Financial Stability News

News about financial stability, central banking and theory of money

Tag Archives: Dodd-Frank

IMF: Financial stability reform lagging behind

This VOX post by one of the leading authors of this years Global Financial Stability Report  Not making the grade: Report card on global financial reform | vox. argues that the pace of reform and restructuring of the financial sector is too slow. Important issues remain unresolved, including

  • Financial systems are still overly complex.
  • Banking assets are highly concentrated (Figure 3), with strong domestic interlinkages.
  • The too-important-to-fail issues are unresolved.
  • Banking systems are still over-reliant on wholesale funding (Figure 4)

There is still little progress (or politicla will?) to tackle the TBTF problem, and the financial system remain too complex. Shadow banking continue to be a problem, as well.

Key question is whether “traditional” program of reform, inkl. Basel 3, will deliver the required reforms in time? The lobbying pressure is intense, ref. the latest defeat of the SEC on money market reform. May be we need other approaches, ref. Haldane’s critique of Basel 3?

Money, Power and Wall Street

PBS has made a four episode documentary about the crisis on Wall Street. The first two (on the build-up to the crisis and the crisis itself can be seen online). The next two will air today in the US and can be seen online afterwards. The two first were really good. Despite a wealth of reporting on the crisis, including numerous well researched books, they manage to recreate the suspense and also be quite analytical. Conclusion: Nothing much has changed since the crisis – are we heading for another one?

Dallas Fed: End too-big-too-fail NOW

Dallas Fed Governor Richard W. Fisher has been very vocal on the TBTF issue, lastly in a speech in November last year where he wanted to “get an international accord that would break up these institutions”.

Now the annual report for 2011 is out for Dallas Fed and it is in its entirety devoted to the TBTF issue; title of the report: Choosing the Road to Prosperity – Why we must end too big to fail – NOW. Quote:

As a nation we face a distinct choice. We can perpetuate too big to fail, with its inequities and dangers, or we can end it. Eliminating TBTF won’t be easy, but the vitality of our capitalist system and the long-term prosperity it produces hang in the balance.

Goodhart on how to prevent another banking crisis

Charles Goodhart and Enrico Perotti have an interesting VOX note on “Preventive macro prudential policy”. They suggest a five step PCA-like policy response with emphasis on liquidity and punitive charges for non-compliance with the Net Stable Funding ratio. National supervisors should be empowered to charge “prudential risk surcharges” on the gap between the banks’ current liquidity position and the new Basel III norms.

I am not so sure about the novelty of this, or how it would work. It resembles the old PCA framework, although transferred to a liquidity framework. Still interesting to read and could form the basis for some supplementary PCA reactions to the current capital based system.

For a review of the US experience with their PCA system during the latest crisis, see this report from the US Financial Stability Oversight Council. It was issued late 2011, but is still relevant for the ongoing discussion on how to prevent another banking crisis.

Volcker and his critics

There has been quite some press recently on the Volcker rule, in part related to the deadline for comments last week. The Financial Times carried a comment from Volcker himself where he rejected the claims from some capitals (JP, CA, EU among others) that the rule would sap liquidity from their sovereign bond markets.Today a chairwomen from the Institute of International Bankers responds.

A complete run on the arguments for and against the Volcker rule is given by Simon Johnson (former Chief Economist of the IMF) in this recent NY Times post, which also includes several relevant references. He notes that if anything, the bankers are getting away cheaply in the proposed new regime, which isn’t even finished yet.

Among those that have submitted comments are also the Occupy Wall Street subsidiary “Occupy SEC”, which have provided a well balanced and constructive comment paper of 190 pages! According to this report, it has been accomplished as a huge workshop,  with some of the participants clearly being well informed about the intricacies of Wall Street. You can find their comment letter on their web site.

EU Red-Flags ‘Volcker’

Latest news from Davos where commissioner Barnier stated that EU (like Japan and Canada before him) is concerned with the fallout from the introduction of the Volcker rule in the US on foreign debt markets. As noted in earlier posts, the administration in the US is not to eager on the Volcker rule either, which tries to prohibit trades done with the intent of making money. So, while the UK Treasury seem intent of going ahead with its variant of the Volcker rule (ring fencing the retail part of big banks), the US Treasury (and US banks) is getting surprising support for delaying the policy measure. The proposal is still out for hearing, but given the strong international reaction, my guess is it will remain out for hearing for quite some time.

Too-Big-To-Fail Banks Back on Senate Agenda

Bloomberg reports that the TBTF issues again is being addressed in the Senate. Senator Brown (D-Ohio) has earlier tried to limit the size of mega banks in the Dodd-Frank legislation, but failed then. Today there will be a  hearing in the Senate Senate Subcommittee on Financial Institutions and Consumer Protection to again address the issue. Among the witnesses will be Sheila Bair, former head of the FDIC and an outspoken critic of the large banks.

Also on the hill, yesterday there were hearings on the implementation of the Dodd-Frank bill. Chairman Johnsen noted that he in particular looked forward to progress report on the rule making for the Volcker rule. Not surprisingly, the financial industry, and the Fed and the US Treasury, think the proposal is not such a good idea. The web-cast from the hearings, including Fed governor Turello is posted here.