Basel III complexity: Third round of clarifications

Basel III counterparty credit risk - Frequently asked questions (update of FAQs published in July 2012)

November 2012

http://www.bis.org/publ/bcbs235.htm

 

The Basel Committee on Banking Supervision has received a number of interpretation questions related to the December 2010 publication of the Basel III regulatory frameworks for capital and liquidity and the 13 January 2011 press release on the loss absorbency of capital at the point of non-viability.

Today's publication sets out the third set of frequently asked questions (FAQs) that relate to counterparty credit risk, including the default counterparty credit risk charge, the credit valuation adjustment (CVA) capital charge and asset value correlations. FAQs that have been added since the publication of the second version of this document in July 2012 are shaded yellow.
These FAQs aim to promote consistent global implementation of Basel III.  
Translations in German, Spanish, French and Italian will be published soon

CBO: What Accounts for the Slow Growth of the Economy After the Recession? - Infographic

CBO, November 14, 2012

The U.S. economy has grown slowly since the deep recession in 2008 and 2009. In the three years following the recession, the cumulative growth of the nation’s output—real (inflation-adjusted) gross domestic product—was nearly 9 percentage points below the average seen in previous economic recoveries since the end of World War II, or less than half the average growth during those other recoveries.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43712-Infographic-SlowRecovery.pdf

The full report is here: http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-14-12-SlowRecovery.pdf

Fiscal Rules at a Glance: Country Details from a New Dataset

Fiscal Rules at a Glance: Country Details from a New Dataset. By Nina Budina, Tidiane Kinda, Andrea Schaechter, and Anke Weber
IMF Working Paper No. 12/273
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40101.0

Summary: This paper provides country-specific information on fiscal rules in use in 81 countries from 1985 to end-September 2012. It serves as background material and update of the July 2012 Working Paper “Fiscal Rules in Response to the Crisis—Toward the ‘Next Generation’ Rules: A New Dataset” and is also available in an easy accessible electronic data visualization tool (http://www.imf.org/external/datamapper/FiscalRules/map/map.htm). The dataset covers four types of rules: budget balance rules, debt rules, expenditure rules, and revenue rules, applying to the central or general government or the public sector. It also presents details on various characteristics of rules, such as their legal basis, coverage, escape clauses, as well as key supporting features such as independent monitoring bodies.

Excerpts:

This paper provides country-specific information on fiscal rules in use in 81 countries from 1985 to end-September 2012.1 It accompanies and updates the July 2012 Working Paper “Fiscal Rules in Response to the Crisis—Toward the ‘Next Generation’ Rules: A New Dataset” (Schaechter, Kinda, Budina, and Weber) and the electronic data visualization tool. The dataset covers four types of rules: budget balance rules, debt rules, expenditure rules, and revenue rules, applying to the central or general government or the public sector. It also presents country-specific details on various characteristics of rules, such as their legal basis, coverage, escape clauses, and takes stock of key supporting features that are in place, including independent monitoring bodies. The electronic dataset codes this information for easy cross-country comparisons and empirical analysis. It includes additionally information on institutional supporting arrangements, namely multi-year expenditure ceilings and fiscal responsibility laws.

A fiscal rule is a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. This implies that boundaries are set for fiscal policy which cannot be frequently changed. That said the demarcation lines of what constitutes a fiscal rule are not always clear. For this dataset and paper, we followed the following principles:

• In addition to covering rules with targets fixed in legislation, we consider also those fiscal arrangements, as fiscal rules for which the targets can be revised, but only on a low-frequency basis (e.g., as part of the electoral cycle) as long as they are binding for a minimum of three years. Thus, medium-term budgetary frameworks or expenditure ceilings that provide multi-year projections but can be changed annually are not considered to be rules.
• We only consider those fiscal rules that set numerical targets on aggregates that capture a large share of public finances and at a minimum cover the central government level. Thus, rules for subnational governments or fiscal sub-aggregates are not included here.
• We focus on de jure arrangements and not to what degree rules have been adhered to in practice.

How to interpret the country-specific information? The tables in Section II contain all national rules and a cross-reference to Section III if the country also operates under supranational fiscal rules. The date when a rule took effect is shown in brackets. The most recent rules are show first. When a characteristic of the rule was changed over time, the year of the change is shown in the respective column. A description of each rule and the time period to which it applied is included in the bottom part of each table. Supranational fiscal rules are described in Section III.

Chinese Strategic Miscalculations in the South China Sea, by Hoang Anh Tuan

Chinese Strategic Miscalculations in the South China Sea, by Hoang Anh Tuan
Asia Pacific Bulletin, No. 181
Washington, D.C.: East-West Center
September 27, 2012
http://www.eastwestcenter.org/publications/chinese-strategic-miscalculations-in-the-south-china-sea

Hoang Anh Tuan is the Director-General of the Institute for Foreign Policy and Strategic Studies at the Diplomatic Academy of Vietnam.

Excerpts:

Regrettably, China does not yet recognize the extent to which its aggressive course in the South China Sea is damaging its diplomacy with neighboring countries.

China’s current assertiveness in the South China Sea is now slowly but surely eroding its positive image with its ASEAN neighbors as a peacefully rising power. Without exception, countries within Southeast Asia and beyond are very cautious of China’s rise. Even as China’s national economic and global stature increase, its influence, image and “soft power” abroad is declining dramatically.

