Thursday, December 10, 2009

Capital Minimums, Liquidity Buffers and Regulatory Scope must Increase

Author: David Schwartz David Schwartz

Higher capital levels are expected to form the best long-term protection, just as more liquidity will be the best buffer for short-term stresses. To insure that financial defenses are uniformly adopted, global supervisors recommend the inclusion of all business models and market domains.

International Monetary Fund: Preventive measures are needed to reduce the likelihood of crises. These include widening the regulatory perimeter and making it more flexible; increasing the amount and quality of bank capital and the liquidity buffers they carry; allowing prudential frameworks to play a greater stabilizing role over the business cycle; and intensifying the regulation and supervision of systemically important institutions.

Measures to improve crisis management are also critical. … Some progress has already been made on strengthening microprudential regulation. ... In particular, a key lesson of the financial crisis is that capital requirements cannot be lenient. They must therefore not only be increased, but also made more variable in order to prevent excessive risk taking.  Development of an operational framework for macroprudential supervision remains a work in progress. There is broad agreement on the needed components for such a system: procyclicality of regulation must be dampened, and systemically important financial institutions must be supervised better. However, methodological issues have posed challenges to international agreement on new regulations.   Addressing cross-border resolution issues remains one of the greatest challenges.[1]

Swiss National Bank: A new liquidity regulation is currently in the test and calibration phase. This regulation takes into account all balance-sheet and off-balance-sheet items that are of relevance in liquidity considerations, and is based – as far as possible – on internal bank liquidity management principles. It makes the big banks more resilient to disturbances in the interbank market or larger-scale withdrawals of deposits. It promotes longer-term financing as well as higher-rated securities that are capable of generating liquidity even in a stressed market environment. The new regulation is due to come into force in the second quarter of 2010. [2]

[1] Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, Berlin, September 4, 2009

[2] Mr Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, Zurich, 10 December 2009.