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
Santa-Barbara political economy professor Benjamin Cohen proposes new fiscal stimulus to complement the current low-interest-rate monetary policy.
Daphne Basel

2019-08-28 14:46:00 Wednesday ET

Santa-Barbara political economy professor Benjamin Cohen proposes new fiscal stimulus to complement the current low-interest-rate monetary policy.

Santa-Barbara political economy professor Benjamin Cohen proposes new fiscal stimulus to complement the current low-interest-rate monetary policy. Cohen fin

+See More
Mark Granovetter follows the key principles of modern economic sociology to analyze social relations and economic phenomena.
Charlene Vos

2021-02-17 09:28:00 Wednesday ET

Mark Granovetter follows the key principles of modern economic sociology to analyze social relations and economic phenomena.

Mark Granovetter follows the key principles of modern economic sociology to analyze social relations and economic phenomena. Mark Granovetter (2017) &

+See More
Harvard economic platform researcher Dipayan Ghosh proposes some alternative solutions to breaking up tech titans such as Facebook, Google, Apple, and Amazon.
Olivia London

2019-07-23 09:22:00 Tuesday ET

Harvard economic platform researcher Dipayan Ghosh proposes some alternative solutions to breaking up tech titans such as Facebook, Google, Apple, and Amazon.

Harvard economic platform researcher Dipayan Ghosh proposes some alternative solutions to breaking up tech titans such as Facebook, Google, Apple, and Amazo

+See More
Apple upstream suppliers such as Foxconn and Pegatron experience sharp share price declines during the Christmas 2017 holiday quarter.
Jacob Miramar

2018-11-21 11:36:00 Wednesday ET

Apple upstream suppliers such as Foxconn and Pegatron experience sharp share price declines during the Christmas 2017 holiday quarter.

Apple upstream suppliers from Foxconn and Pegatron to Radiance and Lumentum experience sharp share price declines during the Christmas 2017 holiday quarter.

+See More
Jim Cramer provides 5 key reasons against the purchase and use of cryptocurrencies such as Bitcoin, Ethereum, and Ripple.
Becky Berkman

2017-11-23 10:42:00 Thursday ET

Jim Cramer provides 5 key reasons against the purchase and use of cryptocurrencies such as Bitcoin, Ethereum, and Ripple.

As the TV host of Mad Money, Jim Cramer provides 5 key reasons against the purchase and use of cryptocurrencies such as Bitcoin. First, no one knows the ano

+See More
President Trump threatens to shut down the government if Democrats refuse to help approve $5 billion border wall finance.
Joseph Corr

2018-12-18 10:38:00 Tuesday ET

President Trump threatens to shut down the government if Democrats refuse to help approve $5 billion border wall finance.

President Trump threatens to shut down the U.S. government in 2019 if Democrats refuse to help approve $5 billion public finance for the southern border wal

+See More