Vienna 2 proposes enhancements in cross-border supervision to European authorities
IMF Press Release No. 12/399
October 26, 2012
http://www.imf.org/external/np/sec/pr/2012/pr12399.htm
Excerpts:
The Steering Committee of the Vienna Initiative 2 has submitted observations and proposals on cross-border supervisory practices to a number of European authorities. 1 These focus on critical aspects of home-host cooperation, which are of particular importance for host countries in Central, Eastern, and Southeastern Europe where locally systemic affiliates of foreign banks operate.
The aim is to provide input for the designing of the supervisory framework for Europe and to communicate systemic concerns of host countries. The proposals have been shared with the EBA, the ECB and the European Commission.
The document
reflects the Steering Committee’s views on implementation of
cooperation between national authorities in home and host countries
during the crisis. It draws on discussions between home and host country
supervisors, central banks, fiscal authorities and key parent banks,
including at a workshop hosted by the EBRD in London on September 12,
2012. Frequent contacts with other national authorities and with the
private banking sector have added further insights.2
Some issues in supervisory practices are particularly relevant to
European countries in Central, Eastern, and Southeastern Europe which
mainly host affiliates of the cross border banking groups from the EU
that are systematically important for their financial sectors. The last
years have shown that the viewpoint of home and host authorities can
differ when assessing systemic risk of financial institutions, not least
because subsidiaries may account only for a minor part of a banking
group yet be systemic in host countries. These concerns can be even more
pronounced in countries outside the EU where EU-based banks have
systemic operations.
The proposals focus on:
1. Addressing potential conflicts of interest to ensure that supervisory colleges take a wider European perspective.
2. Ensuring that the EBA guidelines are observed and implemented in practice.
3. Fostering more open and active discussions in supervisory colleges.
4. Strengthening the position of the EBA as an “honest broker” in
mediation and involving fiscal authorities when fiscal issues are
relevant.
5. Bringing the relevant non-EU countries into the supervisory ccooperation framework.
6. Highlighting the need to ensure appropriate conditions for the
non-Euro zone countries toparticipate in the banking union ("opting
in").
7. Bringing the macro-prudential perspective into the discussion of cross border supervision, including in supervisory colleges.
The Vienna 2 is also preparing detailed comments on the new bank
resolution proposal for submission to the relevant European authorities.
---
1
The EBRD, EIB, IMF, World Bank, and European Commission are members of
the Steering Committee as well as Italy and Romania, which represent
home and host authorities respectively. The Committee is chaired by
Marek Belka, President of the National Bank of Poland.
2 The European Commission may have different views on the issues addressed in this document.
Friday, October 26, 2012
Wednesday, October 24, 2012
Everybody involved was, one, interested, two, dedicated, and, three, fascinated by the job they were doing
Notable & Quotable.
The Wall Street Journal, August 27, 2012, on page A15
http://online.wsj.com/article/SB10000872396390444506004577613080016153006.html
Astronaut Neil Armstrong, who died on Saturday at age 82, speaking about the 1969 Apollo 11 mission to the moon, from NASA'S Johnson Space Center Oral History Project:
I was certainly aware that this was a culmination of the work of 300,000 or 400,000 people over a decade and that the nation's hopes and outward appearance largely rested on how the results came out. With those pressures, it seemed the most important thing to do was focus on our job as best we were able to and try to allow nothing to distract us from doing the very best job we could. . . .
Each of the components of our hardware were designed to certain reliability specifications, and far the majority, to my recollection, had a reliability requirement of 0.99996, which means that you have four failures in 100,000 operations. I've been told that if every component met its reliability specifications precisely, that a typical Apollo flight would have about [1,000] separate identifiable failures.
In fact, we had more like 150 failures per flight, [substantially] better than statistical methods would tell you that you might have. I can only attribute that to the fact that every guy in the project, every guy at the bench building something, every assembler, every inspector, every guy that's setting up the tests, cranking the torque wrench, and so on, is saying, man or woman, "If anything goes wrong here, it's not going to be my fault, because my part is going to be better than I have to make it." And when you have hundreds of thousands of people all doing their job a little better than they have to, you get an improvement in performance. And that's the only reason we could have pulled this whole thing off. . . .
When I was working here at the Johnson Space Center, then the Manned Spacecraft Center, you could stand across the street and you could not tell when quitting time was, because people didn't leave at quitting time in those days. People just worked, and they worked until whatever their job was done, and if they had to be there until five o'clock or seven o'clock or nine-thirty or whatever it was, they were just there. They did it, and then they went home. So four o'clock or four-thirty, whenever the bell rings, you didn't see anybody leaving. Everybody was still working.
The way that happens and the way that made it different from other sectors of the government to which some people are sometimes properly critical is that this was a project in which everybody involved was, one, interested, two, dedicated, and, three, fascinated by the job they were doing. And whenever you have those ingredients, whether it be government or private industry or a retail store, you're going to win.
The Wall Street Journal, August 27, 2012, on page A15
http://online.wsj.com/article/SB10000872396390444506004577613080016153006.html
Astronaut Neil Armstrong, who died on Saturday at age 82, speaking about the 1969 Apollo 11 mission to the moon, from NASA'S Johnson Space Center Oral History Project:
I was certainly aware that this was a culmination of the work of 300,000 or 400,000 people over a decade and that the nation's hopes and outward appearance largely rested on how the results came out. With those pressures, it seemed the most important thing to do was focus on our job as best we were able to and try to allow nothing to distract us from doing the very best job we could. . . .
Each of the components of our hardware were designed to certain reliability specifications, and far the majority, to my recollection, had a reliability requirement of 0.99996, which means that you have four failures in 100,000 operations. I've been told that if every component met its reliability specifications precisely, that a typical Apollo flight would have about [1,000] separate identifiable failures.
In fact, we had more like 150 failures per flight, [substantially] better than statistical methods would tell you that you might have. I can only attribute that to the fact that every guy in the project, every guy at the bench building something, every assembler, every inspector, every guy that's setting up the tests, cranking the torque wrench, and so on, is saying, man or woman, "If anything goes wrong here, it's not going to be my fault, because my part is going to be better than I have to make it." And when you have hundreds of thousands of people all doing their job a little better than they have to, you get an improvement in performance. And that's the only reason we could have pulled this whole thing off. . . .
When I was working here at the Johnson Space Center, then the Manned Spacecraft Center, you could stand across the street and you could not tell when quitting time was, because people didn't leave at quitting time in those days. People just worked, and they worked until whatever their job was done, and if they had to be there until five o'clock or seven o'clock or nine-thirty or whatever it was, they were just there. They did it, and then they went home. So four o'clock or four-thirty, whenever the bell rings, you didn't see anybody leaving. Everybody was still working.
