On June 8, 2017, the Basel Committee on Banking Supervision (BIS) issued a second set of frequently asked questions (FAQs) and answers on Basel III’s Liquidity Coverage Ratio (LCR).
BIS Issues Further LCR Guidance
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Change Overview and Rationale
Fed Reports Post-Crisis Regulation Affecting Bond Market Liquidity
In its semi-annual Monetary Policy Report submitted to Congress on July 7, 2017, the Federal Reserve Board indicated that regulatory reforms since the global financial crisis “have likely altered financial institutions’ incentives to provide liquidity.” The Fed found that In recent years, market participants have been particularly concerned with liquidity conditions in the corporate bond market.
GOP Congressmen Warn the Fed to Freeze their Rules
On February 23, 2017 House Financial Services Committee Chairman Rep. Jeb Hensarling (R-TX) and 33 GOP members of the Committee sent a letter to Federal Reserve Chair Janet Yellen requesting that the Fed “neither propose nor adopt any new rules until the U.S. Senate confirms a [Federal Reserve] Vice Chairman for Supervision.”
Fed Chair Rejects Regulatory Roll-back
Federal Reserve Chairwoman Janet L. Yellen strongly defended post-crisis financial reforms, saying that new regulations have strengthened the U.S. financial markets and wholesale roll-back would be unwise. In remarks delivered at a symposium sponsored by the Fed in Jackson Hole, Wyoming Yellen made the case for the success of these reforms, summarizing indicators and research that show the improved resilience of the U.S. financial system, due, she said, “importantly to regulatory reform as well as actions taken by the private sector.”
Pension Funds File Sweeping Securities Lending Class Action
Three U.S. pensions have filed a class action suit against the largest prime brokers alleging collusion to fix fees and stifle competing electronic platforms in securities finance. This suit follows the theme of other class actions involving allegations of collusion and manipulation amongst the biggest global banks in relation to LIBOR, municipal bonds, Forex, and interest rate swaps. The suit filed was filed August 16, 2017 in the US Southern District Court of New York as an anti-trust action by the Iowa Public Employees’ Retirement System, Orange County Employees Retirement System and Sonoma County Employees’ Retirement Association.
Fed President Sees Rebound in Inflation and Modest Wage Growth
New York Federal Reserve President and CEO William Dudley says he and his Fed colleagues anticipate U.S. inflation to rise gradually over the next several months as the labor market is expected to continue heating up. These trends, Dudley says, support the Fed’s near-term policy tightening. In the New York Fed’s August 10, 2017 Regional Economic Press Briefing, Dudley called on the United States to better address factors driving racial inequality of employment and income, and he also suggested the Fed was planning to raise interest rates once more and begin reducing some bond holdings this year.
Risk Management Still at the Heart of Financial Regulation
In an August 2, 2017 address, President and CEO of the Federal Reserve Bank of Cleveland Loretta J. Mester advocated a fresh risk assessment to recalibrate financial regulations and right-size them to ease the burden on smaller banks. Ms. Mester proposed “tiering of oversight by risk,” thereby relieving community banks from much of the regulation intended for larger banks whose activities present different and larger risks to the greater financial system than those of smaller institutions.
There is No Room for Complacency
In a July 12, 2017 address before the Paris Europlace International Financial Forum, François Villeroy de Galhau, Governor of the Banque de France, outlined what he sees is necessary to complete the work of financial regulatory reform. Noting that resilience of the global financial system has significantly improved in eight years as a result of sweeping regulatory changes, de Galhau urged regulators and central bankers not to be complacent.
Securities Finance Faces ‘Fickle’ Future
In a June 21, 2017 address before the 26th Annual Securities Finance and Collateral Management Conference in Berlin, Deutsche Bundesbank Board Member Professor Joachim Wuermeling warned that the securities finance sector faces some unique liquidity and collateral challenges. In particular, he noted that the extraordinary measures taken by central banks to shore up liquidity in the years since the financial crisis may be distorting liquidity and affecting collateral quality in securities lending and repo markets.
Deglobalizing or Reglobalizing?
On June 30, 2017, the Bank For International Settlements (BIS) published the results of a study examining trends in bank deglobalization since the financial crisis. Prompted by data indicating a decline in cross-border activity by banks, the BIS launched a study to determine whether the data support the hypothesis that the largest global banks have truly scaled back their cross-border activity since 2007, or whether it might be an indicator of some other trend.