Key Aspects of Macroprudential Policy - Background Paper
IMF, June 10, 2013
http://www.imf.org/external/pp/longres.aspx?id=4804
Summary
The countercyclical capital buffer (CCB) was proposed by the Basel committee to increase the resilience of the banking sector to negative shocks. The interactions between banking sector losses and the real economy highlight the importance of building a capital buffer in periods when systemic risks are rising. Basel III introduces a framework for a time-varying capital buffer on top of the minimum capital requirement and another time-invariant buffer (the conservation buffer). The CCB aims to make banks more resilient against imbalances in credit markets and thereby enhance medium-term prospects of the economy—in good times when system-wide risks are growing, the regulators could impose the CCB which would help the banks to withstand losses in bad times.
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IMF: Implementing Macroprudential Policy - Selected Legal Issues
IMF, June 10, 2013
http://www.imf.org/external/pp/longres.aspx?id=4802
Summary
As countries design and implement macroprudential policies, they face the challenge of determining what—if any—changes need to be made to their legal and institutional framework to ensure that these policies are effective. Based on a review of experience, it is clear that there are a variety of approaches that can be taken by members, in light of the legal constraints and institutional preferences of each country. Whichever approach is followed, a number of issues need to be addressed when designing legislation in this area, both with respect to the substantive legal provisions and the allocation of institutional responsibilities. As background to ”Key Aspects of Macroprudential Policy“, this paper provides an overview of these legal and institutional issues, while recognizing that macroprudential policy is an area that is still evolving.
Monday, September 16, 2013
Friday, September 13, 2013
Financial Inclusion for Financial Stability: Improving Access to Deposits and Bank Resilience in Sync
Financial Inclusion for Financial Stability: Improving Access to Deposits and Bank Resilience in Sync. By Martin Melecky
World Bank Blogs
Tue, Sep 10, 2013
http://blogs.worldbank.org/allaboutfinance/financial-inclusion-financial-stability-improving-access-deposits-and-bank-resilience-sync
From 2006 to 2009, growth of bank deposits dropped by over 12 percentage points globally. The most affected by the 2008 global crisis were upper middle income countries that experienced a drop of 15 percentage points on average. Individual countries such as Azerbaijan, Botswana, Iceland, and Montenegro switched from deposit growth of 58 percent, 31 percent, 57 percent, and 94 percent in 2007 to deposit declines (or a complete stop in deposit growth) of -2 percent, 1 percent, -1 percent, -8 percent in 2009, respectively.
In times of financial stress, depositors get anxious, can run on banks, and withdraw their deposits (Diamond and Dybvig, 1983). Large depositors are usually the first ones to run (Huang and Ratnovski, 2011). By the law of large numbers, correlated deposit withdrawals could be mitigated if bank deposits are more diversified. Greater diversification of deposits could be achieved by enabling a broader access to and use of bank deposits, i.e. involving a greater share of adult population in the use of bank deposits (financial inclusion). Based on this assumption, broader financial inclusion in bank deposits could significantly improve resilience of banking sector funding and thus overall financial stability (Cull et al., 2012).
In the recent background paper for the World Development Report 2014 (Han and Melecky, 2013), we investigate the implications of a broader access to deposits for the dynamics of bank deposits during the global financial crisis. Namely, we analyze whether access to bank deposits by a larger share of a country’s population can help explain differences in the drop of deposit growth over 2007-2010 across our sample of 95 countries. We also separately estimate the differences in the relationship between the drop in deposit growth and access to deposits for low-income (LIC), middle-income (MIC), and high-income (HIC) countries.
Our paper responds to an existing gap in the empirical literature linking greater access to deposits with greater financial (banking sector) stability. While the literature postulates that an inclusive financial sector will have a more diversified, stable retail deposit base that can increase systemic stability, empirical research confirming existence of such a relationship, especially at the level of the financial system, is largely absent in the literature (Cull et al., 2012; Prasad, 2010).
We find that a broader access to and use of bank deposits can significantly mitigate bank deposit withdrawals or growth slowdowns in times of financial stress. Specifically, the estimated coefficient on the variables measuring access to deposits indicates that a 10 percent increase in the share of people that have access to bank deposits can mitigate the deposit growth drops (or deposit withdrawal rates) by about three to eight percentage points. While this finding holds for the entire sample of HICs, MICs, and LICs, it could be particularly strong in MICs, where a large share of population still lacks access to bank deposits, trust in banks is yet to be firmly established, and the integration in global financial flows is growing.
Our findings have important policy implications. Policy makers face tradeoffs when deciding whether to focus on reforms to promote financial development (financial inclusion, innovation, competition, etc.) or whether to focus on further improvements in financial stability (microprudential, macroprudential, business conduct supervision, etc.). However, synergies between promoting financial development and financial stability can also exist as shown in our paper.
