Wednesday, April 12, 2017

All the Bonds in Christendom

Part I: The Relationship Factor

Author: David Schwartz

The 180th anniversary of J.P. Morgan’s birth will fall on Monday, April 17th, 2017. The great financier died aged 76, a few months after testifying before the U.S. Congress in the Money Trust hearings. By all accounts, Morgan shocked the national media when he said that a strong relationship was more important than collateral when extending bank credit. Risk management, to Morgan, was personal, concise and pithy:

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Sunday, April 9, 2017

BIS Issues New Consultation on G-SIBs

Author: David Schwartz

On March 30, 2017, the Basel Committee on Banking Supervision (BIS) issued a consultation proposing changes to the framework employed to designate global systemically important banks (G-SIBs). The consultation also proposes higher capital requirements on G-SIBs. The revised G-SIB assessment framework supersedes the framework proposed by BIS in July of 2013, a process BIS has committed to revisit every three years. This latest revision maintains the previously adopted system assessing the relative systemic importance of internationally active banks based on 12 indicators in five categories, resulting in a score that measures the systemic importance of each bank. The bank's overall score is then mapped to buckets that are associated with a higher loss absorbency (HLA) capital requirement. However, the new consultation proposes some modifications to the framework and also seeks feedback on the introduction of a new indicator for short-term wholesale funding.

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Tuesday, April 4, 2017

Fed Paper Seeks Optimal Capital Ratio for U.S. Banks

Empirical cost-benefit analysis yields a range of ratios

Author: David Schwartz

A working paper published on April 3, 2017 by the US Federal Reserve attempts to quantify the costs and benefits of bank capital to arrive at an estimate of the optimal capital ratio for U.S. banks. In their paper,[1] authors Simon Firestone, Amy Lorenc, and Ben Ranish begin their analysis by estimating to what extent the probability of financial crises falls as bank capital rises and calculate the output costs of a financial crisis. Against this cost, the authors then balance the cost of equity, a more expensive source of funding for banks than debt.

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Friday, March 31, 2017

Lack of Haircut Data Hampers E.U. SFT Risk Assessment

Author: David Schwartz

The European Securities and Markets Authority (ESMA)’s report on Trends, Risks, and Vulnerabilities No. 1, 2017 (TRV) is the body’s latest effort to highlight areas of risk facing European financial markets. Noting that financial markets remained relatively calm since its last quarterly assessment, ESMA said that risks in the markets "remained at high levels, reflecting very high risk in securities markets, and elevated risk for investors, infrastructures, and services.” ESMA’s overall risk assessment remained unchanged with market and credit risks remaining at "the highest level,” while liquidity and contagion risk remained merely “high." The report also identified political and policy uncertainties following Brexit and the U.S. elections as well as potential repercussions from the upcoming elections in some E.U. member states as the main risk drivers for 2017. ESMA also expressed concerns about haircut levels in securities financing transaction (SFT) markets but said that lack of haircut data was a significant impediment to assessing risks in SFT markets.  

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Thursday, March 30, 2017

OFR Launches Initiative to Reduce Regulatory Reporting Burden

Author: David Schwartz

In a March 16, 2017 address before the Financial Data Summit in Washington, DC, Richard Berner, Director of the Office of Financial Research (OFR), announced an initiative to identify areas of “duplication, overlap, and inefficiency in regulatory reporting.” The initiative is being undertaken in partnership with with the Financial Stability Oversight Council (and its member agencies). The goal of the project is to “improve data quality and reduce the reporting burden” faced by regulated financial firms. 

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