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2016 | OriginalPaper | Buchkapitel

10. Financial Regulatory Reform: A Mid-term Assessment from an Emerging Market Perspective

verfasst von : Alok Sheel, Meeta Ganguly

Erschienen in: Global Economic Cooperation

Verlag: Springer India

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Abstract

The recent global financial crisis initiated the most far-reaching and comprehensive reform of financial regulation in advanced economies since the days of the Great Depression. The international initiative under the aegis of the G20 was supplemented by major national level initiatives in major jurisdictions. The paper discusses the progress of what it considers to be the core reforms of Basel III, shadow banking, ring-fencing and financial institutions deemed too big to fail. It goes on to discuss the impact and relevance of these reforms in emerging markets who, while willing participants in the reform process, have so far not been actively engaged in the global debate, perhaps since their financial systems are fundamentally different.

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Vorheriges Kapitel Third Industrial Revolution and India’s Approach to Sustainable Energy Development

Nächstes Kapitel Cross-Border Spillovers of Financial Stress Shocks: Evidence and Policy Implications

According to the Congressional testimony of July 2007 testimony of Ben Bernanke, Chairman of the US Federal Reserve at the time, sub-prime losses, though significant, were estimated at just $50–100 billion. http://money.cnn.com/2007/07/19/news/economy/bernanke/index.htm?postversion=2007071914. At that time the size of the US residential mortgage market was estimated at around $10 trillion, with the sub-prime component at just 12 % of the total. Weaver, Karen, The Sub-prime Crisis: A Synopsis. Deutsche Bank, Global Securitisation and Structured Finance 2008, Chapter 4, pp. 22–31. http://www.globalsecuritisation.com/08_gbp/gbp_gssf08_022_031_db_us_subprm.pdf.

Asset bubbles involve mispricing of assets over an extended period, and are preceded by a period of low volatility when financing is easily accessible, speculators are very active and there is a prominent buildup of leverage. The bubble bursts with the arrival of the ‘Minsky moment’ leading to distress sale by speculators as they fail to roll over short-term debt, eventually resulting in systemic collapse of asset prices through fire sales as the value of assets used as collateral for the borrowing also falls. Brunnermeier Markus and Oehmke Martin, “Bubbles, Financial Crises, and Systemic risk” NBER working paper # 18398, September 2012, http://www.nber.org/papers/w18398.pdf. Nobuhiro Kiyotaki and John Moore, “Credit Cycles”, Journal of Political Economy, 1997, vol. 105, no. 2. http://econweb.ucsd.edu/~grondina/pdfs/Econ211_KiyotakiMoore1997.pdf.

In a paper published in April 2008, the authors had specifically anticipated nine problems with the western financial system that needed to be fixed, namely, capital adequacy norms, strengthening the existing safeguards to address maturity mismatches, the banking emolument structure, integrity of credit quality, consumer protection, shadow banking, mark to market, credit rating agencies and monetary policy. Alok Sheel and Meeta Ganguly, “The Rise and Fall of Securitized Structured Finance?” (with Meeta Ganguly), Economic and Political Weekly, vol. 43, no. 16, April 19–April 25, 2008. pp. 44–51. http://www.epw.in/perspectives/rise-and-fall-securitised-structured-finance.html.

G20 Working Groups 1 and 2. http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/20_010409.pdf. http://www.astrid-online.it/Dossier--d1/Documenti/The-London/G20_wg2_27_03_09.pdf.

A brief summary of the Dodd Frank Wall Street reform and Consumer Protection Act is available at http://www.banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf.

A brief summary of The Independent Commission on Banking: The Vickers Report is available in the House of Commons Library, SNBT 6171 by Timothy Edmonds, dated January 3, 2013. www.parliament.uk/briefing-papers/sn06171.pdf.

A brief summary of the main recommendations of the High Level Expert Group on Reforming the Structure of the EU Banking Sector is available in Tom Burgis, The Liikanen Report Decoded, Financial Times, October 2, 2012, http://www.ft.com/intl/cms/s/0/0ff0b3a4-0c8a-11e2-a73c-00144feabdc0.html#axzz2h1uncatz.

Douwe Miedema, Regulators push for 6 % leverage ratio for banks: Bloomberg, Reuters article dated June 21, 2013. http://www.reuters.com/article/2013/06/21/us-banks-regulation-capitalidUSBRE95K0R220130621.

JP Morgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street. It needs to be recognized, however, that under US GAAP banks can net off derivative exposure while calculating the leverage ratio, unlike under IFRS rules and BASEL III in Europe. It is therefore not clear whether the new US ratio would be effectively higher in all cases. Gina Chon and Tom Braithwaite, Biggest US banks forced to hold $68 billion in extra capital, Financial Times, April 8, 2014. http://www.ft.com/intl/cms/s/0/a8fc5db6-bf47-11e3-b924-00144feabdc0.html#axzz2yRJ07hfr.