The way that happens and the way that made it different from other sectors of the government to which some people are sometimes properly critical is that this was a project in which everybody involved was, one, interested, two, dedicated, and, three, fascinated by the job they were doing. And whenever you have those ingredients, whether it be government or private industry or a retail store, you're going to win.
Tuesday, October 23, 2012
Globalization and Corporate Taxation. By Manmohan Kumar, and Dennis Quinn
Globalization and Corporate Taxation. By Manmohan Kumar, and Dennis Quinn
IMF Working Paper No. 12/252
October 22, 2012
http://www.imfbookstore.org/IMFORG/9781557754752
Summary: This paper analyzes the extent to which the degree of international economic integration, both financial and trade, affects corporate tax rates. It explores this issue in the context of strategic behavior by countries, taking into account other global and domestic political economy factors. Tax rates are analyzed using a unique tax dataset for advanced and developing economies extending over five decades. We report a number of novel results: there is no general negative relationship between financial globalization and corporate tax rates and revenues—results vary according to country grouping with OECD countries showing a positive relationship; the United States exhibits a “Stackelberg” type of leadership on other countries; trade integration is inversely correlated with tax rates; and public sentiment and ideology affect tax rates. The policy implications of these findings, particularly given budgetary pressures in the aftermath of the global crisis, are noted.
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40059.0
IMF Working Paper No. 12/252
October 22, 2012
http://www.imfbookstore.org/IMFORG/9781557754752
Summary: This paper analyzes the extent to which the degree of international economic integration, both financial and trade, affects corporate tax rates. It explores this issue in the context of strategic behavior by countries, taking into account other global and domestic political economy factors. Tax rates are analyzed using a unique tax dataset for advanced and developing economies extending over five decades. We report a number of novel results: there is no general negative relationship between financial globalization and corporate tax rates and revenues—results vary according to country grouping with OECD countries showing a positive relationship; the United States exhibits a “Stackelberg” type of leadership on other countries; trade integration is inversely correlated with tax rates; and public sentiment and ideology affect tax rates. The policy implications of these findings, particularly given budgetary pressures in the aftermath of the global crisis, are noted.
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40059.0
Russia's Ex-Finance Chief Has Grim Outlook for EU. By Alexander Kolyandr
Russia's Ex-Finance Chief Has Grim Outlook for EU. By ALEXANDER KOLYANDR
The Wall Street Journal, October 23, 2012, on page A11
MOSCOW—Just over a year ago, Alexei Kudrin came out of the Group of 20 meetings in Washington warning that the U.S. and Europe weren't doing enough to head off economic slowdown. Now, no longer in government but still highly respected for his fiscal prudence, the former Russian finance minister doesn't have to mince words. His message is even more dire.
Alexei Kudrin, left, spoke with Russia's Deputy Finance Minister Sergei Storchak during the VTB Capital investment conference in New York, April 2012.
Keeping Greece in the euro zone? "Already impossible," he says in an interview. Spain and Italy next for the exit? "The probability is very high." And creditors beware—Mr. Kudrin sees both Greece and Spain defaulting on their sovereign debt.
"Everything should be done to avoid it, but I don't feel that the process is under control," says the man who shepherded Russia from default to financial stability.
As if that weren't worrisome enough, the 52-year-old who was named finance minister of the year by various publications on four separate occasions during his tenure says he now fears that Europe's economic problems may turn into political ones.
Democracies, he says, don't always survive when their citizens are asked to make the kinds of economic sacrifices that Europe now faces. Already, some analysts are comparing Greece's shocked polity to the Weimar Republic.
Mr. Kudrin is more cautious, but plans to participate next month in a conference at St. Petersburg State University, where he is now a dean, on the question of how economic hardships can lead to political upheavals. The case studies aren't inspiring—from Communist Poland to the Soviet Union to Latin American dictatorships.
Mr. Kudrin thinks that citizens of the Western countries aren't ready to accept the steep drop in living standards they face, but that if governments fail to cut spending they will get even deeper collapses.
"Russia faced that in the 1990s, but due to [Russian President Boris] Yeltsin we've passed it peacefully," he says. "I'm not sure the Western countries would be able to pass through such hardships; it may be very painful."
Mr. Kudrin sees the recent decisions of the European Central Bank as only a temporary relief because its funds aren't limitless. However, he says, the euro would survive dropouts.
Mr. Kudrin expects European economies to contract further in the short term, before growth resumes, and he urges governments to reduce debt in order to be prepared for growth.
His outlook for the U.S. isn't much better. While the looming "fiscal cliff"—tax increases and spending cuts scheduled to take effect Jan. 1—worries analysts and economists, he said the size of the U.S. deficit is the real longer-term risk.
No matter which party wins the White House, the outlook is tough. "Both are in a very difficult position," he says. Even so, the dollar's future is secure, he says.
"Trust in the U.S. dollar is not shaken yet. If the U.S. administration meets the task of the budget consolidation in several years, the dollar will be firm, but even if it weakens, there would be no other currency to replace, given its scale and importance."
The Wall Street Journal, October 23, 2012, on page A11
MOSCOW—Just over a year ago, Alexei Kudrin came out of the Group of 20 meetings in Washington warning that the U.S. and Europe weren't doing enough to head off economic slowdown. Now, no longer in government but still highly respected for his fiscal prudence, the former Russian finance minister doesn't have to mince words. His message is even more dire.
Alexei Kudrin, left, spoke with Russia's Deputy Finance Minister Sergei Storchak during the VTB Capital investment conference in New York, April 2012.
Keeping Greece in the euro zone? "Already impossible," he says in an interview. Spain and Italy next for the exit? "The probability is very high." And creditors beware—Mr. Kudrin sees both Greece and Spain defaulting on their sovereign debt.
"Everything should be done to avoid it, but I don't feel that the process is under control," says the man who shepherded Russia from default to financial stability.
As if that weren't worrisome enough, the 52-year-old who was named finance minister of the year by various publications on four separate occasions during his tenure says he now fears that Europe's economic problems may turn into political ones.
Democracies, he says, don't always survive when their citizens are asked to make the kinds of economic sacrifices that Europe now faces. Already, some analysts are comparing Greece's shocked polity to the Weimar Republic.
Mr. Kudrin is more cautious, but plans to participate next month in a conference at St. Petersburg State University, where he is now a dean, on the question of how economic hardships can lead to political upheavals. The case studies aren't inspiring—from Communist Poland to the Soviet Union to Latin American dictatorships.
