Bank Capital and Liquidity Rules
Recent experiences demonstrate the need for new capital requirements which ensure that institutions can weather shocks and remain “going concerns.” New bank capital rules will stress higher minimum levels, higher quality of capital, higher specific capital held against trading positions and counter-parties, and overall leverage limits. At the same time, banks previously viewed as well-capitalized were pushed into insolvency due to a loss of access to funding. To counter that risk, new minimum liquidity requirements are being proposed in many countries.
At the systemic level, many governments are exploring the potential benefits of requiring counter-cyclical capital (building higher buffers during boom years for use in recessions.) Countries that have pursued these options, though, have experienced mixed success.
CFS evaluates whether these various proposals will reduce the risk of future crises, and explores any unintended consequences of the proposed reforms. These proposals will be the subject of CFS research and feature as key issues in the Policy Forum. Our goal is to promote thoughtful public dialog on the framework for reform, the structure of the financial system post-reform, and the implications of these proposals for the economy and provision of financial services in the future.
Proposals for Regulatory Reforms
Micro-prudential (at the bank level)
Macro-prudential (at the banking system level)
- Higher minimum capital
- Higher quality of capital
- High capital v. trading risk
- Higher capital v. counter-party risk
- Overall leverage ratio
- Minimum liquidity ratios
- Counter-cyclical capital and dynamic provisioning
- Funding risk assessments
Bank Capital and Liquidity Rules Policy Forum
Moderated by CFS Senior Fellow Robin L. Lumsdaine
A central lesson of the recent crisis is that banks worldwide lacked sufficient, high quality capital to absorb large unexpected losses. Even well-capitalized banks found themselves at risk when valuations plummeted and market turmoil disrupted their traditional sources of funding. Since then, officials and regulators have outlined a range of proposals aimed at strengthening bank capital and liquidity.
A recent GlobeAsia Op-Ed by Steve Hanke, re-distributed by the Center for Financial Stability
(CFS), generated strong feelings among the CFS readership. Dissent on the critical issue of bank capital is not unique to the CFS – as evidenced by the public skirmish between JP Morgan Chairman Jamie Dimon and Bank of Canada Governor Mark Carney. But bank capital issues are deeper and more complex than headlines and op-eds suggest.
We therefore asked Senior Fellow Robin Lumsdaine to initiate a more in-depth discussion and to serve as moderator for our Bank Capital and Liquidity Rules Forum, to facilitate further discussion and debate issues associated with this important topic. Her note delves into some of the issues raised and identifies questions for forum participant discussion.
We invite you to submit your thoughts and/or research. Click here to go to the policy forum.
Opinions and Editorials
“Stronger” Banks, Weaker Economies
Steve H. Hanke
August 2011 - Globe Asia
Since the Panic of 2008-09, if not before, the economic and financial regulatory agencies have been beating the drums for banks to raise fresh capital and strengthen their balance sheets. And if banks can’t raise more capital, they are told to shrink the amount of risk assets (loans) on their books. Furthermore, we are told that, to avoid future crises, banks must be made stronger.
They assert that more capital has made the banks stronger and safer. While at first glance that might strike one as a reasonable conclusion, it is not the end of the story.
Click here to view the report.
The Market for LTC Insurance and Systemic Risk
Robin L. Lumsdaine
January 14, 2011
Center for Financial Stability Senior Fellow Robin Lumsdaine discusses why the private long-term care (LTC) insurance market may be under serious threat and relevant for the systemic risk debate.
In addition to an aging population and rising LTC inflation, new capital requirements and financial regulation could discourage insurance company participation in this important market and deprive individuals of affordable policies.
Click here to view the report.