Chris Giles

Today’s consultation document on financial regulation places the Bank of England at the heart of financial regulation and establishes an interim Financial Policy Committee to identify and reduce system-wide risks to the UK financial system, known in the jargon as macroprudential regulation.

The document is months late. That does not matter and  it is clear that it  has benefited from considerable thought about how the new Bank of England will work. The new Bank will maintain its objectives for monetary and financial stability, while adding banking supervision to its duties, and the new FPC will also have some, as yet undefined, powers to direct the PRA and the new Financial Conduct Authority (which we had known as the Consumer Protection and Markets Authority). These directions will aim to damp speculative credit bubbles when they emerge.

The FPC’s toolkit is broad and ranges from speeches and warnings to the possibility of higher bank capital ratios, higher risk weights for certain assets and direct limits on loan-to-value ratios or other collateral in lending.

But there are two significant problems with the new regulatory structure and the members of the FPC, much discussed outside the Bank, but not addressed in the consultation document at all. Read more

Imagine that in January, you will become your country’s chief firefighter, but that the very best reports of smoke currently available are unreliable and intermittent. Scared?

Well, the European Systemic Risk Board is due to launch in January, and the ECB’s vice president has just pointed out that, on current data availability, the Board would struggle to do its job. That job, as a quick reminder, is to “assess and prevent potential risks to financial stability in the EU.” No small task, with markets febrile and bank bail-outs still in vogue.

The ECB has a fair bit of data already, but it is geared towards monetary policy rather than macro-prudential regulation. So, what’s missing? Read more

James Politi

Sheila Bair, chair of the Federal Deposit Insurance Corporation, gained much respect and notoriety in Washington for her warnings about - and handling of - the subprime mortgage crisis.

And so it is somewhat unnerving to see her offer remarks today warning about the potential for a bond bubble that could do significant damage to the US financial system if banks do not prepare for higher interest rates down the road. Especially in a context of possible additional quantitative easing by the Federal Reserve, which could easily push treasury yields even lower than they are now.

“The consensus is that this low-rate environment will persist for some time into the future,” said Ms Bair. “But what will happen when interest rates inevitably rise, and how disruptive will that process be? “ Read more

Chris Giles

Yes. As Angela Knight, chief executive of the British Bankers’ Association says:

“A bank is like any other business – if its fixed operating costs go up then so does the price of its product. All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The consequence is that inevitably the cost of credit – the price the borrower pays for money – will rise. The cheap money era is over.”

But I am sure Ms Knight, as a skilled lobbyist, knows that being strictly correct can happily coexist with being seriously misleading. The impression she gives is that tighter capital and liquidity standards will hit households hard through dearer credit and it is all the fault of pesky regulators. There are two big problems with this: first, the costs of tighter capital standards are only important relative to the benefits; second, the scale of the costs is more important than their existence.

Costs and benefits Read more

States in northern Europe have formed a new group to boost financial stability, the Nordic-Baltic Stability Group. Members – Norway, Sweden, Finland, Estonia, Latvia, Lithuania and Iceland – hail from in and outside the EU, and in and outside the euro.

Banks beware. The memorandum of understanding says members will keep tabs on – and share – information about significant banks, draw up risk assessments in a common template, and share the burden when things go wrong. Faced with cross-border banks and the risks they pose, states are fighting back:

The financial integration between the Nordic and Baltic countries warrants deeper cooperation

 Read more

Basel policymakers, beware: higher capital requirements for banks can increase systemic risk. Although risks are lower for each bank individually, “systemic linkage” between the banks is higher. Depending on the banks’ balance sheets, this can mean higher systemic risk.

Researchers at the Dutch central bank explainRead more

Chris Giles

For those interested in deckchairs, there is a lot of reshuffling of them going on in British financial regulation, outlined in a Treasury consultation document today. A short summary is: the Bank of England will have much more power to do essentially the same things that the tripartite authorities planned under the previous government.

The existing tripartite Council for Financial Stability and the Bank’s Financial Stability Committee will effectively be merged in function and rebadged as the Financial Policy Committee of the Bank. Like the existing councils, the new FPC will have representatives from prudential regulators and from Treasury. It will also have some outside representation on the 11-strong Committee which will meet four times a year other than at times of crisis.

On the substance of the FPC’s remit, there is a lot of stuff in the Treasury consultation about the way the FPC will operate its tools and a bit of fretting about interaction with monetary policy, but there is still rather little on the macro-prudential tools the FPC will be given. Obviously, this is the important bit and the paucity of information here is disappointing, since it does not go much further than the Bank of England’s discussion document on the role of macro-prudential policy from last November.

But the tools the government is thinking of giving the FPC are the following: Read more

Are structured products more accurately valued now than in 2008? If you are an investor or auditor, the Financial Stability Board wants to hear your answer to this question. Read more

The overhaul of the US financial sector cleared its last big hurdle in Congress on Thursday as 60 senators voted in favour of the legislation, which introduces a raft of restrictions on banks to curb risk.

More than a year after the mammoth legislative effort began, Democrats managed to persuade three Republican senators to support the Dodd-Frank bill, enough for the 60-vote supermajority needed to bring debate to a close. Read more

“It is odd that the new regulatory structure makes an unrepentant BOE even more powerful with respect to regulatory matters,” writes former MPC member Sushil Wadhwani in The Future of Finance, a collection of essays. “In my time at the MPC at the Bank, I was surprised by the lack of interest in issues relating to financial markets. Indeed there seemed to be a deliberate policy to run down resource in the Financial Stability wing.”

