The Bank for International Settlements has a fascinating section in its latest quarterly report drawing attention to the amount of debt globally, which has soared since the turn of the millennium from under $40trn to hit a whopping $100trn towards the end of 2012. Here’s the chart:
Forward guidance is central banking’s latest fad. Since the nadir of the crisis, all four of the major central banks have adopted their own version of it.
But is this fashion for keeps? That depends on whether the policy works.
Guidance involves saying what you’re going to do, before doing it. This, central banks hope, will temper markets’ uncertainty about what happens to interest rates.
Whether it works or not, then, depends on how much markets trust policy makers to do what they say they’re going to do. If investors think policy makers are lying, or central banks lose credibility by reneging on their pledges, then the guidance could harm reputations for a long time to come.
So does it work? According to a paper, published by the Bank for International Settlements today, it does. Well, sort of.
Yet the research also flags that if forward guidance does succeed, it could end up doing more harm than good. Read more
Three months after revealing that banks were using wildly different models to measure risk in their trading books, the Basel Committee on Banking Supervision has signaled that it looking for similar issues in the banking book.
In a report to the Financial Stability Board, the committee said it was looking at data from 100 banks in 15 jurisdictions to see how and why they assigned different risk-weights to their portfolios. Read more
Foreign exchange intervention has long had a bad reputation; it earned the beggar-thy-neighbour tag back in the 1930s. Now, even actions that aren’t explicitly aimed at influencing the exchange rate, such as the Federal Reserve’s quantitative easing, prompt accusations that central banks are provoking a “currency war”.
A fascinating piece of research, published by the Bank for International Settlements on Tuesday, claims this bad rep is no longer fair. Read more
“Don’t rely too heavily on monetary policy” is the closest thing that the Bank for International Settlements has had to mantra in recent years.
Monetary policy is no cure-all. But that’s not to say that the BIS thinks the US Federal Reserve was wrong to act with unprecedented force following the collapse of Lehman Brothers in the autumn of 2008. Read more
Unfortunately, the vicious cycle between the economic health of countries and the weakness of their financial systems has been all too evident over the past year.
Think of Spain. Before the crisis, the country’s debt-to-GDP ratios were among the lowest in the eurozone. But the state of its regional banks, the cajas, has pushed the sovereign’s borrowing costs to euro-era highs, far above the levels seen in members of the single currency with far higher levels public indebtedness. In Greece, the government’s fiscal profligacy is at the root of the problems befalling the country’s financial sector, in part because its banks held so much sovereign debt.
In both countries, the economy is stagnant.
So far, central banks have been called upon to stop the cycle turning even more vicious. But central banks’ actions can only buy time; the ECB’s pledge of a whopping €1trn in cheap three-year loans, revolutionary in every respect, only soothed tensions for a few months.
The Bank for International Settlements has long documented the vicious cycle phenomenon (see here, for instance). In its latest annual report, out Sunday, the so-called central bankers’ bank comes up with a prescription on how to cure it. Read more
The Basel Committee on Banking Supervision on Tuesday issued the latest round of its reports on how implementation of the Basel standards was going among each the 27 countries that make up the committee’s members.
There were some signs of improvement since October, when the last set of scorecards was released.
Seventeen countries have now published draft regulation on Basel III – up from 11 out of 27 last autumn – though nine of them are covered by the European Union’s draft bill. But Saudi Arabia remains the only one of the 27 countries to have published a final rule. Read more
As Robin Harding writes here, Bank of Japan governor Masaaki Shirakawa’s speech on the problems of aggressive monetary easing may not have been totally comfortable for his hosts at the Federal Reserve.
Mr Shirakawa was not alone. In comments released today from the same Fed event, Jaime Caruana, head of the influential Bank for International Settlements, also warns on the dangers of keeping monetary policy too loose for too long.
More uncomfortably for the Fed, the BIS general manager signals that he thinks the major central banks have strayed far beyond the bounds of monetary policy and into the domain of fiscal policy. Read more
When IMF officials travelled to Iceland in the summer of 2008, they pronounced the health of its financial sector to be good.
The banking system’s reported financial indicators are above minimum regulatory requirements and stress tests suggest that the system is resilient.
IMF, Iceland: Financial Stability Assessment – update, 19 August 2008
Within two months, the island’s three biggest lenders had collapsed, leaving its economy in tatters. Read more
No longer content with setting the world’s capital and liquidity standards, the Basel Committee now wants to take on the mantle of global regulatory policeman.
This from the FT’s chief regulation correspondent Brooke Masters:
Teams of global regulators will fan out across the world from next year to ensure that new tougher capital and liquidity standards are enforced correctly, the chairman of the Basel Committee on Banking Supervision said on Wednesday.
