News
Basel III Implementation Progress Report
On October 18, the Basel Committee issued a report documenting Basel Committee members’ progress in adopting Basel II, Basel 2.5 and Basel III as of September 2011. The report provides a high level summary of the the status of domestic legislative and rule-making intended to incorporate the Committee’s capital standards into national law or regulation according to the internationally agreed time frames.
Shadow Banking Sector Exceeds PreCrisis Levels
FSB data published in its October 27, 2011 report, Shadow Banking: Strengthening Oversight and Regulation, reveals that among the eleven largest economies with significant shadow banking, the shadow banking sector has surpassed the levels prior to the financial crisis.
Infrastructures must become more resilient
Organized exchanges and central counterparty structures are expected to lower the threat from opaque, concentrated trading networks.
Policy Intervention may be needed to Protect Investors
According to the Bank of England, “The lasting legacy of this crisis is too much debt held by too many sectors against too little capital.” A McKinsey study found that, since 2000, gross debt for the ten largest economies grew by US$40 trillion, or a rise of 60%. Bank leverage soared to as much as 50 times equity, as compared with a ratio of less than 10 at the start of the 20th Century. This is not sustainable, say financial regulators.
Better Hedge Fund Data can Help To Inform Legislative Actions
Legislators will be better equipped to enact appropriate reforms if their deliberations are based on meaningful data regarding hedge funds. IOSCO: IOSCO believes that regulators should seek to develop a comparable and consistent set of data to be collected from local hedge fund managers and advisers to monitor systemic risks and prevent gaps in regulatory reporting requirements. We recognise that the legislative process is ongoing in many jurisdictions and their outcomes could further influence the information needed to monitor systemic risk in the hedge fund sector, as well as who collects the data. Nonetheless, setting out these categories of information may help regulators in the assessment of systemic risk and help to inform the relevant legislative debates.
The Credit Crisis was an Epochal Event
From July 2007 to March 2009, share prices for global banks fell by 75%. That erased US$5 trillion in shareholder equity. Considering all markets, McKinsey has estimated that the fall in global wealth was US$25 trillion. To put that in context, the lost wealth was nearly 45% of global GDP, or a half year’s wages for the entire working world. On that basis, says Bank of England’s Andrew Haldane, “asset price falls in the UK and US were as large as during the Great Depression.”
Regulators Will Engage Third-Parties When Appropriate
Although much will be expected of regulators over the next several years, it is unlikely that their budgets will be enhanced commensurately. As a result, creative affiliations will be established with the private sector, to include in-house compliance professionals and external advisors.
Current thinking in regulatory reform
Regulators have reported the conclusions of study groups looking into the causes of, and remedies for the Credit Crisis. A consensus of opinion exists as to causes, with a growing emphasis among larger central banks on the failings of liquidity risk management. All regulators believe new forms of infrastructure will be needed to prevent a recurrence of the conditions leading up to the Crisis. Larger central banks and securities regulators believe better monitoring within the existing infrastructure must be adopted as a global stopgap until the new infrastructures are created.
Risk Management Failed at Many Levels
Regulators during the crisis were most concerned about the nearly unmanageable spike in systemic risk which, according to the IMF, FSB and BIS, is defined as “a risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy.”
Central Banks should Monitor Counterparty Liquidity
Through their open market operations, the trading desks at central banks gain first-hand knowledge of evolving stresses in the inter-dealer funding markets – information which can help to monitor systemic risks.