Covid-19 policy measures to support bank lending
Bank for International Settlements BIS Quarterly Review by Catherine Casanova, Bryan Hardy and Mert Onen
Seven decades of international banking
Bank for International Settlements BIS Quarterly Review by Robert N McCauley, Patrick McGuire and Philip Wooldridge
Building a more stable financial system: Unfinished business
Twice in this still-young century central banks have had to take steps, unprecedented in size and scope, to limit the economic fallout from financial instability. While we can’t expect a financial system to withstand an overnight shut down of the global economy like we experienced in March 2020 without support from central banks and fiscal authorities, the financial market turmoil at that time highlighted vulnerabilities that were visible well beforehand. The system is stronger than it was going into the Global Financial Crisis (GFC), but much remains to be done, especially in nonbank finance. I’m going to reflect on some of the actions that need to be taken, drawing on the recent recommendations of a Task Force on Financial Stability in the U.S. that I co-chaired, and on my experience as an external member of the Financial Policy Committee at the Bank of England.
My main points are:
Dealing with risks to financial stability is urgent. If the economic and financial situation evolves as seems to be expected in financial markets, credit should flow, and financial markets will continue to serve the needs of the economy. But the current situation is replete with fat tails—unusually large risks of the unexpected which, if they come to pass, could result in the financial system amplifying shocks, putting the economy at risk. Shoring up our defenses against financial instability can’t run on Federal Reserve or, even worse, FSOC time where near endless analysis and consensus building delay needed action for years.
Dodd-Frank and Basel reforms have greatly improved the resilience of the banking system. Still, I have two linked recommendations for banks. First, fix the Supplementary Leverage Ratio and perhaps some other post GFC regulations so they don’t impede market making in Treasury securities and related repo; second, improve risk-based capital regulation by utilizing a countercyclical capital buffer that builds bank capital in good times and releases it aftershocks.
There’s much more to do in nonbank or market finance. This was the focus of our Task Force and we ended up with a 135-page report with dozens of recommendations. I’m going to focus on the Treasury market, but many aspects of market finance need urgent attention.
Our regulatory processes and procedures need to adapt to provide more nimble, more transparent, more accountable responses to ever-evolving threats to financial stability. We must do a better job of spotting potential problems early and making concrete suggestions for dealing with them.
Read the full text here.
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The future of money: The end of cash and the rise of digital currencies
Are we heading for a cashless future? Eswar Prasad, a senior fellow at Brookings and author of the forthcoming book, “The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance,” thinks so. Credit card and cell phone payments have disrupted the physical cash market already, but Prasad says the real driving force will be central banks—as new cryptocurrencies continue to emerge and their popularity expands, central banks will react by developing their own more stable forms.
On September 13, the Hutchins Center on Fiscal and Monetary Policy and the Global Economy and Development program at Brookings will host a virtual conversation between Prasad and Glenn Hutchins, co-chair of the Brookings Board of Trustees, on Prasad’s argument that the world is approaching a tipping point where cash phases out and digital currencies reign supreme. This will have far-reaching implications for individuals, businesses, banks, and governments: improved efficiency, increased flexibility, and improved market access, particularly for the unbanked. But the risks include market instability, minimal accountability, and decreased privacy.
Following the Prasad-Hutchins conversation, the Financial Times’ Gillian Tett will moderate an expert panel focused on the government’s role in managing and regulating digital currencies, maximizing benefits, and minimizing risk.
During the live event, the audience may submit questions at sli.do using the code #FutureofMoney, or join the conversation on Twitter using the hashtag #FutureofMoney.
Step-in risk – Executive Summary
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Global lending conditions and international coordination of financial regulation policies
by Enisse KharroubiUsing a model of strategic interactions between two countries, I investigate the gains to international coordination of financial regulation policies, and how these gains depend on global lending conditions. When global lending conditions are determined non-cooperatively, I show that coordinating regulatory policies leads to a Pareto improvement relative to the case of no cooperation. In the non-cooperative equilibrium, one region – the core – determines global lending conditions, leaving the other region – the periphery – in a sub-optimal situation.
Understanding South Africas trade policy and performance
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Comparing minds and machines: implications for financial stability
Bank of England Working Papers by Marcus Buckmann, Andy Haldane and Anne-Caroline Hüser
Could corporate credit losses turn out higher than expected?
* In a recent survey, US households say they are more likely to trust traditional financial institutions than government agencies or fintechs to safeguard their personal data. They have far less trust in big techs. * This pattern differs across demographic groups: respondents from racial minorities have less trust in financial institutions, while younger respondents trust fintechs relatively more. Female, minority and younger respondents are more concerned about implications of data-sharing for their personal safety. * A quarter of respondents say Covid-19 made them less willing to share data. In this group, nearly half became less willing to share with big techs. Concerns centred on identity theft and abuse of data. * As the economy becomes increasingly digital, and new players expand further into financial services, strong data protection policies will become more important to shield consumers from these harms.
Where are the Biden financial regulators?
