Former LSE Director Howard Davies shares his ingenious insights into the new Basel 4 accord.
Chanel Holden

2018-01-01 06:30:00 Mon ET

As former chairman of the British Financial Services Authority and former director of the London School of Economics, Howard Davies shares his ingenious insights into the new Basel 4 accord. This new accord balances the U.S. and French bids for minimum bank capital output floors to arrive at the key midpoint of 72.5% equity capital output under the old Basel standard approach. In fact, this harmonization helps reduce substantial heterogeneity in internal capital requirements under the prior Basel 3 regime. Although the use and introduction of internal risk models can facilitate risk-sensitive and meaningful core capital calibrations, wide capital output dispersion may be suboptimal. This wide dispersion suggests that the core capital results may differ dramatically when the bank applies different internal risk models to calibrate to the same loan portfolios. Also, some proponents point out that most recent improvements in core capital ratios result from lower private credit growth (rather than higher net equity issuance). Should banks raise equity to strengthen their core capital ratios toward the healthy range of 10%-15% or even 20%, these banks may experience high costs of capital with less available loan credit. These ripple effects can adversely affect real macro variates such as real GDP economic growth, employment, and capital equipment usage. It is thus important for global regulators to standardize minimum core equity capital requirements to assuage these concerns.

In addition to the Basel regime switch, the Federal Reserve vice chairman Randal Quarles proposes simplifying the Volcker rule that prevents banks from using their own money to place hefty market bets on stocks, bonds, indices, funds, currencies, commodities, and derivatives. In recent years, many eminent economists point out that the Volcker rule cannot be one of the culprits of the global financial crisis from 2008 to 2009. The Volcker rule may be too restrictive for most global systemically-important banks.

As part-and-parcel of this new influx of new bank rules, it is important for banks to carefully craft their living wills for better open bank resolution during a key financial crisis. Open bank resolution may involve outright liquidation, bank recapitalization, or bridge-bank sale. Overall, these new regulations can be conducive to promoting sound and efficient bank capital arrangements in most home-host jurisdictions.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More
Financial institutions benefit from higher equity risk premiums and interest rate spreads.
Charlene Vos

2017-04-01 06:40:00 Saturday ET

Financial institutions benefit from higher equity risk premiums and interest rate spreads.

With the current interest rate hike, large banks and insurance companies are likely to benefit from higher equity risk premiums and interest rate spreads.

+See More
Carl Icahn mulls over steps to shake up the board of SandRidge Energy after it adopts a counter poison pill.
Jacob Miramar

2017-11-29 07:42:00 Wednesday ET

Carl Icahn mulls over steps to shake up the board of SandRidge Energy after it adopts a counter poison pill.

The octogenarian billionaire and activist investor Carl Icahn mulls over steps to shake up the board of SandRidge Energy after the oil-and-gas company adopt

+See More
President Trump praises great unity and progress at the G7 summit.
Rose Prince

2019-09-21 09:25:00 Saturday ET

President Trump praises great unity and progress at the G7 summit.

President Trump praises great unity and progress at the G7 summit with respect to Sino-U.S. trade conflict resolution, global climate change, containment fo

+See More
Apple files an appeal to overturn the recent iPhone sales ban in China due to its patent infringement of Qualcomm proprietary technology.
Jonah Whanau

2018-12-17 08:43:00 Monday ET

Apple files an appeal to overturn the recent iPhone sales ban in China due to its patent infringement of Qualcomm proprietary technology.

Apple files an appeal to overturn the recent iPhone sales ban in China due to its patent infringement of Qualcomm proprietary technology. This recent ban of

+See More
American state attorneys general begin bipartisan antitrust investigations into Apple, Amazon, Facebook, and Google.
Charlene Vos

2019-10-21 10:35:00 Monday ET

American state attorneys general begin bipartisan antitrust investigations into Apple, Amazon, Facebook, and Google.

American state attorneys general begin bipartisan antitrust investigations into the market power and corporate behavior of central tech titans such as Apple

+See More
Paulson, Geithner, and Bernanke warn that people seem to have forgotten the lessons of the global financial crisis from 2008 to 2009.
Daphne Basel

2018-07-17 08:35:00 Tuesday ET

Paulson, Geithner, and Bernanke warn that people seem to have forgotten the lessons of the global financial crisis from 2008 to 2009.

Henry Paulson and Timothy Geithner (former Treasury heads) and Ben Bernanke (former Fed chairman) warn that people seem to have forgotten the lessons of the

+See More