Posts Tagged ‘Systemic risk’

G-SIB Capital: A Look to 2015

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday January 17, 2015 at 9:00 am
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Editor’s Note: The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Dan Ryan, Kevin Clarke, Roozbeh Alavi, and Armen Meyer. The complete publication, including appendix, is available here.

On December 9, 2014, the Federal Reserve Board (FRB) issued a long-awaited proposal to impose additional capital requirements on the US’s global systemically important banks (G-SIBs). The proposal implements the Basel Committee on Banking Supervision’s (BCBS) G-SIB capital surcharge framework that was finalized in 2011, but also proposes changes to BCBS’s calculation methodology resulting in significantly higher surcharges for US G-SIBs compared with their global peers.

The proposal, which we expect will be finalized in 2015, requires US G-SIBs to hold additional capital (Common Equity Tier 1 (CET1) as a percentage of Risk Weighted Assets (RWA)) equal to the greater of the amount calculated under two methods. The first method is consistent with BCBS’s framework, and calculates the amount of extra capital to be held based on the G-SIB’s size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. The second method is introduced by the US proposal, and uses similar inputs but replaces the substitutability element with a measure based on a G-SIB’s reliance on short-term wholesale funding (STWF).

…continue reading: G-SIB Capital: A Look to 2015

Ten Key Points from the FSB’s TLAC Ratio

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday January 9, 2015 at 9:00 am
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Editor’s Note: The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Kevin Clarke, Roozbeh Alavi, and Dan Weiss. The complete publication, including appendix, is available here.

On November 10th, the Financial Stability Board (FSB) issued a long-awaited consultative document that defined a global standard for minimum amounts of Total Loss Absorbency Capacity (TLAC) to be held by Global Systemically Important Banks (G-SIBs). TLAC is meant to ensure that G-SIBs have the loss absorbing and recapitalization capacity so that, in and immediately following resolution, critical functions can continue without requiring taxpayer support or threatening financial stability.

The FSB’s document requires a G-SIB to hold a minimum amount of regulatory capital (Tier 1 and Tier 2) plus long term unsecured debt that together are at least 16-20% [1] of its risk weighted assets (RWA), i.e., at least twice the minimum Basel III total regulatory capital ratio of 8%. In addition, the amount of a firm’s regulatory capital and unsecured long term debt cannot be less than 6% of its leverage exposure, i.e., at least twice the Basel III leverage ratio. In addition to this “Pillar 1” requirement, TLAC would also include a subjective component (called “Pillar 2”) to be assessed for each firm individually, based on qualitative firm-specific risks that take into account the firm’s recovery and resolution plans, systemic footprint, risk profile, and other factors.

…continue reading: Ten Key Points from the FSB’s TLAC Ratio

New Approaches to International Financial Regulation

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday December 29, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Annelise Riles, Jack G. Clarke Professor of Far East Legal Studies and Professor of Anthropology at Cornell Law School.

International financial law scholarship is undergoing a revolution. The financial crisis of 2008 has led to a dramatic rethinking of the “givens,” and has attracted a new community of scholars to the field. Until 2008, international legal theory played only a minor role in international financial law. The implicit and taken for granted neoclassical economic theory that undergirded debates about global financial regulation was presumed to be all the theory that could or should apply, and the analysis focused rather simply and uniformly on questions of efficiency and social welfare. Since the financial crisis, however, the mainstream debate has shifted its focus to so-called “macro-prudential issues” and to an awareness of a need for some sort of global, or at least a transnationally coordinated response to systemic risk.

…continue reading: New Approaches to International Financial Regulation

How Do Bank Regulators Determine Capital Adequacy Requirements?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday October 15, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Eric Posner, Kirkland & Ellis Distinguished Service Professor of Law and Aaron Director Research Scholar at the University of Chicago.

The incentive to take socially costly financial risks is inherent in banking: because of the interconnected nature of banking, one bank’s failure can increase the risk of failure of another bank even if they do not have a contractual relationship. If numerous banks collapse, the sudden withdrawal of credit from the economy hurts third parties who depend on loans to finance consumption and investment. The perverse incentive to take financial risk is further aggravated by underpriced government-supplied insurance and the government’s readiness to play the role of lender of last resort.

…continue reading: How Do Bank Regulators Determine Capital Adequacy Requirements?

Cross-Border Recognition of Resolution Actions

Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication authored by Mitchell S. Eitel, Andrew R. Gladin, Rebecca J. Simmons, and Jennifer L. Sutton. The complete publication, including footnotes, is available here.

On September 29, 2014, the Financial Stability Board (the “FSB”) published a consultative document concerning cross-border recognition of resolution actions and the removal of impediments to the resolution of globally active, systemically important financial institutions (the “Consultative Document”). The Consultative Document encourages jurisdictions to include in their statutory frameworks seven elements that would enable prompt effect to be given to foreign resolution actions. In addition, due to a recognized gap between the various national legal resolution regimes that are currently in place and those recommended by the FSB, the Consultative Document sets forth two “contractual solutions”—that is, resolution-related arrangements to be implemented as a matter of contract among the private parties involved—to address two underlying substantive issues that the FSB considers critical for orderly cross-border resolution, namely:

…continue reading: Cross-Border Recognition of Resolution Actions

Financial Market Infrastructures

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday October 6, 2014 at 8:56 am
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Editor’s Note: The following post comes to us from Guido A. Ferrarini, Professor of Business Law at University of Genoa, Department of Law, and Paolo Saguato at Law Department, London School of Economics.