Mr. Kudrin thinks that citizens of the Western countries aren't ready to accept the steep drop in living standards they face, but that if governments fail to cut spending they will get even deeper collapses.
"Russia faced that in the 1990s, but due to [Russian President Boris] Yeltsin we've passed it peacefully," he says. "I'm not sure the Western countries would be able to pass through such hardships; it may be very painful."
Mr. Kudrin sees the recent decisions of the European Central Bank as only a temporary relief because its funds aren't limitless. However, he says, the euro would survive dropouts.
Mr. Kudrin expects European economies to contract further in the short term, before growth resumes, and he urges governments to reduce debt in order to be prepared for growth.
His outlook for the U.S. isn't much better. While the looming "fiscal cliff"—tax increases and spending cuts scheduled to take effect Jan. 1—worries analysts and economists, he said the size of the U.S. deficit is the real longer-term risk.
No matter which party wins the White House, the outlook is tough. "Both are in a very difficult position," he says. Even so, the dollar's future is secure, he says.
"Trust in the U.S. dollar is not shaken yet. If the U.S. administration meets the task of the budget consolidation in several years, the dollar will be firm, but even if it weakens, there would be no other currency to replace, given its scale and importance."
Wednesday, October 17, 2012
Bipartisan Agreement On Single-Sex Education
A Right to Choose Single-Sex Education. By Kay Bailey Hutchison and Barbara Mikulski
For some children, learning in girls-only or boys-only classes pays off. Opponents of the idea are irresponsible.October 16, 2012, 7:11 p.m. ET
http://online.wsj.com/article/SB10000872396390443768804578038191947302764.html
Education proponents across the political spectrum were dismayed by recent attempts to eradicate the single-gender options in public schools in Virginia, West Virginia, Alabama, Mississippi, Maine and Florida. We were particularly troubled at efforts to thwart education choice for American students and their families because it is a cause we have worked hard to advance.
Studies have shown that some students learn better in a single-gender environment, particularly in math and science. But federal regulations used to prevent public schools from offering that option. So in 2001 we joined with then-Sen. Hillary Clinton and Sen. Susan Collins to author legislation that allowed public schools to offer single-sex education. It was an epic bipartisan battle against entrenched bureaucracy, but well worth the fight.
Since our amendment passed, thousands of American children have benefited. Now, though, some civil libertarians are claiming that single-sex public-school programs are discriminatory and thus illegal.
To be clear: The 2001 law did not require that children be educated in single-gender programs or schools. It simply allowed schools and districts to offer the choice of single-sex schools or classrooms, as long as opportunities were equally available to boys and girls. In the vast and growing realm of education research, one central tenet has been confirmed repeatedly: Children learn in different ways. For some, single-sex classrooms make all the difference.
Critics argue that these programs promote harmful gender stereotypes. Ironically, it is exactly these stereotypes that the single-sex programs seek to eradicate.
As studies have confirmed—and as any parent can tell you—negative gender roles are often sharpened in coeducational environments. Boys are more likely, for instance, to buy into the notion that reading isn't masculine when they're surrounded by (and showing off for) girls.
Girls, meanwhile, have made so much progress in educational achievement that women are overrepresented in postgraduate education. But they still lag in the acquisition of bachelor's and graduate degrees in math and the sciences. It has been demonstrated time and again that young girls are more willing to ask and answer questions in classrooms without boys.
A 2008 Department of Education study found that "both principals and teachers believed that the main benefits of single-sex schooling are decreasing distractions to learning and improving student achievement." The gender slant—the math-is-for-boys, home-EC-is-for-girls trope—is eliminated.
In a three-year study in the mid-2000s, researchers at Florida's Stetson University compared the performance of single-gender and mixed-gender classes at an elementary school, controlling for the likes of class sizes, demographics and teacher training. When the children took the Florida Comprehensive Assessment Test (which measures achievement in math and literacy, for instance), the results were striking: Only 59% of girls in mixed classes were scored as proficient, while 75% of girls in single-sex ones achieved proficiency. Similarly, 37% of boys in coeducational classes scored proficient, compared with 86% of boys in the all-boys classes.
Booker T. Washington High School in Memphis, Tenn., the winner of the 2011 Race to the Top High School Commencement Challenge, went to a 81.6% graduation rate in 2010 from a graduation rate of 55% in 2007. Among the changes at the school? Implementing all-girls and all-boys freshman academies.
In Dallas, the all-boys Barack Obama Leadership Academy opened its doors last year. There is every reason to believe it will follow the success of the first all-girls public school, Irma Rangel Young Women's Leadership School, which started in 2004. Irma Rangel, which has been a Texas Education Agency Exemplary School since 2006, also took sixth place at the Dallas Independent School District's 30th Annual Mathematics Olympiad that year.
No one is arguing that single-sex education is the best option for every student. But it is preferable for some students and families, and no one has the right to deny them an option that may work best for a particular child. Attempts to eliminate single-sex education are equivalent to taking away students' and parents' choice about one of the most fundamentally important aspects of childhood and future indicators of success—a child's education.
America once dominated educational attainment among developed countries, but we have fallen disastrously in international rankings. As we seek ways to offer the best education for all our children, in ways that are better tailored to their needs, it seems not just counterproductive but damaging to reduce the options. single-sex education in public schools will continue to be a voluntary choice for students and their families. To limit or eliminate single-sex education is irresponsible. To take single-sex education away from students who stand to benefit is unforgivable.
Ms. Hutchison, a Republican, is the senior senator from Texas. Ms. Mikulski, a Democrat, is the senior senator from Maryland.
For some children, learning in girls-only or boys-only classes pays off. Opponents of the idea are irresponsible.October 16, 2012, 7:11 p.m. ET
http://online.wsj.com/article/SB10000872396390443768804578038191947302764.html
Education proponents across the political spectrum were dismayed by recent attempts to eradicate the single-gender options in public schools in Virginia, West Virginia, Alabama, Mississippi, Maine and Florida. We were particularly troubled at efforts to thwart education choice for American students and their families because it is a cause we have worked hard to advance.
Studies have shown that some students learn better in a single-gender environment, particularly in math and science. But federal regulations used to prevent public schools from offering that option. So in 2001 we joined with then-Sen. Hillary Clinton and Sen. Susan Collins to author legislation that allowed public schools to offer single-sex education. It was an epic bipartisan battle against entrenched bureaucracy, but well worth the fight.
Since our amendment passed, thousands of American children have benefited. Now, though, some civil libertarians are claiming that single-sex public-school programs are discriminatory and thus illegal.