Stefan Ingves, the chairman, notes that this new role “represents a significant practical and cultural shift” for a committee that has in the past relied more on persuasion than policing.
However, the very fact that the chairman believes Basel cops are needed to ensure Basel III is properly enforced highlights a similarly significant shift in attitudes towards its regulations over recent years. Read more
Officials around the world agree that macroprudential policy is an important tool for safeguarding the stability of their financial systems. But there is less consensus on what does and doesn’t count as a macroprudential policy tool.
In an effort to provide some much needed clarity, then, the Financial Stability Board, Basel Committee and International Monetary Fund have today released a guide.
But their reading of what doesn’t count is contentious. Read more
Among the timeliest pieces of economic research produced this year has been the Committee for the Global Financial System paper that identified a “vicious circle between the conditions of public finances and those of banks”.
The reluctance of Mr Sarkozy to spend French taxpayers’ money to prop up the country’s lenders for fear that this may cause France to lose its triple-A rating, further hurting those same investments, is just one example of this vicious circle.
It could be seen as embarrassing for regulators that they allowed banks to treat high-grade sovereign debt as though it was risk free, given that it has since been proven to be anything but.
Hervé Hannoun, the deputy general manager of the Bank for International Settlements and former Banque de France deputy, offered his take on regulators’ treatment of sovereign debt on Wednesday. Those hoping for an apology might be disappointed. Read more
Our week ahead email will help you to track the most important events in the central banking world. To see all of our emails and alerts visit www.ft.com/nbe
The key event in next week’s calendar is the Federal Open Market Committee’s policy meeting, which Ben Bernanke announced at Jackson Hole would be a longer-than-usual two-day affair. Read more
Our new week ahead email will help you to track the most important events in the central banking world. To see all of our email and alerts visit www.ft.com/nbe
Both of next week’s key events are on Monday. Read more
Last month, a Committee on the Global Financial System paper identified “a vicious circle between the conditions of the public finances and those of banks”.
This sounds a lot like what is going on in France.
From Tuesday’s FT.com: Read more
Regulators’ fondness for sovereign debt is looking odder by the day.
The eurozone crisis and the Congressional impasse over the US debt ceiling have put paid to any notion of government bonds as risk free. What’s more, a Committee on the Global Financial System paper suggests that encouraging banks to up their holdings might in fact do more to endanger stability than promote it.
The paper, published Monday, identifies a “vicious circle between the conditions of public finances and those of banks”. As banks’ funding costs worsen, so does the creditworthiness of the sovereign, which in turn heightens funding costs. If such a vicious circle does indeed exist, then incentivising banks to hold more sovereign debt in order to fulfil regulatory requirements would only compound the problem. Read more
Central banks’ intellectual frameworks are a little dowdy and need a bit of a freshening up, says Jaime Caruana, the secretary general of the Bank for International Settlements.
In a speech published on the BIS’s website on Thursday, which was delivered in South Africa last week, Caruana claims the crisis opened up a gap between “the theory and practice of central banking” which has left the profession requiring an “intellectual makeover”.
Nowhere was this more apparent, he says, than with monetary policy. Read more
Officials must do more to ensure no firm is too big to fail. So says the Basel Committee on Banking Supervision in its report on the progress made by its 27 members in introducing frameworks to resolve ailing banks.
Many of the 27 have made progress in granting powers to save local lenders. But for firms with operations around the globe, the problems are “largely unresolved”. Progress on burden-sharing between states remains “at a preliminary stage”.
No wonder. As Bill Dudley, the president of the Federal Reserve Bank of New York, has said, the bulk of regulation and financial information is contained within national boundaries. And these boundaries, Dudley believes, are formidable obstacles to overcome. Read more
Retired LSE professor Charles Goodhart makes a strong case in today’s FT about the systemic risks posed by bail-in bonds and contingent capital (cocos) — debt that converts to equity when a bank is in or near crisis.
But he may be overstating the case when he argues that the Basel Committee on Banking Supervision and the Financial Stability Board have become too enamoured of these cocos and should be forcing banks to raise more equity instead.
In fact, the BCBS did exactly what Mr Goodhart would have wanted when they met last month to determine how to make the world’s largest banks, known as Global systemically important financial institutions (G-sifis), more resilient and safer. The regulators and central bankers agreed that 25-30 institutions would have to carry extra capital — ranging from 1 to 2.5 per cent of their assets, adjusted for risk — on top of the global minimum of 7 per cent set for all banks last year. Read more
A lot has been made of the Federal Reserve’s close links with Ivy League academics, some of whom also consult for private banks. See, for instance, this paper by Gerald Epstein and Jessica Carrick-Hagenbarth, which looks at the whether there is a relationship between economists’ positions on financial regulation and who they’re working for.
No-one, however, has gone as far as to claim that the universities may be considered part of the Fed itself. Read more