- Publisher: Europeye
- Edition: 2015.1
- Available in: Digital. If you are interested in the printed version of the magazine please contact firstname.lastname@example.org for info
- Published: July 7, 2015
FROM THE EDITORIAL DESK
The Tangled Web: Do Capital Requirements and Loss Absorption Capacity Foster a Systemic Risk Free, Pro-Growth Banking Environment?
JEAN CHARLES ROCHET
In the aftermath of the last financial turmoil, economists should assist policy makers in their revision of the financial and banking regulatory framework with new and more accurate theoretical and empirical models. Unfortunately, the debate on capital requirements in particular has been populated by “ideological views”, with extreme adverse positions that are not supported by robust scientific analysis.
This paper discusses the effectiveness of different regulatory reforms, with a special focus on capital requirements, from a theoretical and empirical point of view, and from a microeconomic and macro-prudential perspective. The picture that emerges is complex.
JAN PIETER KRAHNEN AND LAURA MORETTI
This paper illustrates the recent European regulatory reform agenda, comprising prominently BRRD, SSM and SRM, as a comprehensive attempt to resurrect market discipline in banking. The build-up of loss absorbing capacity in the form of sufficiently thick layers of equity and bail-in able debt are seen as the major regulatory innovation in Europe since the outbreak of the global financial crisis.
QUESTIONS & ANSWERS
In this section four contributors address questions raised by the editors. The first three contributions cie, Clerq and Salleo) discuss how capital and loss absorption requirements affect financial stability and banks’assets allocation. The fourth contribution (Fernandez de Lis) looks at the relationship between TLAC rules and banking organisational models.
This contribution offers a precise and comprehensive description of the functioning of TLAC. Recent reforms that have been approved or are under current scrutiny, after the crisis, represent significant progresses both in terms of innovation and scale and should not be underestimated.
This contribution discusses the effectiveness of tackling the too-big-to-fail issue with capital requirements and specific systemic add-ons, or buffers for systemic risk. In particular, it investigates the trade-off between reducing systemic risk and hurting economic growth, by raising the total cost of funding, implied by these measures.
This contribution looks at the link between loss absorbing capital and other liabilities and banks asset allocation. It takes an agnostic view, exploring different sides of the argument. New requirements of loss absorption, like GSIBs buffers and TLAC, may enhance the ex post resilience to shocks, but as they are costly, banks might try to improve their profitability by taking on risks that are not adequately captured by the current regulatory framework.
SANTIAGO FERNANDEZ DE LIS
This contribution argues that TLAC should be neutral with respect to the banks’ business model (Multiple Point of Entry vs. Single Point of Entry) and should be tailored to each bank’s business model. In particular, it discusses in detail the implications of TLAC requirements in emerging market economies for banks organised along the Multiple point of Entry Model of stand-alone subsidiaries, mostly funded with local retail deposits.