In the paper Financial Market Infrastructures, recently made publicly available on SSRN and forthcoming as a chapter of The Oxford Handbook on Financial Regulation, edited by Eilís Ferran, Niamh Moloney, and Jennifer Payne (Oxford University Press), we study the impact of the post-crisis reforms on financial market infrastructures in the securities and derivatives markets.

The 2007-2009 financial crisis led to large-scale reforms to the regulation of securities and derivatives markets. Regulators around the world acknowledged the need for structural reforms to the financial system and to market infrastructures in particular. Due to the global dimension of the crisis and the extent to which financial markets had been revealed to be closely interconnected, national regulators moved the related policy debate to the supranational level. This approach led to the international regulatory guidelines and principles adopted by the G20 and then developed by the Financial Stability Board (FSB). The new global regulatory framework which has followed has institutionalized financial market infrastructures (FMIs) as key supports for financial stability and as cornerstones of the crisis-era regulatory reform agenda for financial markets.

…continue reading: Financial Market Infrastructures

Rolling Back the Repo Safe Harbors

Posted by Mark Roe, Harvard Law School, on Wednesday September 10, 2014 at 9:02 am
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Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an article co-authored by Professor Roe, Ed Morrison, Professor of Law at Columbia Law School, and Bankruptcy Judge Christopher Sontchi for the District of Delaware. All three are members of the Advisory Committee on Derivatives, Financial Contracts and Safe Harbors, which is working with the ABI Commission to Study the Reform of Chapter 11. The article was presented at the Federal Reserve’s recent conference on Wholesale Funding Markets.

Ed Morrison, Judge Christopher Sontchi and I recently posted to SSRN our article recommending a major narrowing of the repo safe harbors, after presenting it at the Federal Reserve’s recent conference on Wholesale Funding Markets in which the Boston Fed president warned of the dangers in the repo market. Overall, we conclude that the Bankruptcy Code has aggressively and unwisely sought to regulate market liquidity and systemic risk, with the Code’s “safe harbors” from the normal bankruptcy machinery largely backfiring during the financial crisis. The sounder policy would be to limit the repo safe harbors to U.S. Treasury repos and repos of similarly liquid government securities.

…continue reading: Rolling Back the Repo Safe Harbors

Correcting Some of the Flaws in the ABS Market

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Tuesday September 9, 2014 at 9:07 am
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [August 27, 2014] the Commission takes an important step to protect investors and promote capital formation, by enhancing the transparency of asset-backed securities (“ABS”) and by increasing the accountability of issuers of these securities. The securitization market is critical to our economy and can provide liquidity to nearly all the major economic sectors, including the automobile industry, the consumer credit industry, the leasing industry, and the commercial lending and credit markets.

Given the importance of this market, let’s also remember why we are here and the magnitude of the crisis in the ABS market. At the end of 2007, the ABS market consisted of more than $7 trillion of mortgage-backed securities and nearly $2.5 trillion of other outstanding ABS. However, by the fall of 2008, the securitization market had completely seized up. For example, in 2006 and 2007, new issuances of private-label residential mortgage-backed securities (“RMBS”) totaled $686 billion and $507 billion, respectively. In 2008, private-label RMBS issuance dropped to $9 billion, and flat-lined in 2009.

…continue reading: Correcting Some of the Flaws in the ABS Market

Statement on Asset-Backed Securities and Credit Rating Agencies

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Friday August 29, 2014 at 9:00 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here and here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Commission will today [August 27, 2014] consider recommendations of the staff for adopting two very important final rules in different, but closely related, areas—asset-backed securities and credit rating agencies.

The reforms before us today will add critical protections for investors and strengthen our securities markets by targeting products, activities and practices that were at the center of the financial crisis. With these measures, investors will have powerful new tools for independently evaluating the quality of asset-backed securities and credit ratings. And ABS issuers and rating agencies will be held accountable under significant new rules governing their activities. These reforms will make a real difference to investors and to our financial markets.

We will first consider the recommendation related to asset-backed securities, and then we will consider the rules relating to credit rating agencies.

…continue reading: Statement on Asset-Backed Securities and Credit Rating Agencies

A Strict Liability Regime for Rating Agencies

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday August 25, 2014 at 9:02 am
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Editor’s Note: The following paper comes to us from Alessio Pacces and Alessandro Romano, both of the Erasmus School of Law at Erasmus University Rotterdam.

In our recent ECGI working paper, A Strict Liability Regime for Rating Agencies, we study how to induce Credit Rating Agencies (CRAs) to produce ratings as accurate as the available forecasting technology allows.

Referring to CRAs, Paul Krugman wrote that: “It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt […] could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job.”

However, the conflicts of interest stemming from the issuer-pays model and rating shopping by issuers are not sufficient to explain rating inflation. Because ratings are valuable only as far as they are considered informative by investors, in a well-functioning market, reputational sanctions should prevent rating inflation.

…continue reading: A Strict Liability Regime for Rating Agencies

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