We recommend that policy makers focus first on taking advantage of such synergies in their framework for financial sector policy. This framework is typically formulated in a national financial sector strategy which sets the development goals in finance, in view of systemic risk associated with achieving these goals and the risk preference of the country government. Namely, we argue that involving more people in the use of bank deposits could be beneficial for people, economic development, and stability of the financial system alike.
Drawing on our paper, the World Development Report 2014, in its chapter on the financial system, makes similar recommendations; namely, that countries should strive to promote a broader and responsible use of financial tools not only to aid economic development and poverty alleviation, but also to complement the mainstream (macroprudential) policies to enhance financial stability and prevent financial crises.
Again, these policy efforts, their synergetic effects, and the plan for their implementation, including the resulting responsibilities of different government agencies, should be clearly described in the national financial sector strategy. With proper regulation and oversight in place, initiatives such as Kenya’s M-PESA and M-KESHO projects (Demombynes and Thegeya, 2012) or South Africa’s Mzansi accounts (Bankable Frontier Associates, 2009) could serve as good examples of promoting a broader use of bank accounts (deposits) and enhancing the reliability of bank deposit funding at the same time.
References
World Bank Blogs
Tue, Sep 10, 2013
http://blogs.worldbank.org/allaboutfinance/financial-inclusion-financial-stability-improving-access-deposits-and-bank-resilience-sync
From 2006 to 2009, growth of bank deposits dropped by over 12 percentage points globally. The most affected by the 2008 global crisis were upper middle income countries that experienced a drop of 15 percentage points on average. Individual countries such as Azerbaijan, Botswana, Iceland, and Montenegro switched from deposit growth of 58 percent, 31 percent, 57 percent, and 94 percent in 2007 to deposit declines (or a complete stop in deposit growth) of -2 percent, 1 percent, -1 percent, -8 percent in 2009, respectively.
In times of financial stress, depositors get anxious, can run on banks, and withdraw their deposits (Diamond and Dybvig, 1983). Large depositors are usually the first ones to run (Huang and Ratnovski, 2011). By the law of large numbers, correlated deposit withdrawals could be mitigated if bank deposits are more diversified. Greater diversification of deposits could be achieved by enabling a broader access to and use of bank deposits, i.e. involving a greater share of adult population in the use of bank deposits (financial inclusion). Based on this assumption, broader financial inclusion in bank deposits could significantly improve resilience of banking sector funding and thus overall financial stability (Cull et al., 2012).
In the recent background paper for the World Development Report 2014 (Han and Melecky, 2013), we investigate the implications of a broader access to deposits for the dynamics of bank deposits during the global financial crisis. Namely, we analyze whether access to bank deposits by a larger share of a country’s population can help explain differences in the drop of deposit growth over 2007-2010 across our sample of 95 countries. We also separately estimate the differences in the relationship between the drop in deposit growth and access to deposits for low-income (LIC), middle-income (MIC), and high-income (HIC) countries.
Our paper responds to an existing gap in the empirical literature linking greater access to deposits with greater financial (banking sector) stability. While the literature postulates that an inclusive financial sector will have a more diversified, stable retail deposit base that can increase systemic stability, empirical research confirming existence of such a relationship, especially at the level of the financial system, is largely absent in the literature (Cull et al., 2012; Prasad, 2010).
We find that a broader access to and use of bank deposits can significantly mitigate bank deposit withdrawals or growth slowdowns in times of financial stress. Specifically, the estimated coefficient on the variables measuring access to deposits indicates that a 10 percent increase in the share of people that have access to bank deposits can mitigate the deposit growth drops (or deposit withdrawal rates) by about three to eight percentage points. While this finding holds for the entire sample of HICs, MICs, and LICs, it could be particularly strong in MICs, where a large share of population still lacks access to bank deposits, trust in banks is yet to be firmly established, and the integration in global financial flows is growing.
Our findings have important policy implications. Policy makers face tradeoffs when deciding whether to focus on reforms to promote financial development (financial inclusion, innovation, competition, etc.) or whether to focus on further improvements in financial stability (microprudential, macroprudential, business conduct supervision, etc.). However, synergies between promoting financial development and financial stability can also exist as shown in our paper.
We recommend that policy makers focus first on taking advantage of such synergies in their framework for financial sector policy. This framework is typically formulated in a national financial sector strategy which sets the development goals in finance, in view of systemic risk associated with achieving these goals and the risk preference of the country government. Namely, we argue that involving more people in the use of bank deposits could be beneficial for people, economic development, and stability of the financial system alike.
Drawing on our paper, the World Development Report 2014, in its chapter on the financial system, makes similar recommendations; namely, that countries should strive to promote a broader and responsible use of financial tools not only to aid economic development and poverty alleviation, but also to complement the mainstream (macroprudential) policies to enhance financial stability and prevent financial crises.
Again, these policy efforts, their synergetic effects, and the plan for their implementation, including the resulting responsibilities of different government agencies, should be clearly described in the national financial sector strategy. With proper regulation and oversight in place, initiatives such as Kenya’s M-PESA and M-KESHO projects (Demombynes and Thegeya, 2012) or South Africa’s Mzansi accounts (Bankable Frontier Associates, 2009) could serve as good examples of promoting a broader use of bank accounts (deposits) and enhancing the reliability of bank deposit funding at the same time.
