the BIS have added RSS feeds. All that is really important in bank regulation on feeds. Yeahaa. Who said banking is behind the times and stodgy?
Even better, you can tailor the feeds to cover just the issues that matter to you. I my case that feed may be Basel II and Australia - but you can set up your own.
I will put the main feed on my RSS feeds down the side. Share and enjoy.
For those looking for an up-to-the minute summary of why Basel II is needed I would advise a look at this speech by Randall Krosner of the US Fed. Like most of the speeches by members of the Fed, he appears to understand the reasons for Basel II and why, in a global sense, it is important - unlike the lack of understanding displayed by other US regulators.
As a side note - it is interesting that the BIS PR department choose to publish the speeches of Fed employees and not those of the FDIC. Curious.
I would disagree with him on the need for Basel IA though - as I have said before, if a small credit union in Australia can implement Basel II Standardised I see no reason why a US S&L cannot.
Short speech that Nout Wellink of the Netherlands Central Bank will be making later today in Paris has just popped up on the BIS website. It makes a few good points around how the risk management practices being improved through Basel II will improve the resilience of financial institutions and the system generally. Might not be worth a full read, unless you like that sort of thing but a few points bear repeating.
Nout was clear on the importance of the Pillar III disclosures - “Pillar 3 will become more important because of increasing intermediation of risk through the capital markets.” In the context of the draft Pillar III disclosures that APRA released in the new APS 330 I can only repeat what I said at the time - they are inadequate. Banks and other ADIs going standardised and seeking cheaper funding would be well advised to make fuller disclosure than required.
The US regulators (hello - that is you FDIC) -
A regulatory framework based on a simple risk weight scheme has become less and less effective in assessing an appropriate level of regulatory capital against these new, complex risk exposures.
To extend the point beyond Nout’s - the old ways of calculating risk exposures do not work. Trying to impose them in this context is simply wrong. Financial institutions need to be able to fail. Trying to make sure they cannot, as the FDIC seems to be trying to do is merely a recipe for the whole sector to become a moribund wasteland of zombies, too afraid to do anything new. Not an attractive prospect.
A newsletter out from the Basel Committee gives some information on the progress towards implementation globally, but, to be honest, it pulls all its punches. It just gives broad information on where most of the countries implementing the Accord are - and does not give any specific information on those that are failing or even giving any concern. On the progress front it is a bit of wasted space.
The interest is in the bits on the new workstreams. Read the rest of this entry »
Interesting, if short, paper today from the BIS on the impact of credit risk transfer. In a way, this is just a warning shot across the bows of the credit risk transfer industry and a timely reminder not to treat the current, benign, conditions as if they were normal.
The paper highlights the important parts of the risk transfer - that a lot of the risk is moved from the bank’s balance sheet to other financiers, including hedge funds, that may have a higher appetite for risk. Overall, the greater dispersal of the risks improves systemic stability. The problem he highlights, though, is often missed.
It is not that far away to the date of Basel II implementation. Most banks would be on their final hurdle, well, at least for Pillar 1.
Up until now, firms who were planned to be beyond standardized, have spent millions. With lot of projects start winding up. One question has floated to the surface, which somehow, did not have a clear answer back then.
A quick word on a speech by Malcolm Knight (General Manager of the BIS) on the relationships between micro risks (those affecting just one bank) and macro risks (those affecting the entire economy - or at least the banks). Like many of the pronouncements from the BIS you can expect regulators the world over to read this and incorporate the results in their next supervisory visits. Read the rest of this entry »
Just a quick note for those in operational risk, particularly those involved in a home / host situation. There was a new consultative paper released overnight that should be essential reading.
At this point I can only copy what the BIS has said about it:
The Basel Committee on Banking Supervision today issued for public comment a paper entitled Principles for home-host supervisory cooperation and allocation mechanisms in the context of Advanced Measurement Approaches (AMA).
The paper sets out principles related to two important topics in the implementation of the Advanced Measurement Approaches for operational risk under Basel II. The first set of principles focuses specifically on supervisory cooperation in the context of banks implementing an AMA. These principles are intended as a supplement to the paper Home-host information sharing for effective Basel II implementation issued by the Committee in June 2006. The second set of principles builds on the 2004 paper Principles for the home-host recognition of AMA operational risk capital and specifically addresses allocation mechanisms developed as part of a hybrid AMA.
