Politics reassert supremacy over financial markets - BIS

     Politics reasserted their supremacy over financial markets in recent months as investors began to discriminate across asset classes, regions and sectors in contrast to the heard behavior in recent years that was characterized by consistent waves of risk-on and risk-off buying and selling, according to the Bank for International Settlements (BIS).
     This break with the past was another sign that financial markets' close dependence of central banks' utterances and actions has been weakened, at least temporarily, according to Claudio Borio, head of BIS' Monetary and Economic Department.
    In its March 2017 Quarterly Review, BIS also found that U.S. dollar credit to non-bank borrowers outside the United States grew by $420 billion between the end of the first quarter and the end of the third quarter of 2016, with the total outstanding amount end-September now at $10.5 trillion when new data from banks in China and Russia are included.

    Click to read the BIS Quarterly Review, March 2017

    Following are remarks by Borio and Hyun Song Shin, economic adviser and head of research at BIS, known as the central banks' bank, in connection with the release of the review:

Cap on debt-to-income can control home prices - BIS

    Most countries that experienced an explosion in house prices ahead of the global financial crises have taken a variety of policy measures to avoid another real estate boom with evidence that a limit of the debt-service-to-income ratio is the best tool to slow housing credit growth, according to the Bank for International Settlements (BIS).
    But to slow down the actual growth of real estate prices, a BIS working paper found that higher housing- related taxes was the only tool that had any measurable impact.
    Measures specifically targeted at dampening a rise in real estate prices are now used by authorities worldwide as it has become clear that an increase in central bank interest rates that is large enough to dampen the rise in house prices would run the risk of triggering an overall recession.
    The working paper by Kenneth Kuttner, professor of economics at Williams College, and Ilhyock Shim, senior economist at BIS' Hong Kong office, systematically examines the efficacy of nine different measures taken by 60 countries since 1980 to control housing credit and house prices.
    Click to read: "Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies."

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FSB names China's ICBC as systemically important bank

    The Industrial and Commercial Bank of China Ltd. (ICBC) has been added to the list of globally systemically important banks (G-SIBs) by the Financial Stability Board (FSB), which means the Chinese bank faces stricter supervision and higher capital charges from January 2016.
    The Swiss-based FSB, which coordinates global financial regulation, updates its list of globally systemically important banks and financial institutions (G-SIFIs) every November. The latest update of the list is based on end-2012 data and the list has now risen to 29 from 28.
    In July the FSB also identified nine global systemically important insurers (G-SIIs), which together with the banks comprise the list of G-SIFIs. The update to the list of insurers takes place next November.
    In addition to including ICBC for the first time as a G-SIB, the FSB will impose slightly less additional loss absorbency on Citigroup, Deutsche Bank and Bank of New York Mellon while France's Group Credit Agricole faces a slightly higher charge.
   Systemically important banks are defined as those whose distress or disorderly failure would cause significant disruption to the global financial system and economic activity due to their size, complexity and interconnectedness. These banks are often referred to as "too-big-to-fail."

BIS set to name new economic adviser next week

    The Bank for International Settlements (BIS), known as the central bankers’ bank, will get a new public face next week when it announces a new chief economic adviser, a unique job that combines the art of diplomacy with the rigorous discipline of a scientist.

    It will be the seventh economic adviser to Swiss-based BIS, the world’s oldest international financial institution, and the candidate will succeed the straight-talking Stephen Cecchetti, who once compared the financial sector to cancer because it can grow so large that it suffocates and eventually devours its national host.

    The choice of economic adviser is significant because it provides an insight into how central banking will evolve in coming decades as it faces the twin challenge of exiting from years of ultra-easy monetary policy and integrating financial stability into its operational framework.

    From managing Germany’s war reparations to helping extinguish international financial crises and give birth to Europe’s single currency, the BIS has evolved into a truly global institution, at the core of international efforts to design and implement many of the policies that make up a new international financial architecture.

    The common thread that binds all BIS advisers is a deep personal commitment to public policy. Not only were all its past advisers marked by the policy issues of their time, they put their own mark on public policy.