To be clear: The 2001 law did not require that children be educated in single-gender programs or schools. It simply allowed schools and districts to offer the choice of single-sex schools or classrooms, as long as opportunities were equally available to boys and girls. In the vast and growing realm of education research, one central tenet has been confirmed repeatedly: Children learn in different ways. For some, single-sex classrooms make all the difference.
Critics argue that these programs promote harmful gender stereotypes. Ironically, it is exactly these stereotypes that the single-sex programs seek to eradicate.
As studies have confirmed—and as any parent can tell you—negative gender roles are often sharpened in coeducational environments. Boys are more likely, for instance, to buy into the notion that reading isn't masculine when they're surrounded by (and showing off for) girls.
Girls, meanwhile, have made so much progress in educational achievement that women are overrepresented in postgraduate education. But they still lag in the acquisition of bachelor's and graduate degrees in math and the sciences. It has been demonstrated time and again that young girls are more willing to ask and answer questions in classrooms without boys.
A 2008 Department of Education study found that "both principals and teachers believed that the main benefits of single-sex schooling are decreasing distractions to learning and improving student achievement." The gender slant—the math-is-for-boys, home-EC-is-for-girls trope—is eliminated.
In a three-year study in the mid-2000s, researchers at Florida's Stetson University compared the performance of single-gender and mixed-gender classes at an elementary school, controlling for the likes of class sizes, demographics and teacher training. When the children took the Florida Comprehensive Assessment Test (which measures achievement in math and literacy, for instance), the results were striking: Only 59% of girls in mixed classes were scored as proficient, while 75% of girls in single-sex ones achieved proficiency. Similarly, 37% of boys in coeducational classes scored proficient, compared with 86% of boys in the all-boys classes.
Booker T. Washington High School in Memphis, Tenn., the winner of the 2011 Race to the Top High School Commencement Challenge, went to a 81.6% graduation rate in 2010 from a graduation rate of 55% in 2007. Among the changes at the school? Implementing all-girls and all-boys freshman academies.
In Dallas, the all-boys Barack Obama Leadership Academy opened its doors last year. There is every reason to believe it will follow the success of the first all-girls public school, Irma Rangel Young Women's Leadership School, which started in 2004. Irma Rangel, which has been a Texas Education Agency Exemplary School since 2006, also took sixth place at the Dallas Independent School District's 30th Annual Mathematics Olympiad that year.
No one is arguing that single-sex education is the best option for every student. But it is preferable for some students and families, and no one has the right to deny them an option that may work best for a particular child. Attempts to eliminate single-sex education are equivalent to taking away students' and parents' choice about one of the most fundamentally important aspects of childhood and future indicators of success—a child's education.
America once dominated educational attainment among developed countries, but we have fallen disastrously in international rankings. As we seek ways to offer the best education for all our children, in ways that are better tailored to their needs, it seems not just counterproductive but damaging to reduce the options. single-sex education in public schools will continue to be a voluntary choice for students and their families. To limit or eliminate single-sex education is irresponsible. To take single-sex education away from students who stand to benefit is unforgivable.
Ms. Hutchison, a Republican, is the senior senator from Texas. Ms. Mikulski, a Democrat, is the senior senator from Maryland.
Tuesday, October 16, 2012
Banking Union for Europe – Risks and Challenges
Banking Union for Europe – Risks and Challenges. By Thorsten Beck
http://blogs.worldbank.org/allaboutfinance/banking-union-for-europe-risks-and-challenges
Excerpts:
The Eurozone crisis has gone through its fair share of buzz words — fiscal compact, growth compact, Big Bazooka. The latest kid on the block is the banking union [discussed by economists since even before the 2007 crisis]. But what kind of banking union? For whom? Financed how? And managed by whom?
A new collection of short essays by leading economists on both sides of the Atlantic — including Josh Aizenman, Franklin Allen, Viral Acharya, Luis Garicano, and Charles Goodhart — takes a closer look at the concept of a banking union for Europe, including the macroeconomic perspective in the context of the current crisis, institutional details, and political economy. The authors do not necessarily agree and point to lots of tradeoffs. However, several consistent messages come out of this collection.
Banking union for whom?
One critical question is whether the banking union should be “just” for the Eurozone or for the whole European Union. In my contribution, I argue that the need for a banking union is stronger within a currency union, as it is here where the close link between monetary and financial stability plays out strongest.
The institutional details
Should the responsibilities for running the banking union be concentrated in the ECB? There is certainly a strong argument for centralizing responsibility on the supra-national level. There are clear arguments to separate bank resolution and deposit insurance in an institution outside the ECB, to avoid conflicts between monetary and micro-stability goals and introduce additional monitoring (Dirk Schoenmaker). One argument for a supra-national supervisor is that it would help reduce the political capture of regulators that has been observed across Europe over the past years and became obvious during the current crisis. This lesson can also be learned from Spain, as Luis Garicano points out: “the supervisor must be able and willing to stand up to politicians.” In addition, there is a supervisory tendency to be too lenient toward national champions, while bailing them out is too costly, [and] Andrew Gimber argue, however, that the ECB might not necessarily be a tougher supervisor than national supervisors. It might actually be more lenient, because it is concerned about contagion across the Eurozone and it has more resources available. Tying its hands by rules might therefore be necessary.
Looking west across the Atlantic
This time is not different. Studying history can be insightful, for both economists and policymakers. Accordingly, several observers have looked for comparisons in economic history for clues on how to solve the Eurozone crisis. Joshua Aizenman argues that the history of the United States suggests large gains from buffering currency unions with union-wide deposit insurance and partial debt mutualization. It is important to note, however, that it took the United States a long time to get to where it is now, and quite a lot of institutional experimentation and several national banking crises. And, as is currently being discussed in Europe, the United States had to address both banking fragility and state over-indebtedness. Fiscal and banking unions go hand in hand.
It’s the politics, stupid!
In addition to a banking, sovereign, macroeconomic, and currency crisis, the Eurozone faces a governance crisis. Diverse interests have hampered the efficient and prompt resolution of the crisis. And as financial support for several peripheral Eurozone countries has involved political conflicts both between and within Eurozone countries, so the discussion on the banking union has an important political economy aspect, Geoffrey Underhill points out. More importantly, there is an increasing lack of political legitimacy and sustainability of the Eurozone and for the move toward closer fiscal and banking integration. “Citizens in both creditor and debtor countries increasingly perceive rightly or wrongly that the common currency and perhaps European integration tout court have intensified economic risks.” A banking union can therefore only succeed with the necessary electoral support.
http://blogs.worldbank.org/allaboutfinance/banking-union-for-europe-risks-and-challenges
Excerpts:
The Eurozone crisis has gone through its fair share of buzz words — fiscal compact, growth compact, Big Bazooka. The latest kid on the block is the banking union [discussed by economists since even before the 2007 crisis]. But what kind of banking union? For whom? Financed how? And managed by whom?
