- Publisher: Associazione Centro Studi Luca D'Agliano
- Edition: 2015.1
- 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?
by Giorgio Barba Navaretti, Giacomo Calzolari and Alberto Franco Pozzolo
Numbers
by Maria Teresa Trentinaglia
Institutions
by Maria Teresa Trentinaglia
A bird eye (re)view of key readings
by Maria Teresa Trentinaglia
LEADING ARTICLES
The Bank Capital Controversy
by Jean-Charles Rochet
Bank Capital – Panacea for a crisis-free banking system?
by Thorsten Beck
A Greenhouse for Market Discipline: Making Bail-In Work
by Jan Pieter Krahnen and Laura Moretti
QUESTIONS & ANSWERS
TLAC and financial stability
by Andrew Gracie
Higher capital requirements for GSIBs: systemic risk vs. lending to the real economy
by Laurent Clerc
Loss absorbing capital and bank asset allocation
by Carmelo Salleo
TLAC implementation in retail banks in Emerging Markets: the Multiple Point of Entry model
by Santiago Fernández de Lis
The first issue: Capital Requirements and Loss Absorbing Capacity for Large Banks.
How effective can additional capital requirements be in reducing systemic risk? What is their impact on lending to the real economy? Is the bail-in principle effective in enhancing the resilience of banks and reducing the occurrence of bail-outs with tax payers funds?
The debate on capital requirements for large banks is nested around the trade-off between hedging systemic risk and expanding lending to the real economy and fostering economic growth. This first issue is devoted to disentangling this debate and discussing its key ingredients.
Its bottom-line is that all capital requirements and loss absorption measures are necessary but also imperfect tools for achieving financial stability, and under several circumstances they may hinder growth. The specific provisions and the design of these measures must be assessed and understood with care and balance. Especially crucial is the discussion on TLAC, given that its regulatory framework is still under definition and that this measure is sizeable and expected to have a major impact on the structure of banks’ liabilities.
FROM THE EDITORIAL DESK
The tangled web: do capital requirements and loss absorption capacity foster a systemic risk free, pro-growth banking environment?
GIORGIO BARBA NAVARETTI, GIACOMO CALZOLARI AND ALBERTO FRANCO POZZOLO
Numbers
Institutions
A bird eye (re)view of key readings
LEADING ARTICLES
The Bank Capital Controversy
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.
Bank Capital – Panacea for a crisis-free banking system?
THORSTEN BECK
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.
A Greenhouse for Market Discipline: Making Bail-In Work
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.
TLAC and financial stability
ANDREW GRACIE
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.
Higher capital requirements for GSIBs: systemic risk vs. lending to the real economy
LAURENT CLERC
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.
Loss absorbing capital and bank asset allocation
CARMELO SALLEO
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.
TLAC implementation in retail banks in Emerging Markets: the Multiple Point of Entry model
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.