Robin Harding

The most newsy point from NY Fed president William Dudley’s speech today was his call for a change in exit strategy, urging the central bank to reinvest in its mortgage portfolio. But there was a lot more going on in the speech: Mr Dudley put a dovish spin on the Fed’s inflation target. He said bank regulation may be driving down neutral interest rates, and he put markets on notice that how they price bonds will decide how the Fed changes interest rates.

(1) Inflation is coming

Mr Dudley’s tone on inflation was different to the isn’t-it-worringly-low type of remarks that Fed officials have tended to make recently. Instead, he expects inflation to head upwards, and seemed to be testing arguments for why Fed policy should not react.

“With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure deflator . . . That said, I see little prospect of inflation climbing sharply over the next year or two. There still are considerable margins of excess capacity available in the economy—especially in the labor market—that should moderate price pressures.”

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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

Restructuring the FSA will improve regulatory supervision without harming the competitive position of the UK, according to a majority of UK finance professionals surveyed by international law firm Norton Rose.

Of the 156 UK respondents, 69 per cent disagreed or strongly disagreed that restructuring Britain’s regulator would harm the competitive position of the UK as a financial sector, while 54 per cent agreed or strongly agreed that the proposals would improve regulatory supervision. 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

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

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

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

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

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

Matthew Elderfield, head of financial regulation at the Irish central bank, will today announce a ban on chief executives becoming chairmen, limits to the number of outside directorships bankers can hold, and new standards for non executive independent members of boards. “So much of what has happened flowed from poor corporate governance and risk management that it is important to get rigorous standards in place,” he told the FT in an interview.

A security should be for life, not just for Christmas. Or at least part of the security.

That is—paraphrased—one of the many judicious suggestions from the Stability section of the ECB’s fourth Financial Integration in Europe report, released today. The proposals seem clever and heart-warmingly risk averse. But the elephant in the room—whether further integration is actually a good thing—is taken as a given: “the progress towards more advanced and integrated financial markets cannot and should not be seen to stand in contrast with the objective of financial stability,” states the report.

Specific suggestions …on …financial reform …include requirements that originators retain an economic interest in their securitisations, that products be simpler and more standardised, intermediation chains shorter, collateral better documented, the role of ratings reduced and investor diligence strengthened, and – more generally – that capital and liquidity requirements be strengthened and made less pro-cyclical.

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Expect greater collaboration between the central bank and regulator in Switzerland. They have signed a memorandum of understanding saying they will work more closely together in future.

The two bodies worked more closely during the financial crisis, and fell in love found some common ground. Principal changes/ how it will workRead more

… and apparently the Republicans are warming to it. Early days and no doubt there will be many more posts on this topic. But for now, here’s what we have.

From Tom Braithwaite, ft.comRead more

A very rough paraphrase of Daniel Tarullo’s speech follows:

Within the world of banking regulation, the bulk of the consensus has formed around prudential requirements, supervisory initiatives, and market discipline proposals. Those who believe additional measures are required have mostly turning to structural proposals, such as:

(1) Reversing the trend that allowed more financial activities within banks;
(2) Directly regulating products and services, regardless of the type of firm;
(3) Limiting the size or interconnectedness of financial firms.

Other points of interest: Read more

The Dutch central bank will focus on ‘conduct and culture‘ at banks, rather (presumably) than focusing solely on reserve ratios and other capital requirements. This came out on February 8 (apologies) but a full English translation is not yet available.

So, ample room for weekend speculation on how the central bank intends to achieve their aim. Improving the integrity – not just of individuals within the system, but of the system itself – is the holy grail. Capital ratios are poor proxies toward this end. Read more

Simone Baribeau

Today many of the long awaited credit card consumer protections passed by Congress and interpreted by the Federal Reserve take effect. The Fed has launched a new website to help consumers understand their rights.

There’s no news, per se, but it’s worth remembering what banks said would happen if they were prevented from raising interest rates based on a number of now prohibited factors, including changes in consumers’ credit scores, their behaviour with other companies, approaching credit limits, and making minimum payments.

I believe that not using a cardholder’s behaviour on their other debts as part of your predictive model is like taking the batteries out of a smoke detector – Roger C. Hochschild, president Discover Financial Services

I believe if we drop our ability to monitor credit, we could (be compared to)…the subprime mortgage business – Bruce Hammonds, president, Bank of America Card Services

We’ll see what happens. Meantime, the Fed today released another document Read more

Nigeria’s central bank is honing plans to categorise banks by region or speciality. The idea, discussed in January, would reject the current banking model in which all banks are all things to all people. Read more

Swiss central bank governor Phillip Hildebrand has taken a somewhat political stance, defending the universal banking model in an interview with Swiss daily Le Temps. A form of the Glass Steagall Act would not work in Switzerland, he said: wealth management and commercial banking should not be split.

The former banker explained: “The universal banking model represents a form of risk diversification,” quoting difficult periods in the 1980s when one side of the bank had been able to bail out the other. He added that ultra-rich customers needed the full range of investment banking services, for instance to help with mergers and acquisitions involving companies they owned. Read more

Simone Baribeau

In the wake of the financial crisis, the Federal Reserve has made much of the dangers of using interest rates to “lean against” asset bubbles, such as the one in the housing market whose collapse brought the US economy to the brink. Fed governors have implied that this was their only practical tool. (There have been quieter on the influence they may have wielded by warning of the bubble). The problem, several Fed governors have said recently, lied in a failure of regulation.

At today’s Financial Crisis Inquiry Commission hearings, Sheila Bair, chairman of the FDIC, had a response: the Fed, she said, should have regulatedRead more