References
- Bankable Frontier Associates. 2009. "The Mzansi Bank Account Initiative in South Africa." Report commissioned by FinMark Trust. Bankable Frontier Associates, Somerville, MA.
- Cull, Robert, Asli Demirguc-Kunt and Timothy Lyman. 2012. "Financial Inclusion and Stability: What Does Research Show?" CGAP Brief 71305, CGAP, Washington, DC.
- Demombynes, Gabriel and Aaron Thegeya. 2012. "Kenya's Mobile Revolution and the Promise of Mobile Savings." Policy Research Working Paper 5988. World Bank, Washington, DC.
- Diamond, Douglas W. and Philip H. Dybvig. 1983. "Bank Runs, Deposit Insurance, and Liquidity." Journal of Political Economy 91(3): 401–19.
- Huang, Rocco, and Lev Ratnovski. 2011. "The Dark Side of Bank Wholesale Funding." Journal of Financial Intermediation 20: 248–263.
- Prasad, Eswar S. 2010. "Financial Sector Regulation and Reforms in Emerging Markets: An Overview." NBER Working Paper 16428, Cambridge, MA.
Monday, September 2, 2013
Margin requirements for non-centrally cleared derivatives - final report issued by the Basel Committee and IOSCO
Margin requirements for non-centrally cleared derivatives - final report issued by the Basel Committee and IOSCO
September 2, 2013
The Basel Committee on Banking Supervision and the International
Organization of Securities Commissions (IOSCO) released today the final
framework for margin requirements for non-centrally cleared derivatives.
The framework is available on the websites of the Bank for International Settlements and IOSCO.
Under the globally agreed standards published today, all financial firms and systemically important non-financial entities that engage in non-centrally cleared derivatives will have to exchange initial and variation margin commensurate with the counterparty risks arising from such transactions. The framework has been designed to reduce systemic risks related to over-the-counter (OTC) derivatives markets, as well as to provide firms with appropriate incentives for central clearing while managing the overall liquidity impact of the requirements.
The final requirements have been developed taking into account feedback from two rounds of consultation (a July 2012 consultative paper and a February 2013 near-final proposal) as well as a quantitative impact study that helped inform the policy deliberations.
Compared with the near-final framework proposed earlier this year, the final set of requirements includes the following modifications:
Finally, the framework published today envisages a gradual phase-in period to provide market participants with sufficient time to adjust to the requirements. The requirement to collect and post initial margin on non-centrally cleared trades will be phased in over a four-year period, beginning in December 2015 with the largest, most active and most systemically important derivatives market participants.
The Basel Committee and IOSCO acknowledge that the margin requirements are new to the market and that their precise impact will depend on a number of factors and market conditions that will only be realised over time as the requirements are put into practice. Accordingly, the Basel Committee and IOSCO will monitor and assess the impact of the requirements as they are implemented globally.
September 2, 2013
Under the globally agreed standards published today, all financial firms and systemically important non-financial entities that engage in non-centrally cleared derivatives will have to exchange initial and variation margin commensurate with the counterparty risks arising from such transactions. The framework has been designed to reduce systemic risks related to over-the-counter (OTC) derivatives markets, as well as to provide firms with appropriate incentives for central clearing while managing the overall liquidity impact of the requirements.
The final requirements have been developed taking into account feedback from two rounds of consultation (a July 2012 consultative paper and a February 2013 near-final proposal) as well as a quantitative impact study that helped inform the policy deliberations.
Compared with the near-final framework proposed earlier this year, the final set of requirements includes the following modifications:
- The framework exempts physically settled foreign exchange (FX) forwards and swaps from initial margin requirements. Variation margin on these derivatives should be exchanged in accordance with standards developed after considering the Basel Committee supervisory guidance for managing settlement risk in FX transactions.
- The framework also exempts from initial margin requirements the fixed, physically settled FX transactions that are associated with the exchange of principal of cross-currency swaps. However, the variation margin requirements that are described in the framework apply to all components of cross-currency swaps.
- "One-time" re-hypothecation of initial margin collateral is permitted subject to a number of strict conditions. This should help to mitigate the liquidity impact associated with the requirements.
Finally, the framework published today envisages a gradual phase-in period to provide market participants with sufficient time to adjust to the requirements. The requirement to collect and post initial margin on non-centrally cleared trades will be phased in over a four-year period, beginning in December 2015 with the largest, most active and most systemically important derivatives market participants.
The Basel Committee and IOSCO acknowledge that the margin requirements are new to the market and that their precise impact will depend on a number of factors and market conditions that will only be realised over time as the requirements are put into practice. Accordingly, the Basel Committee and IOSCO will monitor and assess the impact of the requirements as they are implemented globally.
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