Strong words. But the argument against giving regulatory powers to the Bank of England is not, however, that they don’t deserve them. Rather, Dr Wadhwani argues that monetary policy and macro-prudential policy need to be able to work against each other, or, as he puts it, “the use of monetary policy to ‘lean against the wind’ is critically important in its own right and to the success of the ‘macroprudential’ policy to be adopted by the [Financial Policy Committee].”

Irish banks might never be the same. New bank regulation legislation was passed yesterday, 69-65. The bill is now off to the upper house, the Seanad.

The Central Bank Reform Bill would merge the central bank with the regulator, giving the regulator’s consumer information roles to the national consumer agency. The new integrated central bank and regulator would be called the Central Bank Commission. Read more

Chris Giles

George Osborne’s mansion house speech tonight is generating lots of interest because it is billed as the moment he reveals his blueprint for financial regulation in Britain. Most of the speculation in the media this morning is of the “let’s print Conservative Party policy and pretend it is a scoop” variety. I have not seen the speech by the chancellor, nor the reply from Mervyn King, Bank of England governor, so here is a quick guide to what we know and don’t know.

What we know for certain

 Read more

James Politi

We’re in the last throes of the battle over financial regulatory reform, and Barney Frank, the chief congressional negotiator on the legislation and chairman of the House financial services committee, today suggested a possible compromise on the Federal Reserve – one that would strip the three banker board members of the right to select regional bank presidents, but would safeguard the position of NY Fed president from political appointment.

It still needs to be voted on by the conference of lawmakers charged with reconciling the Senate and House versions of the bill, so nothing is etched in stone. But his proposal merits attention because it could be an elegant way to resolve the remaining differences.

Gone would be the controversial proposal to make the president of the Federal Reserve Bank of New York a political appointee – which was seen by some critics of the measure as a misguided attempt to politicise the US central bank. Read more

Key points of the bill:

Related reading: full list of key points or the main news article.

Thoroughly recommended, from Howard Davies & David Green:

There are areas in the coalition agreement where mating a pure-bred Tory policy with a pedigree Liberal Democrat manifesto commitment has produced a mongrel, but in the area of financial regulation the opposite is the case… The formal statement says the government will “give the Bank of England control of macroprudential regulation and oversight of microprudential regulation”. We may presume from this that day-to-day institutional supervision will remain with the FSA. That makes sense. Read more

Two key Democratic senators offered a narrow path for compromise over the weekend after banks pleaded with regulators and clients to help overturn provisions of a financial regulation bill they say will rock markets.

Chris Dodd, Senate banking committee chairman, and Blanche Lincoln, chairman of the agriculture committee, told the Financial Times there was room to negotiate on a proposal that would force banks to spin off their swaps desks. Financial regulation reform is entering its final week in the senate, and there is a frantic lobbying effort to change parts of the bill before Barack Obama, US president, signs it into law and claims his second big legislative victory after healthcare reform. Read more

Simone Baribeau

The White House is highlighting common problems of military families to push for more comprehensive financial reform.

Barack Obama today argued against an amendment which would exclude auto dealer lenders from increased consumer protections (that will be overseen by the Fed).

This amendment guts provisions that empower consumers with clear information that allows them to make the financial decisions that work best for them and simply encourages misleading sales tactics that hurt American consumers. Unfortunately, countless families – particularly military families – have been the target of these deceptive practices.

Last month, the White House blog included a post on military families being the potential victims of the proposed auto lending carve out, which said that, in the past six months, 72 per cent of military financial counselors had spoken with soldiers on abusive auto lending practices.

Dealers that target military families have an incentive to Read more

City analysts will be relieved by the UK government’s reprieve for the FSA, the UK’s financial services regulator. “There will be cheers in the City if, as now seems likely, the FSA remains the single regulator for banks and insurers,” Paul Edmondson, a London-based regulatory lawyer, told Bloomberg.

The Conservative Party had pledged to scrap the body, shifting its responsibilities to the Bank of England. This now looks unlikely but FSA responsibilities will still change. According to Bloomberg, the FSA will “undertake day-to-day supervision of individual lenders, and report directly to the central bank”. Read more

George Osborne, the new Tory chancellor, has been forced to water down plans to hand over banking supervision to the Bank of England under a five-year coalition deal struck with the Liberal Democrats.

Tory officials admitted that the Financial Services Authority could survive the planned shake-up of banking regulation, a move that will delight many in the City who feared that Mr Osborne’s original plan would lead to serious upheaval. Read more

Fed officials are watching the markets, trying to get to the bottom of the sudden plummet this afternoon and the various “fat finger”/programme trade theories for what happened. But across the nation – at the regional Fed headquarters as well as in DC – they have also kept an eye on C-Span and the “audit the Fed” amendment on Capitol Hill.

Right now Bernie Sanders, the independent, self-proclaimed “socialist” senator from Vermont, is preparing for the vote on his audit amendment, which would broaden the scope of the things Congress is allowed to investigate inside the central bank. The Fed has seen this as an existential threat – possibly ending almost 100 years of independence from political control. Read more