Enjoy!
This is one survey that should make the consultants working in the Basel II space happy. The Financial Stability Institute (no, I hadn’t heard of them either - but they are part of the BIS) have released a paper giving the results of asking regulators around the world whether they will be implementing the Basel II accord.
Of the 98 that responded (of 115 countries asked), 95 said they would be implementing, with most to do so before 2015. Read the rest of this entry »
To follow up on our earlier post on Basel II use tests - the BCBS yesterday released a set of 4 principles in their latest newsletter, called “The IRB Use Test: Background and Implementation“.
To be honest, the principles are fairly generic and if you use tests are not complying with these principles already then calling them a use test is probably incorrect. Read the rest of this entry »
The BIS have just released their quarterly statistical review. The statistics are good for those interested in the area - they are the authoratative resourse on international banking -but the real interest is in the articles (remind you of another publication?).
There are 5 this time. They are summarised as
…five special feature articles: the first on the changing composition of official reserves; another on the domestic implications of foreign exchange reserve accumulation in emerging markets; a third on forward currency markets in Asia and lessons from the Australian experience; a fourth on derivatives activity and monetary policy; and a fifth on the past 150 years of financial market volatility.
The first is interesting for its picture of the general moves in official reserves away from the rock solid investments and into the more speculative. The second is more interesting from a macro perspective - looking particularly at China, Taiwan and the other East Asian countries an the effects of their building up absolutely huge positions in the USD.
If you like really long term views of the markets, though, it is difficult to go past the last of the articles. 150 years of stock and bond yields to look at volatility - I would not like to have been involved in that data cleansing exercise. If anyone is looking for a topic for a PhD thesis, the rise in volatility since 1970 identified in this paper would be a good one.
The last of the papers from the workshop on ‘Accounting, risk management and prudential regulation’ held by the BIS in Basel on the 11th and 12th of November have been released. These may appear a bit dry, but they give some important pointers to where the regulators will be heading over the next few years in relation to both IFRS and improved risk management. Those implementing IAS 39 and FAS 133 should pay particular note.
These have already influenced the Australian regulators, as evidenced by APRA’s recent(ish) Regulation Impact Statement.
Use-test is a potentially the widest and biggest area in Basel as it applies to all the portfolios and rating system within a bank. Also rating system in Basel not only implies the PD models but every elements which contribute to the internal ratings such as LGD, EAD, rating process, data, IT infrastructure, etc.
More over the page. Read the rest of this entry »
Important paper released overnight (our time) from the Joint Forum of the BCBS. This one is one business continuity and you can expect the regulators to include its principles in future reviews and audits. Most institutions will have already reviewed their plans in light of many recent threats to business continuity, but you may want to review these in light of these principles and write up a paper for the regulator on how you meet these.
If you really do not want to read the full paper, the principles are over the fold. Read the rest of this entry »
Just in case your printers have not finished printing out the November 2005 update to the accord, you can now save the expense of printing it out. The BCBS have now released a consolidated version of the new Accord.
At 347 pages we are now comfortably more than 11 times the length of the original accord, so make sure you have a new ream of paper in your printer and try to double side it, please. Your shareholders will notice the difference in the dividends.
Here is the BCBS’s summary of their latest publication:
This document is a compilation of the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. No new elements have been introduced in this compilation.
Two important papers on the BIS website today. The paper on sound credit risk assessment and valuation for loans should be an interesting one for those managing the credit risk areas and the one on the use of the fair value option for financial instruments also promises to be interesting for treasury and finance staff.
Give them a read and pass comments.
Not much new this week on the BIS website this week - the new look is nice, though. Putting the new version of the Accord on the front page is handy, as are the tabs across the top. Nice of them to move to a modern(ish) page layout.
The self congratulatory stuff between the central banks for co-operating for either 130 years or less than a century is interesting - can’t they count? I also wonder how central bank cooperation worked during the 1914 to 1945 period.
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