New credit gauge warns of impending crises - BIS review

    A boom in credit usually foreshadows a financial crises but authorities failed to spot the build-up in total credit from the late 1990s through 2006 because they were looking the other way, according to an article in the latest quarterly review from the respected Bank of International Settlements (BIS).
    While authorities were busy looking at lending by domestic banks, which only rose slowly, credit created by foreign institutions and non-banks – the so-called shadow banking sector that includes pension funds, mutual funds, hedge funds, and insurance companies – exploded.
    “A new BIS database reveals, for example, that banks may provide as little as 30% of total credit to the private non-financial sector, as is currently the case in the United States,” said the article by senior BIS economist Mathias Drehmann.
    The database, which captures all sources of credit regardless of source or origin, provides more information than the traditional measurements of bank credit and is therefore useful as an early warning indicator for financial crises, Drehmann finds.
    That finding has very practical implications for banks as the Basel III global rules include countercyclical capital buffers that are based on a credit-to-GDP gap, but they don’t specify how national banking regulators should calculate that gap.

Models, supervision determine banks' risk weights - report

    Investors have a hard time comparing the riskiness of the major global banks because there are differences in how each bank calculates the potential danger of their assets, according to a report by the Basel Committee on Banking Supervision.
    Based on tests of how 15 major banks assign risks to a simple, hypothetical portfolio of financial instruments, the Basel Committee found differences, either due to supervisory decisions or due to the in-house models that banks use to calculate risk.
    “While some variation in risk weightings should be expected, excessive variation arising from bank modelling choices is undesirable when it does not reflect actual risk-taking,” said Stefan Ingves, Chairman of the Basel Committee and governor of Sveriges Riksbank.
    The Swiss-based Basel Committee, which includes banking supervisors from almost 30 countries, sets global standards and has been tightening its rules in recent years in an effort to prevent another global financial crises.
    The Committee’s analysis of how banks assess the risks from financial instruments is important because the global financial crises in 2007-2009 was largely triggered by major losses on banks’ investments in housing related securities that were held in their trading books.

Bank regulators propose new securitisation framework

    Global banking regulators have proposed a new framework for banks to calculate potential losses on asset-back securities that aims to reduce their automatic reliance on credit ratings agencies whose  assumptions proved far too optimistic and contributed to the severity of the global financial crises.
    The Basel Committee on Banking Supervision said the proposal - "Revisions to the Basel Securitisation Framework - did not include a specific text but was a revision to the framework. The Committee is now asking for industry feedback and will carry out an impact study of the proposals before deciding on the "definite way forward."
    The popularity of securitised debt, such as mortgage-backed securities, exploded in the last decade but the financial crises revealed that banks and ratings agencies severely underestimated the expected loss in underlying exposures and the concentration of systemic risk. They were also far too optimistic in their view of the benefits to banks of such diversification.
    As the crises started to unfold in 2007, it became clear that capital requirements assigned to both highly-rated and low-rated securitised products were too low. So when ratings agencies downgraded the products as credit quality deteriorated, banks suddenly had to come up with additional regulatory capital and often sought to get rid of their securitisation exposure, further depressing their value.

BIS not worried by U.S. delay of Basel III bank rules

    The Bank for International Settlements (BIS) is looking forward to full implementation of the new Basel III banking regulations and is not worried by the United States' delay in applying the global rules.
    BIS Economic Adviser Stephen Cecchetti said "some jurisdictions are having small technical problems on meeting the exact timetable to which they have committed so there are modest and immaterial delays."
    Last month the United States said it had delayed indefinitely the implementation of Basel III beyond the internationally-agreed date of January 1, 2013 due to the high volume of comments received and the range of views that were expressed.
    The delay raised fears that other countries could backtrack on their commitments to implement the new tougher banking rules following criticism by both U.S. and UK officials that the Basel III rules were too complex and should be redrafted.
    But Cecchetti said the Basel III rules had been agreed by global leaders and were now in the process of being implemented.
   The Financial Stability Board (FSB), which monitors the implementation of global financial rules, said in October that only eight of 27 countries had issued their new banking rules so it was highly likely that only six of 28 global systemically important banks would be subject to Basel III in January.