A new collection of short essays by leading economists on both sides of the Atlantic — including Josh Aizenman, Franklin Allen, Viral Acharya, Luis Garicano, and Charles Goodhart — takes a closer look at the concept of a banking union for Europe, including the macroeconomic perspective in the context of the current crisis, institutional details, and political economy. The authors do not necessarily agree and point to lots of tradeoffs. However, several consistent messages come out of this collection.
- No piecemeal approach. Centralizing supervision alone at the supra-national level, while leaving bank resolution and recapitalization at the national level, is not only unhelpful but might make things worse.
- A banking union is part of a larger reform package that has to address sovereign fragility and the entanglement of banks with sovereigns.
- Immediate crisis resolution vs. long-term reforms. There is an urgent need to address banking and sovereign fragility to resolve the Eurozone crisis. Transitional solutions that deal with legacy problems, both at the bank and at the sovereign level, are urgently needed and can buy sufficient time to implement the many long-term institutional reforms that cannot be introduced immediately.
Banking union for whom?
One critical question is whether the banking union should be “just” for the Eurozone or for the whole European Union. In my contribution, I argue that the need for a banking union is stronger within a currency union, as it is here where the close link between monetary and financial stability plays out strongest.
The institutional details
Should the responsibilities for running the banking union be concentrated in the ECB? There is certainly a strong argument for centralizing responsibility on the supra-national level. There are clear arguments to separate bank resolution and deposit insurance in an institution outside the ECB, to avoid conflicts between monetary and micro-stability goals and introduce additional monitoring (Dirk Schoenmaker). One argument for a supra-national supervisor is that it would help reduce the political capture of regulators that has been observed across Europe over the past years and became obvious during the current crisis. This lesson can also be learned from Spain, as Luis Garicano points out: “the supervisor must be able and willing to stand up to politicians.” In addition, there is a supervisory tendency to be too lenient toward national champions, while bailing them out is too costly, [and] Andrew Gimber argue, however, that the ECB might not necessarily be a tougher supervisor than national supervisors. It might actually be more lenient, because it is concerned about contagion across the Eurozone and it has more resources available. Tying its hands by rules might therefore be necessary.
Looking west across the Atlantic
This time is not different. Studying history can be insightful, for both economists and policymakers. Accordingly, several observers have looked for comparisons in economic history for clues on how to solve the Eurozone crisis. Joshua Aizenman argues that the history of the United States suggests large gains from buffering currency unions with union-wide deposit insurance and partial debt mutualization. It is important to note, however, that it took the United States a long time to get to where it is now, and quite a lot of institutional experimentation and several national banking crises. And, as is currently being discussed in Europe, the United States had to address both banking fragility and state over-indebtedness. Fiscal and banking unions go hand in hand.
It’s the politics, stupid!
In addition to a banking, sovereign, macroeconomic, and currency crisis, the Eurozone faces a governance crisis. Diverse interests have hampered the efficient and prompt resolution of the crisis. And as financial support for several peripheral Eurozone countries has involved political conflicts both between and within Eurozone countries, so the discussion on the banking union has an important political economy aspect, Geoffrey Underhill points out. More importantly, there is an increasing lack of political legitimacy and sustainability of the Eurozone and for the move toward closer fiscal and banking integration. “Citizens in both creditor and debtor countries increasingly perceive rightly or wrongly that the common currency and perhaps European integration tout court have intensified economic risks.” A banking union can therefore only succeed with the necessary electoral support.
Sunday, October 14, 2012
Exploring the Dynamics of Global Liquidity. By Sally Chen et al.
Exploring the Dynamics of Global Liquidity. By Sally Chen, Philip Liu, Andrea Maechler, Chris Marsh, Sergejs Saksonovs, and Hyun Song Shin
IMF Working Paper WP/12/246
Oct 2012
JEL Classification Numbers: G01, G15, G18, G32, C23
Keywords: Liquidity, core and noncore financial liabilities, shadow banking, growth
Excerpts
Introduction
Recent financial crises in the U.S. and Europe have brought the impact of liquidity on economic and financial stability into sharp relief. Much of this impact has long been documented. Domestically, liquidity has been seen as having important implications for the real economy and the financial system (for example Friedman and Schwarz, 1963). It can drive up asset prices and encourage risk-taking, with negative consequences for financial stability (Borio and Zhu, 2008). Globally, the allocation liquidity affects macroeconomic and financial developments in ways that are not directly under the control of national policymaker (a theme of recent GFSR and spillover reports, see IMF, 2011a; IMF, 2011b; IMF, 2011c; IMF, 2011d; also Matsumoto, 2011; and Darius and Radde, 2010).
At the most basic level, liquidity can be described as the amount of funding readily available to finance domestic and cross-border asset purchases. Liquidity reflects both the ability and willingness of parties to engage in financial transactions, including intermediation, as well as the capacity of financial markets to absorb temporary fluctuations in demand and supply without undue dislocations in prices. In part because of the many purposes liquidity serves, there is no straightforward way to assess developments in global liquidity conditions.
One challenge in measuring liquidity is that it is largely endogenous and highly cyclical, contributing to the build-up of risks to financial stability and be affected by them in return. While central bank injection of base money plays an important role in liquidity creation, flows in global liquidity are also driven by growth differentials, financial innovation, and market participants’ risk appetite (CGFS, 2011). For example, the recent explosion of collateralized market-based borrowing, where funding expands or contracts depending on the market value of the underlying collateral, has introduced a significant source of endogeneity (IMF, 2011e, 2011f, 2011g). Similarly, if for some reason, private agents become unwilling to transact, much of the liquidity can disappear and the same amount of liquidity as measured by quantity aggregates may go from being abundant to scarce, with attendant price increases, while exacerbating the potentially volatile nature of liquidity.
