Basel 3, Financial Regulation Reform and Implications for Australian Banks Professor Kevin Davis...
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Transcript of Basel 3, Financial Regulation Reform and Implications for Australian Banks Professor Kevin Davis...
Basel 3, Financial Regulation Reform and Implications for
Australian Banks
Professor Kevin Davis
Research Director, Australian Centre for Financial Studies
A recipe for disaster?
• Create organizations which – Invest in assets which are non-marketable
and hard to value– Are very highly levered, and allow creditors
to withdraw funds at call– Are opaque – difficult for outsiders (or even
insiders) to understand value and risk– Reduce the level of regulation they are
subject to, particularly when technology is making the business more complex and risky
And it came to pass!
The GFC prompted a “Belts and Braces” Response
• Unfreeze/restore liquidity• Shore up public confidence• Bail-outs• Failure management• Temporary regulations• Macro-economic stimuli• Regulatory forbearance
And then:
The GFC experience prompted
A Global regulatory agenda (Basel, IOSCO, FSB, G20)
And national agendas
UK, EC,USA etc• Shift in views on working
of financial markets• A “grand vision” or
“tinkering at the edges”?– What are the
aggregate effects of plethora of changes?
Problems and Responses: The Global Agenda
Problem Response Excessive leverage increase capital requirements Liquidity/ counterparty spillovers
Central Clearing Counterparties, higher risk weights for financial sector counterparties, minimum liquidity & funding requirements
Inappropriate incentive structures
ad hoc interference in remuneration structures, codes of practice for credit rating agencies, etc.
Resolution and “exit” problems
expanded intervention powers for regulators, requirements for contingent capital and “bail-inable” debt, living will (recovery and resolution plan) requirements, G-SIFIs
Bank runs (actual or potential)
expand or introduce explicit deposit insurance
Banks arbitraging regulatory requirements
introduce more complexity into the risk-weighting system
National/Regional Responses
UK• Retail Ring-fencing proposal
– limiting implicit government guarantees– Reducing spillovers
• Higher Loss Absorbency (Capital)• Depositor Preference• Bail-in powersEurope• Tobin Tax proposal• Remuneration• D-SIBs (“Too big to Swallow”)USA• Dodd-Frank Act
A Changing Paradigm?• Applicability of Econ 101 model of market
efficiency to financial markets?
Slapped in the Face by the Invisible Hand:
Banking and the Panic of 2007
A Changing Paradigm?
• Recognition of importance of network externalities (adaptive systems)
A Changing Paradigm?
• Questioning of merits of larger financial sector– Not new ..we are throwing more and more of our
resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. JAMES TOBIN (1984) – Nobel Laureate, Economics
• Questioning of merits of increasing complexity of regulation
Australian responses
• Financial sector emerged relatively unscathed from GFC (luck, management, supervision)– Apart from non-regulated sector failures,
securitization freeze, stock prices!• But lets not kid ourselves
– There was massive government/ regulator/ taxpayer support
• Wholesale debt guarantee subsidy• Deposit insurance and implicit guarantees• Expansion of RBA liquidity facilities• RBA-US Fed FX Swaps
Local Regulatory Agenda
FOFA
Competitive and Sustainable Banking System
Insolvency reforms
MySuper
National C
onsumer
Credit P
rotectio
n
Equity Market Trading Reforms
“If not w
hy not”
disclosure
OTC derivatives & CCCPs
Superstream
Short form
PDS &
prospectus
Covered Bonds
Managed Investments
Act review
LAGIC
Disability Insurance
National Disaster Insurance Scheme
Financial Market
Infrastructure
PriceSignaling
Superfund
Prudentia
l Standard
sFinancial
Claims Scheme
But banking regulation….
Much of the wide-ranging regulatory agenda affects banks, but:
“If it ain’t broke don’t fix it” attitude prevails
• Can it work better?• Might it break in the future?
Australian Bank Regulation• Implement Basel 3
– Continued “tougher” bank capital requirements – what is the cost?
– Liquidity requirements (LCR and NSFR)• RBA committed liquidity facility• Impacts on deposit markets and pricing
• Enhanced resolution and failure management powers for APRA
• “Living will” requirements • Potentially - Central Clearing Counterparties
(CCPs) for OTC derivatives trading?
The Unresolved Issues• Banking (whole of financial) sector competition
– Major banks dominate “financial sector supply chain”
• D-SIBs “too big to swallow” – and have similar exposures – systemic issues
• Designing policy for a world of implicit guarantees– Did we ever believe that big banks weren’t
guaranteed? • Charging for explicit guarantees (Financial
Claims Scheme)
Possible Responses• Retail Ring-Fencing a la UK
– Reduce risk of “utility” banking, reduce spillovers, limit implicit guarantees
• “Volcker rule” a la US– Separate trading activities from banking
Possible Responses
• Higher capital ratios (including contingent capital) for D-SIBS (or special taxes!)
• “Bail-in-able” debt• Charging for deposit insurance• “Nudge” bank management incentives
– Remuneration, director liabilities• More generally – “Tobin tax”
Happening overseas - reduced power of financial oligarchy to stymie change (failures, scandals (LIBOR, AML, “the whale” etc))
Consequences?• Banks and “shadow banks”
– Savings and investments institutions • where should govt. protection stop?
– Trading and dealing• If banks don’t do it, others will
– just shifting source of potential problems?• Banks and capital markets
– Strong incentives for growth of capital markets for funding (and as outlet for savings)
• Optimal size of financial sector– It may be smaller?
Conclusion• “You never let a serious crisis go to waste. And
what I mean by that it's an opportunity to do things you think you could not do before. “ Rahm Emanuel
• Have we? Or have we done lots of things without fully thinking through the consequences?
• A “Son of Wallis” Inquiry warranted– Stocktake of costs/benefits and consistency of
recent regulatory changes– Assessment of consequences of distortions
caused by tax, guarantees, compulsion– Consider how D-SIBS should be treated