How Were the Basel 3 Minimum Capital Requirements Calibrated?
One way to reduce the likelihood of bank failures is to require banks to hold more and better capital. But how much capital is enough? An international committee of regulators recently reached a new agreement (called Basel 3) to impose new, higher standards for capital on globally active banks. The Basel 3 common equity minimum capital requirement will be 4.5 percent plus an additional buffer of at least 2.5 percent of risk-weighted assets (RWA). Are these numbers big or small?and where did they come from? In this post, I describe how the new Basel capital standards were calibrated.
Using Crisis Losses to Calibrate a Regulatory Capital Buffer
In response to the enormous losses experienced during the recent financial crisis, the Basel Committee on Banking Supervision reached a new international agreement on the amount of capital banks will be required to hold. The “Basel 3” agreement introduces a new, two-tiered structure for regulatory capital requirements involving much more stringent standards for the amount of common equity banks must hold. In a previous post, I discussed how the minimum capital requirement component of the Basel 3 agreement was calibrated. In this post, I explain how the other component—the common equity ...
Just Released: What Do Banking Supervisors Do?
In most developed economies, banking is among the most regulated and supervised sectors. While 'regulation' and 'supervision' are often used interchangeably, these two activities are distinct. Banking supervision is a complement to regulation, but its scope is much broader than simply ensuring that an institution is in compliance with regulation. Despite the importance of supervision, information about it is often limited, both because of the heavy reliance upon banks' confidential information and because many supervisory activities and actions are themselves confidential. In a recently ...
Are Stress Tests Still Informative?
Since the height of the financial crisis, each year the Federal Reserve has disclosed the results of its stress tests, and stress testing has become ?business as usual? in the U.S. banking industry. In this post, we assess whether market participants find supervisory stress test disclosures informative. After half a decade, do the disclosures still contain information that the market finds valuable?
Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness
Last month the New York Fed held a conference on supervising large, complex financial institutions. The event featured presentations of empirical and theoretical research by economists here, commentary by academic researchers, and panel discussions with policymakers and senior supervisors. The conference was motivated by the recognition that supervision is distinct from regulation, but that the difference between them is often not well understood. The discussion focused on defining objectives for supervising the large, complex financial companies that figure so prominently in our financial ...
How Does Supervision Affect Banks?
Supervisors monitor banks to assess the banks? compliance with rules and regulations but also to ensure that they engage in safe and sound practices (see our earlier post What Do Banking Supervisors Do?). Much of the work that bank supervisors do is behind the scenes and therefore difficult for outsiders to measure. In particular, it is difficult to know what impact, if any, supervisors have on the behavior of banks. In this post, we describe a new Staff Report in which we attempt to measure the impact that supervision has on bank performance. Does more attention by supervisors lead to lower ...
A Peek behind the Curtain of Bank Supervision
Since the financial crisis, bank regulatory and supervisory policies have changed dramatically both in the United States (Dodd-Frank Wall Street Reform and Consumer Protection Act) and abroad (Third Basel Accord). While these shifts have occasioned much debate, the discussion surrounding supervision remains limited because most supervisory activity? both the amount of supervisory attention and the demands for corrective action by supervisors?is confidential. Drawing on our recent staff report ?Parsing the Content of Bank Supervision,? this post provides a peek behind the scenes of bank ...
Remarks at the Economic Press Briefing on Homeownership and Housing Wealth, Federal Reserve Bank of New York, New York City
Remarks at the Economic Press Briefing on Homeownership and Housing Wealth, Federal Reserve Bank of New York, New York City.
Structural and cyclical macroprudential objectives in supervisory stress testing: remarks at The Effects of Post-Crisis Banking Reforms, Federal Reserve Bank of New York, New York City
Remarks at The Effects of Post-Crisis Banking Reforms, Federal Reserve Bank of New York, New York City.
Opening Remarks: Heterogeneity Blog Series Webinar
Remarks for the Heterogeneity Blog Series Webinar, Federal Reserve Bank of New York, New York City.