US delays start of Basel III bank rules, no new date set

    The United States has delayed indefinitely the implementation of new tougher banking standards, known as Basel III, beyond the internationally-agreed date of January 1, 2013.

    Under Basel III, banking regulators worldwide would have raised capital charges around three times and imposed stricter supervision, especially on major banks such as Citigroup and JP Morgan Chase, to prevent a repeat of the 2008 global financial crises.

    Although Group of 20 finance ministers and central bank governors, including those from the U.S., agreed to implement Basel III only last week, there has been increasing pressure to delay the start due to the complexity of the rules and the cost to banks at a time of weak global economic growth.

     The Federal Reserve issued its version of the Basel III rules in June and asked for comment. Today it said that many bankers had told it they were concerned they would be subject to the new capital rules “without sufficient time to understand the rule or to make necessary systems changes.”

    “In light of the volume of comments received and the wide range of views expressed during the comment period, the (U.S. federal banking) agencies do not expect that any of the proposed rules would become effective on January 1, 2013,” the Federal Reserve said.

U.S., Russia, Turkey make progress with Basel 2.5 - report

    The United States, Russia and Turkey have made significant progress in implementing the Basel 2.5 global banking rules, while Argentina, Indonesia and Mexico still have work to do, according to the latest progress report by the Basel Committee on Banking Supervision.
    Basel 2.5 was agreed by global banking regulators in July 2009 as the first institutional response to the global financial crises, ahead of the more comprehensive revision of banking rules under Basel III.
    While Basel 2.5, which imposed higher capital charges on banks' trading activities and specifically on securities composed of bundles of assets, was due to be implemented by the end of 2011, Basel III is first due to be implemented in phases from January 2013.
    The Basel Committee conducts period reviews of the implementation of its standards by national lawmakers and found progress at the end of September compared with its April report.
     “It is clear that not all jurisdictions will be ready in time. Still, we see continuing signs of progress," said Stefan Ingves, chairman of the Basel Committee and governor of Sweden’s central bank.

Joint Forum wants lead supervisor of conglomerates

     Countries should pick a supervisor with overall responsibility for an entire financial conglomerate to prevent any supervisory blind spots and coordinate and monitor all  risks, according to a final report on "Principles for the Supervision of Financial Conglomerates" by the Joint Forum.
    The global financial crises highlighted the glaring shortcomings of the supervision of financial conglomerates with their myriad of regulated and unregulated units that span national and industry boundaries. Deciding which supervisory body was responsible for which unit was not always clear.
    In response to the crises, the Joint Forum - set up in 1996 to include banking, insurance and securities regulators - published an initial framework in 1999 for how to avoid such supervisory gaps.
    These principles have now been updated to reflect progress made by the Joint Forum's parent committees: the Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS).

Banks progress, but still short of capital under Basel III

    Major banks have made major progress in thickening their capital cushion to prepare for the new tougher Basel III rules but they were still short of up to 374 billion euros by the end of 2011.
    In order for all the 102 largest banks to reach a 4.5 percent minimum level of capital to risk-weighted assets, an additional 11.9 billion euros is needed, the Basel Committee on Banking Supervision said in its latest study of the impact of the new, more stringent rules.
    To reach Basel III's target of a 7.0 percent capital ratio, which includes a surcharge for globally systemic important banks and a capital conservation buffer, the largest banks have to put aside an additional 374.1 billion euros, more than their combined 2011 net profits of 356 billion euros.
    In comparison to the previous study from April, the Basel Committee of global bank regulators found that largest banks had reduced the total shortfall by 111.5 billion euros.

Answers about euro zone banking supervision

     The European Commission has introduced a proposal for a Single Supervisory Mechanism (SSM) that gives the European Central Bank (ECB) responsibility for financial stability and banking supervision in the 17-nation euro area.
    Here is a link from the European Commission with answers to Frequently Asked Questions.

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