Progress After Basel II: Monetary Policy, Leverage Ratios and Risk Based Capital Adequacy Measures

What is it about?

This paper highlights the need to address risks associated with unregulated financial institutions - as well as off balance sheet instruments which serve as Special Purpose Vehicles. Further, progress made by the Financial Stability Board and the IMF - in addition to the need for coordination between national supervisors and regulators on a global wide basis, are highlighted. The role of Securities Financing Transactions (SFTs) in respect of leverage ratios and liquidity matters is also accorded focal point under recent initiatives. According to the Financial Stability Board, "SFTs such as securities lending and repurchase agreements (repos) play a crucial role in supporting price discovery and secondary market liquidity for a wide variety of securities. However, such transactions can also be used to take on leverage as well as maturity and liquidity mismatched exposures, and therefore can pose risks to financial stability."

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Photo by Claire Anderson on Unsplash

Photo by Claire Anderson on Unsplash

Why is it important?

Implications of over accommodative monetary policies - as well as the impact of consequences of such policies in response to short term vulnerabilities to be considered since any monetary policy adopted to address such short term disruptions may eventually generate more vulnerabilities for the financial sector. In this respect, the need to implement macro prudential policies as being complementary to the fulfilment of Federal Reserve dual mandates of price stability and maximum employment, could be considered - as well as the deployment of other federal and national supervisory tools such as the federal funds rate. There are various justifications for the degree of central bank independence from political interference - as evidenced by the Bank of England's Monetary Policy Committee. The creation of separate agencies for regulation and supervision was popular in the nineties - as well as the creation of unified structures of regulation and supervision (notably led by the Scandinavian jurisdictions). However even though regulatory structures between several jurisdictions might appear similar, regulatory styles and systems may differ. Whilst some jurisdictions might to a larger extent choose to adopt a system of on site and offsite supervision which incorporates the assistance and involvement of external auditors, other jurisdictions may decide to resort to less dependence in their engagement of external auditors for inspections (on site) and offsite supervision and monitoring exercises. Following the GFC, there has also been a reversion in the structures of financial regulation in several jurisdictions. Of more concern, it appears, is the need to regulate the increasingly popular crypto asset industry - whose global market capitalisation - although still relatively small is becoming increasingly popular with investors, the need for greater focus on unregulated financial institutions, financial instruments which particularly serve the purposes of SPVs, derivative markets, as well as the SFT and shadow banking sectors. As highlighted by the FSB: "SFTs such as securities lending and repurchase agreements (repos) play a crucial role in supporting price discovery and secondary market liquidity for a wide variety of securities. However, such transactions can also be used to take on leverage as well as maturity and liquidity mismatched exposures, and therefore can pose risks to financial stability."

Perspectives