The case for monitoring global liquidity conditions is not straightforward. While there is conflicting evidence whether national monetary aggregates contain useful information about the business cycles, and possible asset price misalignments, the value of aggregating national monetary aggregates is particularly questionable given their differences. Domestic quantity measures of money aggregates have fallen out of fashion in some countries, such as the United States, because of the lack of empirically-stable relations between money aggregates and macroeconomic variables. At the same time, the global financial crisis has made clear that traditional monetary aggregates on a national level may not capture the full range of liquidity-creating instruments nor the full impact of the activities of large cross border financial intermediaries, which play an increasingly important role in globally integrated capital markets. In particular, the source of funding—whether via deposit funding or wholesale funding—matters. The crisis has also highlighted that financial structure does matter—especially in times of stress, in sharp contrast to the frictionless financial market hypothesis underlying modern monetary theory (Tirole, 2011).
Approaches to liquidity measurement generally fall along two lines: the asset side or the liability side. From the asset side, efforts involve measuring the amount of global credit extended to the private sector, providing valuable insights about the liquidity cycle through the private sector balance sheet expansion. The liability side approach, adopted in this paper, focuses on the funding available to expand financial institutions’ balance sheets and the risks associated with sudden funding reversals, as manifested during the global financial crisis. Put differently, “liquidity” as measured here, is the degree to which institutions can borrow—as measured by the liability side of the balance sheets—and to expand and contract balance sheets through increases in leverage or consolidation based on collateral valuations. A key advantage of the current funding-based approach is that it aims at capturing not only bankbased financial intermediation but also the broader range of wholesale intermediation, something which has proven difficult to do on the credit side.
The use of price and quantity measures together can help better understand developments in liquidity conditions. Quantity indicators, which reflect the size of the risk exposure, tend to be slow-moving, making them ill-suited as forward-looking indicators of crises. Similarly, price indicators are coincident indicators, spiking only when the crisis is already underway, making them equally poor early warning indicators. Combining the behavior of prices and quantities provides a richer framework of analysis. It sheds light on the paradox of risk management, where risk (as reflected by the size of exposures) is often at its highest when its perception (as reflected by the price of funding) is at its lowest. Additionally, analyzing price and quantity measures together helps disentangling the pull- and push-factors driving the behavior of liquidity. Persistent increases in liquidity supply—for example, driven by financial innovations—would result in growing liquidity (quantity) and falling interest rates (prices). By contrast, higher demand for liquidity—driven by rising risk appetite and expectations of higher returns—would result in increases in both price and quantity measures.
Important caveats are in order. First and foremost, there is no theoretical framework to determine an optimal level of global liquidity, nor do we know how global liquidity should behave to promote sound, sustainable global growth with financial stability. Second, financial markets are undergoing rapid transformation, the underlying reality that these indicators try to capture is therefore constantly evolving, at a rapid pace. Finally, serious data shortcomings remain—for example, only a few countries compute flow of funds data while cross-country reporting consistency is still lacking. Thus, any policy conclusions from our measurement exercises should depend on a thorough analysis of the underlying developments. More research is needed to improve the measurement of liquidity and develop a theoretical basis for understanding its economic and financial implications.
IMF Working Paper WP/12/246
Oct 2012
JEL Classification Numbers: G01, G15, G18, G32, C23
Keywords: Liquidity, core and noncore financial liabilities, shadow banking, growth
Excerpts
Introduction
Recent financial crises in the U.S. and Europe have brought the impact of liquidity on economic and financial stability into sharp relief. Much of this impact has long been documented. Domestically, liquidity has been seen as having important implications for the real economy and the financial system (for example Friedman and Schwarz, 1963). It can drive up asset prices and encourage risk-taking, with negative consequences for financial stability (Borio and Zhu, 2008). Globally, the allocation liquidity affects macroeconomic and financial developments in ways that are not directly under the control of national policymaker (a theme of recent GFSR and spillover reports, see IMF, 2011a; IMF, 2011b; IMF, 2011c; IMF, 2011d; also Matsumoto, 2011; and Darius and Radde, 2010).
At the most basic level, liquidity can be described as the amount of funding readily available to finance domestic and cross-border asset purchases. Liquidity reflects both the ability and willingness of parties to engage in financial transactions, including intermediation, as well as the capacity of financial markets to absorb temporary fluctuations in demand and supply without undue dislocations in prices. In part because of the many purposes liquidity serves, there is no straightforward way to assess developments in global liquidity conditions.
One challenge in measuring liquidity is that it is largely endogenous and highly cyclical, contributing to the build-up of risks to financial stability and be affected by them in return. While central bank injection of base money plays an important role in liquidity creation, flows in global liquidity are also driven by growth differentials, financial innovation, and market participants’ risk appetite (CGFS, 2011). For example, the recent explosion of collateralized market-based borrowing, where funding expands or contracts depending on the market value of the underlying collateral, has introduced a significant source of endogeneity (IMF, 2011e, 2011f, 2011g). Similarly, if for some reason, private agents become unwilling to transact, much of the liquidity can disappear and the same amount of liquidity as measured by quantity aggregates may go from being abundant to scarce, with attendant price increases, while exacerbating the potentially volatile nature of liquidity.
The case for monitoring global liquidity conditions is not straightforward. While there is conflicting evidence whether national monetary aggregates contain useful information about the business cycles, and possible asset price misalignments, the value of aggregating national monetary aggregates is particularly questionable given their differences. Domestic quantity measures of money aggregates have fallen out of fashion in some countries, such as the United States, because of the lack of empirically-stable relations between money aggregates and macroeconomic variables. At the same time, the global financial crisis has made clear that traditional monetary aggregates on a national level may not capture the full range of liquidity-creating instruments nor the full impact of the activities of large cross border financial intermediaries, which play an increasingly important role in globally integrated capital markets. In particular, the source of funding—whether via deposit funding or wholesale funding—matters. The crisis has also highlighted that financial structure does matter—especially in times of stress, in sharp contrast to the frictionless financial market hypothesis underlying modern monetary theory (Tirole, 2011).
Approaches to liquidity measurement generally fall along two lines: the asset side or the liability side. From the asset side, efforts involve measuring the amount of global credit extended to the private sector, providing valuable insights about the liquidity cycle through the private sector balance sheet expansion. The liability side approach, adopted in this paper, focuses on the funding available to expand financial institutions’ balance sheets and the risks associated with sudden funding reversals, as manifested during the global financial crisis. Put differently, “liquidity” as measured here, is the degree to which institutions can borrow—as measured by the liability side of the balance sheets—and to expand and contract balance sheets through increases in leverage or consolidation based on collateral valuations. A key advantage of the current funding-based approach is that it aims at capturing not only bankbased financial intermediation but also the broader range of wholesale intermediation, something which has proven difficult to do on the credit side.
