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Lecture 4 (Why we regulate banks (Protect consumers and customers, Provide…
Lecture 4
Why we regulate banks
Protect consumers and customers
Provide market integrity
Deal with moral hazard (in relation to deposit
insurance)
Fairness and efficiency of markets
Safety and soundness健康 of FIs
Deal with systemic risk issues
The Basel Committee
The Basel Committee for Banking Supervision (BCBS) was established in 1974 by Group of Ten countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, the United States and in 1984 Switzerland
In 1988, the BCBS established the Basel Accord, now known as Basel I, for measuring capital adequacy for banks
ensure banks held sufficient capital to cover their risks
Capital Adequacy Ratio
Total qualifying capital
/
Risk weighted assets for credit risk
-
Minimum requirement weighted assets
level the playing field among international banks competing cross‐border
facilitate comparability of the capital positions of
banks
helped to define the role of regulators in cross‐jurisdictional 跨管辖situations
Ensured that international banks do not escape comprehensive supervision by the domestic regulatory authority
Promoted uniform capital requirements so that banks from different countries may compete with each other on a level playing field促进统一的资本要求，使不同国家的银行可以在平等的竞争环境中相互竞争
Basel II
Basel II offered a range of options for determining capital requirements
This allowed banks to use approaches most
appropriate for their operations
three pillars
supervisory review
disclosure
minimum capital requirement
Basel III
Minimum tier 1 capital: 6%
Minimal total capital requirement: 8%
Two liquidity ratios
the Liquidity Coverage Ratio (LCR)
the Net Stable Funding Ratio (NSFR)
Basel IV
The internal models used for credit risk varied too much and so some standard floor for capital has been sought instead用于信用风险的内部模型变化太大，因此人们转而寻求某种标准的资本金下限
Central banking and monetary policy
Most central banks achieve this by adjusting the legal reserves of the banking system, interest rates, and relative value of the local currency in the foreign exchange markets
three main tools
open market operations
principal tool of central bank monetary policy
it involves the Federal Reserve buying and selling of U.S. Treasury bills, bonds, and notes and selected federal agency securities with a selected group of primary dealers
central bank purchases
increase the growth of deposits and loans and interest rates tend to fall
The central bank sales of securities
decrease the growth of deposits and loans within the financial system and cause interest rates to rise
it can be used daily and, if a mistake is made or conditions change, its effects can be quickly reversed
the discount rate on loans to qualified financial institutions
legal reserve requirements on various bank liabilities
A central bank's principal function is to conduct money and credit policy to promote sustainable growth in the economy and avoid severe inflation
Regulatory structure
Single regulatory – UK pre‐GFC
after GFC
Multiple regulators
Financial Conduct
Authority (FCA)
ensuring that financial markets work effectively and that its financial conduct is acceptable, and meets the legal standards
ensures competition is maintained
banks and other financial institutions do not
abuse their dominant positions
Bank
of England
Prudential Regulation
Authority (PRA)
create a stable financial
system for the UK
Twin peaks model – Australia
Australian Prudential Regulation Authority
(APRA)
the Australian Securities and Investments Commission (ASIC)
The Reserve Bank of Australia
Multiple regulators – USA, China,
China
Banks – China Banking Regulatory Com.
Insurance – China Insurance Regulatory Com.
Securities – China Securities Regulatory Com.
People’s Bank of China
Capital and related concepts
Economic capital is the capital that a firm must hold to protect itself against insolvency不破产 with a chosen level of certainty over a given period of time
Regulatory capital is determined by regulators, for example, as a given percentage of the risk weighted value of assets
Capital is simply the arithmetic difference between assets and liabilities, which is also known as net worth or shareholders equity
The Basel Accord is largely based on capital and its holding relative to risk taking
USA financial legislation
Federal Reserve System
It serves as a lender of last resort and helps
stabilize the financial markets and the economy
The Board‘s most important job today is to control money and credit conditions to promote economic stability
Bank risk and the Basel Accord
Types of bank risks
Financial risks
Credit risk
The credit risk associated with an individual loan concerns the losses the bank may suffer if the borrower defaults
The primary risk that banks have traditionally
faced is the risk of loan defaults
To cover losses when loans become nonperforming, banks set aside reserve
Conduct careful risk assessment
Once a loan is made, banks must monitor its performance
This involves several indicators
Failure to make loan repayments
adverse changes in a customer’s credit rating
Adverse changes in deposit balances, sales and earnings
Delays in supplying financial statements
Market risk
Equity price risk
Commodity price risk
Foreign exchange risk
Energy price risk
Interest rate risk
Banks manage interest rate risk to ensure that the bank will always earn a spread between its borrowing rates and the rates it can earn on investments
Real estate price risk
Non‐financial risks
– Operational risk
is the risk of loss resulting from the failure of people, processes, systems or from external events
examples
crime risk, disaster risk, fiduciary risk, product implementation risk, model risk and legal risk犯罪风险、灾害风险、受托风险、产品实施风险、模型风险、法律风险
– Business risk
– Reputational risk
– Macroeconomic risk
– Business cycle risk
– Country risk
– Political risk
– Sovereign risk
– Purchasing power risk