Seven months into the Biden administration and despite rising attention to a host of diverse issues in financial regulation and monetary policy—notably concerns about inflation, central bank digital currencies, retail investing, stablecoins—the president has shown little appetite for filling pending vacancies in the financial regulatory agencies beyond the occasional (and often inconsistent) trial balloon.
This is an old problem: Joe Biden didn’t invent vacancies in new administrations, nor the preference to hobble along with people in acting positions while nominations await them.
The age of the problem is cold comfort, however. The Biden administration is exacerbating it and should change course, immediately.
Appointments in financial regulatory positions fill three vital functions. First, and most obviously, they permit the president to make policy. The issues pending before financial regulators in 2021 are staggering. The policy priorities of the president are clear—on racial diversity, inequality, climate change, full employment, even competition in banking—but announcing a bold policy agenda is just the beginning of accomplishing the work of policymaking. Without filling these key vacancies, the policy work of the administration will suffer from a lack of clarity on what should be accomplished, when, and by whom.
Second, policymakers appointed by the president to run financial regulation must govern. The poetry of bold policy agendas will always give way to the prose of practical governance. This is true in the Oval Office and is even truer for the corridors of the Federal Reserve System, the Federal Deposit Insurance Corp (FDIC), the Comptroller of the Currency—all of which have key vacancies—as well as other arenas of financial regulation.
Take the Federal Reserve System for example. The task of managing the Federal Reserve System is enormous and has only increased in its complexity. The Board members must be central bankers, voting on the course of monetary policy; they must be bank supervisors, working with banks and other financial institutions to manage financial risk throughout the system; they must be bank regulators, writing rules for that same system; they operate a financial system as participants in payment rails that allow money to flow through the global economy; and they must be managers, supervising the employment of the quasi-private Federal Reserve Banks and the 20,000 people who work within the Federal Reserve System.
Each vacancy—and, at this rate, we risk having at least three simultaneously, a low-water mark that was never crossed before the Obama administration and has become something of a new normal in Fed vacancies—adds to the work of governance and risks muddying the work of all those who depend on the Fed’s managerial competence in all of its many areas of responsibility.
Finally, and perhaps most importantly, these appointments are the principal—in some ways, the only—mechanism for democratic governance to organize, respond to, and participate in the technical affairs of financial regulation. The logic of representative democracy is that elections inspire political organization before they occur and have policy consequences long afterward. But few people make financial regulation the sole basis for their vote in a presidential election, even in the rare instances when politicians pay close attention to financial regulation on the stump. The ballot box just isn’t the time or place where the American public engages forcefully with essential questions about monetary policy, bank supervision, or whether (and if so, how) the Fed should create its own digital currency.
The better time is when a nomination is made and the U.S. Senate engages in providing its advice and consent on the appointment. In those moments, it is astonishing how high the quality of engagement becomes across the partisan divide in debating finer points about the causes of inflation, the consequences of the Fed’s management of the public-private partnerships that characterize our financial system, or the implications of banking merger policy.
At present, however, the administration has deprived the public of these focused conversations. Failing to nominate anyone for the first one-eighth of Biden’s elected term deprives the administration of its ability to make policy and society of the ability to engage in debate on these issues. Floating and then popping trial balloons is not enough to sustain this discussion: we need presidential nominations and hearings in the Senate.
President Biden can quickly change this unfortunate state of affairs. The benches of qualified candidates who can fill them are deep, from across the coalition of Democrats (and some Republicans) who support the president’s views on financial regulation and monetary policy. Some factions within the party may resent appointments made to representatives of other factions, but this must never become a barrier to making timely nominations of qualified candidates. That very intraparty debate is itself enormously beneficial for the nation as it seeks to understand what a candidate for, say, Comptroller of the Currency promoted by the left wing of the party believes about issues of importance to the party’s center.
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There is another risk to these vacancies beyond the top line of the administration. Most (but not all) of the vacancies pending are not the top officials—the Secretary of the Treasury or Chair of the Federal Reserve—but are deeper within the organizations, including the Vice Chair for the FDIC, the Comptroller of the Currency, members of the Fed’s Board of Governors, and others. They just don’t capture the same imagination as those top jobs, and so presidents of both parties may be unwilling to wage the partisan fights that nomination and appointment might invite.
This is folly. The consequence of this “only at the top” focus is to make those top appointments even higher stakes, creating strange hydraulic pressure on a single nomination to satisfy the accountability demands that should be satisfied through the other vacancies. So it is, for example, that Fed Chair Jay Powell’s presumed views on financial regulation threaten his reappointment as the nation’s chief monetary policymaker despite the fact that his record through the Obama and Trump administrations suggests that he will defer on regulatory matters to the administration. The debate about the Fed Chairmanship—a vacancy that the administration is sure not to let occur—has become a debate about financial regulation because the other nominations with arguably more influence on those policies are still pending. The result is an inferior public discourse about both financial regulation and monetary policy alike.
Let us end this abysmal record in financial regulation. Let the president fill the large and soon-to-be growing list of vacancies in the financial regulatory agencies. The policy, governance, and accountability of the system demand it.