The use of price and quantity measures together can help better understand developments in liquidity conditions. Quantity indicators, which reflect the size of the risk exposure, tend to be slow-moving, making them ill-suited as forward-looking indicators of crises. Similarly, price indicators are coincident indicators, spiking only when the crisis is already underway, making them equally poor early warning indicators. Combining the behavior of prices and quantities provides a richer framework of analysis. It sheds light on the paradox of risk management, where risk (as reflected by the size of exposures) is often at its highest when its perception (as reflected by the price of funding) is at its lowest. Additionally, analyzing price and quantity measures together helps disentangling the pull- and push-factors driving the behavior of liquidity. Persistent increases in liquidity supply—for example, driven by financial innovations—would result in growing liquidity (quantity) and falling interest rates (prices). By contrast, higher demand for liquidity—driven by rising risk appetite and expectations of higher returns—would result in increases in both price and quantity measures.
Important caveats are in order. First and foremost, there is no theoretical framework to determine an optimal level of global liquidity, nor do we know how global liquidity should behave to promote sound, sustainable global growth with financial stability. Second, financial markets are undergoing rapid transformation, the underlying reality that these indicators try to capture is therefore constantly evolving, at a rapid pace. Finally, serious data shortcomings remain—for example, only a few countries compute flow of funds data while cross-country reporting consistency is still lacking. Thus, any policy conclusions from our measurement exercises should depend on a thorough analysis of the underlying developments. More research is needed to improve the measurement of liquidity and develop a theoretical basis for understanding its economic and financial implications.
Friday, October 12, 2012
Basel Committee: Dealing with domestic systemically important banks
Dealing with domestic systemically important banks: framework issued by the Basel Committee
October 11, 2012
http://www.bis.org/press/p121011.htm
The Basel Committee on Banking Supervision issued today its Framework for dealing with domestic systemically important banks.
In November 2011, the Basel Committee issued final rules for global systemically important banks (G-SIBs). The G20 leaders endorsed these rules at their November 2011 meeting and asked the Basel Committee and the Financial Stability Board to work on extending the framework to domestic systemically important banks (D-SIBs).
While not all D-SIBs are significant from a global perspective, the failure of such a bank could have a much greater impact on its domestic financial system and economy than that of a non-systemic institution. Some of these banks may have cross-border externalities, even if the effects are not global in nature.
Against this backdrop, the Basel Committee developed a set of principles on the assessment methodology and the higher loss absorbency requirement for D-SIBs. 1 The framework takes a complementary perspective to the G-SIB framework by focusing on the impact that the distress or failure of banks will have on the domestic economy.
Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principles in line with the phase-in arrangements for the G-SIB framework, ie from January 2016.
Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted that "the impact of the failure of a domestic systemically important bank could be significantly greater than that of a non-systemic institution. The principles developed by the Committee address this issue while retaining national flexibility to accommodate the specific characteristics of domestic financial systems. The framework will complement the measures on global systemically important banks announced last year, and contribute to a safer and sounder financial system."
---
A framework for dealing with domestic systemically important banks - final document
http://www.bis.org/publ/bcbs233.htm
The framework text sets out the Basel Committee's framework for dealing with domestic systemically important banks.
While not all D-SIBs are significant from a global perspective, the failure of such a bank could have a much greater impact on its domestic financial system and economy than that of a non-system
Excerpts:
I. Introduction
1. The Basel Committee on Banking Supervision (the Committee) issued the rules text on the assessment methodology for global systemically important banks (G-SIBs) and their additional loss absorbency requirements in November 2011. The G-SIB rules text was endorsed by the G20 Leaders at their November 2011 meeting. The G20 Leaders also asked the Committee and the Financial Stability Board to work on modalities to extend expeditiously the G-SIFI framework to domestic systemically important banks (D-SIBs).
2. The rationale for adopting additional policy measures for G-SIBs was based on the “negative externalities” (ie adverse side effects) created by systemically important banks which current regulatory policies do not fully address. In maximising their private benefits, individual financial institutions may rationally choose outcomes that, from a system-wide level, are sub-optimal because they do not take into account these externalities. These negative externalities include the impact of the failure or impairment of large, interconnected global financial institutions that can send shocks through the financial system which, in turn, can harm the real economy. Moreover, the moral hazard costs associated with direct support and implicit government guarantees may amplify risk-taking, reduce market discipline, create competitive distortions, and further increase the probability of distress in the future. As a result, the costs associated with moral hazard add to any direct costs of support that may be borne by taxpayers.
3. The additional requirement applied to G-SIBs, which applies over and above the Basel III requirements that are being introduced for all internationally-active banks, is intended to limit these cross-border negative externalities on the global financial system and economy associated with the most globally systemic banking institutions. But similar externalities can apply at a domestic level. There are many banks that are not significant from an international perspective, but nevertheless could have an important impact on their domestic financial system and economy compared to non-systemic institutions. Some of these banks may have cross-border externalities, even if the effects are not global in nature. Similar to the case of G-SIBs, it was considered appropriate to review ways to address the externalities posed by D-SIBs.
4. A D-SIB framework is best understood as taking the complementary perspective to the G-SIB regime by focusing on the impact that the distress or failure of banks (including by international banks) will have on the domestic economy. As such, it is based on the assessment conducted by the local authorities, who are best placed to evaluate the impact of failure on the local financial system and the local economy.
5. This point has two implications. The first is that in order to accommodate the structural characteristics of individual jurisdictions, the assessment and application of policy tools should allow for an appropriate degree of national discretion. This contrasts with the prescriptive approach in the G-SIB framework. The second implication is that because a D-SIB framework is still relevant for reducing cross-border externalities due to spillovers at regional or bilateral level, the effectiveness of local authorities in addressing risks posed by individual banks is of interest to a wider group of countries. A framework, therefore, should establish a minimum set of principles, which ensures that it is complementary with the G-SIB framework, addresses adequately cross-border externalities and promotes a level-playing field.
6. The principles developed by the Committee for D-SIBs would allow for appropriate national discretion to accommodate structural characteristics of the domestic financial system, including the possibility for countries to go beyond the minimum D-SIB framework and impose additional requirements based on the specific features of the country and its domestic banking sector.
7. The principles set out in the document focus on the higher loss absorbency (HLA) requirement for D-SIBs. The Committee would like to emphasise that other policy tools, particularly more intensive supervision, can also play an important role in dealing with D-SIBs.
8. The principles were developed to be applied to consolidated groups and subsidiaries. However, national authorities may apply them to branches in their jurisdictions in accordance with their legal and regulatory frameworks.
9. The implementation of the principles will be combined with a strong peer review process introduced by the Committee. The Committee intends to add the D-SIB framework to the scope of the Basel III regulatory consistency assessment programme. This will help ensure that appropriate and effective frameworks for D-SIBs are in place across different jurisdictions.
10. Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principlesic institution. Some of these banks may have cross-border externalities, even if the effects are not global in nature.
Against this backdrop, the Basel Committee developed a set of principles on the assessment methodology and the higher loss absorbency requirement for D-SIBs. The framework takes a complementary perspective to the G-SIB framework by focusing on the impact that the distress or failure of banks will have on the domestic economy.
Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principles in line with the phase-in arrangements for the G-SIB framework, ie from January 2016.
October 11, 2012
http://www.bis.org/press/p121011.htm
The Basel Committee on Banking Supervision issued today its Framework for dealing with domestic systemically important banks.
In November 2011, the Basel Committee issued final rules for global systemically important banks (G-SIBs). The G20 leaders endorsed these rules at their November 2011 meeting and asked the Basel Committee and the Financial Stability Board to work on extending the framework to domestic systemically important banks (D-SIBs).
While not all D-SIBs are significant from a global perspective, the failure of such a bank could have a much greater impact on its domestic financial system and economy than that of a non-systemic institution. Some of these banks may have cross-border externalities, even if the effects are not global in nature.
Against this backdrop, the Basel Committee developed a set of principles on the assessment methodology and the higher loss absorbency requirement for D-SIBs. 1 The framework takes a complementary perspective to the G-SIB framework by focusing on the impact that the distress or failure of banks will have on the domestic economy.
Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principles in line with the phase-in arrangements for the G-SIB framework, ie from January 2016.
Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted that "the impact of the failure of a domestic systemically important bank could be significantly greater than that of a non-systemic institution. The principles developed by the Committee address this issue while retaining national flexibility to accommodate the specific characteristics of domestic financial systems. The framework will complement the measures on global systemically important banks announced last year, and contribute to a safer and sounder financial system."
---
A framework for dealing with domestic systemically important banks - final document
October 2012
The framework text sets out the Basel Committee's framework for dealing with domestic systemically important banks.
Background
In November 2011, the Basel Committee issued final rules for global systemically important banks (G-SIBs). The G20 leaders endorsed these rules at their November 2011 meeting and asked the Basel Committee and the Financial Stability Board to work on extending the framework to domestic systemically important banks (D-SIBs).While not all D-SIBs are significant from a global perspective, the failure of such a bank could have a much greater impact on its domestic financial system and economy than that of a non-system
Excerpts:
I. Introduction
1. The Basel Committee on Banking Supervision (the Committee) issued the rules text on the assessment methodology for global systemically important banks (G-SIBs) and their additional loss absorbency requirements in November 2011. The G-SIB rules text was endorsed by the G20 Leaders at their November 2011 meeting. The G20 Leaders also asked the Committee and the Financial Stability Board to work on modalities to extend expeditiously the G-SIFI framework to domestic systemically important banks (D-SIBs).
2. The rationale for adopting additional policy measures for G-SIBs was based on the “negative externalities” (ie adverse side effects) created by systemically important banks which current regulatory policies do not fully address. In maximising their private benefits, individual financial institutions may rationally choose outcomes that, from a system-wide level, are sub-optimal because they do not take into account these externalities. These negative externalities include the impact of the failure or impairment of large, interconnected global financial institutions that can send shocks through the financial system which, in turn, can harm the real economy. Moreover, the moral hazard costs associated with direct support and implicit government guarantees may amplify risk-taking, reduce market discipline, create competitive distortions, and further increase the probability of distress in the future. As a result, the costs associated with moral hazard add to any direct costs of support that may be borne by taxpayers.
3. The additional requirement applied to G-SIBs, which applies over and above the Basel III requirements that are being introduced for all internationally-active banks, is intended to limit these cross-border negative externalities on the global financial system and economy associated with the most globally systemic banking institutions. But similar externalities can apply at a domestic level. There are many banks that are not significant from an international perspective, but nevertheless could have an important impact on their domestic financial system and economy compared to non-systemic institutions. Some of these banks may have cross-border externalities, even if the effects are not global in nature. Similar to the case of G-SIBs, it was considered appropriate to review ways to address the externalities posed by D-SIBs.
4. A D-SIB framework is best understood as taking the complementary perspective to the G-SIB regime by focusing on the impact that the distress or failure of banks (including by international banks) will have on the domestic economy. As such, it is based on the assessment conducted by the local authorities, who are best placed to evaluate the impact of failure on the local financial system and the local economy.
5. This point has two implications. The first is that in order to accommodate the structural characteristics of individual jurisdictions, the assessment and application of policy tools should allow for an appropriate degree of national discretion. This contrasts with the prescriptive approach in the G-SIB framework. The second implication is that because a D-SIB framework is still relevant for reducing cross-border externalities due to spillovers at regional or bilateral level, the effectiveness of local authorities in addressing risks posed by individual banks is of interest to a wider group of countries. A framework, therefore, should establish a minimum set of principles, which ensures that it is complementary with the G-SIB framework, addresses adequately cross-border externalities and promotes a level-playing field.
6. The principles developed by the Committee for D-SIBs would allow for appropriate national discretion to accommodate structural characteristics of the domestic financial system, including the possibility for countries to go beyond the minimum D-SIB framework and impose additional requirements based on the specific features of the country and its domestic banking sector.
7. The principles set out in the document focus on the higher loss absorbency (HLA) requirement for D-SIBs. The Committee would like to emphasise that other policy tools, particularly more intensive supervision, can also play an important role in dealing with D-SIBs.
8. The principles were developed to be applied to consolidated groups and subsidiaries. However, national authorities may apply them to branches in their jurisdictions in accordance with their legal and regulatory frameworks.
9. The implementation of the principles will be combined with a strong peer review process introduced by the Committee. The Committee intends to add the D-SIB framework to the scope of the Basel III regulatory consistency assessment programme. This will help ensure that appropriate and effective frameworks for D-SIBs are in place across different jurisdictions.
10. Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principlesic institution. Some of these banks may have cross-border externalities, even if the effects are not global in nature.
Against this backdrop, the Basel Committee developed a set of principles on the assessment methodology and the higher loss absorbency requirement for D-SIBs. The framework takes a complementary perspective to the G-SIB framework by focusing on the impact that the distress or failure of banks will have on the domestic economy.
Given that the D-SIB framework complements the G-SIB framework, the Committee considers that it would be appropriate if banks identified as D-SIBs by their national authorities are required by those authorities to comply with the principles in line with the phase-in arrangements for the G-SIB framework, ie from January 2016.
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