China now sees “US hands” in both its internal and external affairs. Examples this year of US influence in China’s domestic affairs include Wang Lijun, Chongqing’s former police chief, applying to the US Consulate in Chengdu for political asylum and the blind lawyer, Chen Guangcheng, fleeing to the US Embassy in Beijing. Throughout the region, US allies including Japan, South Korea and the Philippines have all upgraded their already strong military cooperation with the United States. If China continues to ignore the interests or concerns of its neighbors who have a stake in the South China Sea, its aggressiveness is likely to galvanize increased regional cooperation with the United States.

Third, troubles with close neighbors also affect the image and position of China in the world. The most important condition for any country aspiring to ascend to global power status is to maintain good relations with its neighbors. However, if China is unable or unwilling to maintain a cordial relationship with its closest neighbors, how can countries further afield trust and respect this aspiring superpower? As long as China is unable to maintain a significant level of trust and friendship with its neighbors, benevolent global power status for China is likely to remain a pipe dream.

First and foremost, China should take constructive steps to bring about an amicable conclusion to negotiations on the Code of Conduct (COC) in the South China Sea, and implement a face-saving policy renouncing once and for all its U-shaped line. Obviously, this will be a difficult decision for China to take. However, the international dividend and return for China’s peaceful rise would ripple far beyond the neighborhood and confines of the South China Sea.

U2's Bono realizes the importance of capitalism

Notable & Quotable: U2 frontman and anti-poverty activist Bono realizes the importance of capitalism
The Wall Street Journal, October 30, 2012, on page A23
http://online.wsj.com/article/SB10001424052970203922804578080453358300198.html

Staff writer Parmy Olson writing at forbes.com, Oct. 22

Bono has learned much about music over more than three decades with U2. But alongside that has been a lifelong lesson in campaigning—the activist for poverty reduction in Africa spoke frankly on Friday about how his views about philanthropy had now stretched to include an appreciation for capitalism.

The Irish singer and co-founder of ONE, a campaigning group that fights poverty and disease in Africa, said it had been "a humbling thing for me" to realize the importance of capitalism and entrepreneurialism in philanthropy, particularly as someone who "got into this as a righteous anger activist with all the cliches."

"Job creators and innovators are just the key, and aid is just a bridge," he told an audience of 200 leading technology entrepreneurs and investors at the F.ounders tech conference in Dublin. "We see it as startup money, investment in new countries. A humbling thing was to learn the role of commerce."

Joseph Schumpeter on how a swelling mass of unemployable college graduates sets the stage for anticapitalist radicalism

Joseph Schumpeter in 1942 on how a swelling mass of unemployed and unemployable college graduates sets the stage for anticapitalist radicalism.
The Wall Street Journal, October 29, 2012, on page A21
http://online.wsj.com/article/SB10000872396390444897304578046520760656926.html

Joseph Schumpeter writing in "Capitalism, Socialism and Democracy," 1942:

The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work. His failure to do so may be due either to lack of natural ability—perfectly compatible with passing academic tests—or to inadequate teaching; and both cases will . . . occur more frequently as ever larger numbers are drafted into higher education and as the required amount of teaching increases irrespective of how many teachers and scholars nature chooses to turn out.

The results of neglecting this and of acting on the theory that schools, colleges and universities are just a matter of money, are too obvious to insist upon. Cases in which among a dozen applicants for a job, all formally qualified, there is not one who can fill it satisfactorily, are known to everyone who has anything to do with appointments . . .

All those who are unemployed or unsatisfactorily employed or unemployable drift into the vocations in which standards are least definite or in which aptitudes and acquirements of a different order count. They swell the host of intellectuals in the strict sense of the term whose numbers hence increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment. And it often rationalizes itself into that social criticism which as we have seen before is in any case the intellectual spectator's typical attitude toward men, classes and institutions especially in a rationalist and utilitarian civilization.

Well, here we have numbers; a well-defined group situation of proletarian hue; and a group interest shaping a group attitude that will much more realistically account for hostility to the capitalist order than could the theory—itself a rationalization in the psychological sense—according to which the intellectual's righteous indignation about the wrongs of capitalism simply represents the logical inference from outrageous facts. . . . Moreover our theory also accounts for the fact that this hostility increases, instead of diminishing, with every achievement of capitalist evolution.

Tax Composition and Growth: A Broad Cross-Country Perspective. By Santiago Acosta-Ormaechea and Jiae Yoo

Tax Composition and Growth: A Broad Cross-Country Perspective. By Santiago Acosta-Ormaechea and Jiae Yoo
IMF Working Paper No. 12/257
October 25, 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40067.0

Summary: We investigate the relation between changes in tax composition and long-run economic growth using a new dataset covering a broad cross-section of countries with different income levels. We specifically consider 69 countries with at least 20 years of observations on total tax revenue during the period 1970-2009—21 high-income, 23 middle-income and 25 low-income countries. To our knowledge this is the most comprehensive and up-to-date dataset on tax composition and growth. We find that increasing income taxes while reducing consumption and property taxes is associated with slower growth over the long run. We also find that: (1) among income taxes, social security contributions and personal income taxes have a stronger negative association with growth than corporate income taxes; (2) a shift from income taxes to property taxes has a strong positive association with growth; and (3) a reduction in income taxes while increasing value added and sales taxes is also associated with faster growth.

Vienna 2 proposes enhancements in cross-border supervision to European authorities

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.