LIQUIDITY, not capital, should be key for supervisors
XVA costs come under concerted pressure from banks
LIBOR replacement may face legal problems, industry fears
COMMENTARY: Flowing away
Regulators dropped the ball before the 2008 crisis by focusing their attention on capital levels at the expense of studying liquidity. They freely admit it, and that is one of the reasons why after the crisis rule-makers have spent so much effort on ensuring financial institutions are both adequately capitalised and able to survive a sudden drop in liquidity.
This week, senior regulators expressed concerns that the reformed fixed-income market could be at higher risk of a liquidity shortage. While many in the industry have blamed higher capital requirements for the shortfall in bond market liquidity, regulators are less sure – pointing to structural factors, such as greater participation by mutual funds and the associated redemption risk, as the real cause of illiquidity. The FSB's Svein Andresen, for his part, points out that, ironically, the stability of the bond market in recent months may be to blame, as it reduces the profits market-makers can reap from steadying the market, and so keeps a lid on activity and liquidity.
However, liquidity stress testing is no easy matter, even when dealing with a single institution. And regulators such as the Netherlands' DNB are becoming increasingly certain that market-wide stress tests – far more complex and lengthy – will also be vital in preserving financial stability in years ahead.
QUOTE OF THE WEEK
"Capital is – and should be – there to serve as a disincentive for insurers to engage in activities prone to a systemic element. But in a stressed situation, it won't be the element of capital that will ‘save the world'. It's all the other preventative measures, such as intensified supervision, that are the most relevant" – Eiopa chairman Gabriel Bernardino
STAT OF THE WEEK
The Financial Stability Board estimates that TLAC shortfalls across global systemically important banks could be as high as €1.1 trillion ($1.2 trillion) when the stricter standard of 18% comes into force in 2022.
ALSO THIS WEEK
EU banks plan to flee CME when key Emir date arrives
CCP oversight stand-off leaves banks in a bind as Feb 21 frontloading deadline nears
CRO says NY Fed faces same op risks as commercial banks
"The predominant risks the bank faces have shifted since the end of the financial crisis"
Mixed industry reaction to Moody’s CCP ratings
Clearing members say narrow definition of default may limit ratings' usefulness
HSCEI autocallable hedging hitting forex market, say dealers
Dealers flock to Hong Kong dollar options and forwards markets amid depeg fears
Barclays ousts head of rates trading
Yarian out after UK bank announces major shake-up of global investment banking operations
The week on Risk.net, February 10-16, 2018Receive this by email