BCBS’s latest issue of final standards for NSFR in October 2014 has been the cause of friction between banks and regulators as the revised norms suggest changes in required stable funding (RSF) for inter-bank short term exposures, equities, derivatives and assets posted as margins. A higher multiplier factor like say 50 % RSF was assigned in case of repo trades, where the bank was the lender. This put significant pressure as capital and funding requirement increased. This multiplier factor is now reduced to 10 %. A conservative NSFR approach for equity market transactions undertaken by banks will significantly increase the cost of equity trades and also curtail their participation. Banks support/undertake several critical functions that are vital for vibrant performance of equity markets. Fleming Sam, “Banks say funding rules will make key equities trades more expensive” Financial Times, September 1, 2014. http://www.ft.com/cms/s/0/b05a87da-31f3-11e4-b929-00144feabdc0.html#axzz3QryA5sAQ.

Alberto Gallo, Taking the Capital out of Capitalism, Wall Street Journal, January 15, 2014. http://online.wsj.com/news/articles/SB10001424052702304149404579322353754599412. Christopher Thompson, hit Europe repo market, Financial Times, February 6, 2014. http://www.ft.com/intl/cms/s/0/4f1f6ca8-8f3a-11e3-be85-00144feab7de.html#axzz2xcp93B7Z. Daniel Shafer, Regulation pushes banks on to a riskier path, Financial Times, August 5, 2013. http://www.ft.com/intl/cms/s/0/6f14e23e-fdc4-11e2-8785-00144feabdc0.html#axzz2h1uncatz.

Shearman and Sterling, LLP, Basel III Framework: The Leverage Ratio, February 5, 2014, http://www.shearman.com/~/media/Files/NewsInsights/Publications/2014/02/BaselIIIFrameworkTheLeverageRatioFIAFR050214.pdf.

Eavis Peter, “With new capital rule, Fed nudges big banks to shrink”, New York Times, December 9, 2014. http://dealbook.nytimes.com/2014/12/09/with-new-capital-rule-fed-nudges-big-banks-to-shrink/?_r=1 The European financial structure characterised by relatively small players in the corporate bond market and mortgage finance, could see significant “credit constrained pain” inflicted on mortgage and corporate borrowers as European banks may need to shrink their asset base to comply with the Basel III norms. A smaller asset base while keeping capital constant will immediately improve leverage ratio. A higher leverage ratio implies a self-imposed cap by banks on borrowing and lending thereby hindering profitability. Samuels Simon, Withering regulations will make for shrivelled banks, Financial Times, January 13, 2015. http://www.ft.com/cms/s/0/346cbe4c-9a79-11e4-8426-00144feabdc0.html#axzz3PAfmlWx6.

McKinsey Global Institute, Financial Globalization: Retreat or Reset? Global Capital Markets 2013, March 2013, http://www.mckinsey.com/~/media/McKinsey/dotcom/Insights%20and%20pubs/MGI/Research/Financial%20Markets/Financial%20globalization/MGI_Financial_globalization_Full_report_Mar2013.ashx. Rijckeghem Van Caroline and Mauro Beatrice, Financial Deglobalization: Is The World Getting Smaller? September, 2013. http://www.econ.boun.edu.tr/content/wp/EC2013_14.pdf.

Brooke Masters, Shadow banking surpasses pre-crisis level, Financial Times, October 27, 2011. http://www.ft.com/intl/cms/s/0/39c6a414-00b9-11e1-930b-00144feabdc0.html#axzz2h1uncatz. Anne-Sylvaine Chassaney and Henny Sender, Finance: Forced into the Shadows, Financial Times, June 6, 2013. http://www.ft.com/intl/cms/s/0/a0984be0-ce88-11e2-8e16-00144feab7de.html#axzz2h1uncatz. Tom Braithwaite, Dimon warns regulation will push credit costs higher, Financial Times, April 9, 2014. http://www.ft.com/intl/cms/s/0/c5bff9cc-c027-11e3-bfbc-00144feabdc0.html?siteedition=intl#axzz2yRJ07hfr.

Paul McCulley, Make shadow banks safe and private money sound, Financial Times, June 16, 2014, http://www.ft.com/intl/cms/s/0/f5b30bce-f321-11e3-a3f8-00144feabdc0.html?siteedition=intl#axzz34zaoUUix.

In an influential work, Admati and Hellwig have made a persuasive case for banks being mandated a much higher capital ratio of 20–30 %, as was the case till the early twentieth century, before deposit insurance and implicit sovereign guarantees created new moral hazards by which much lower ratios became acceptable to investors on account of transfer of risks to the tax-payer. They also argue that higher capital norms on their own will not affect credit off take and, with a higher equity stake, bank owners would adopt more prudent lending practices. Anat Admati and Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It, March, 2013.

It is for this reason that Sheila Bair, former Chairman of the US Federal Deposit Insurance Commission, has been consistently critical of mark-to-market accounting. See her interview in Forbes Magazine, August 2, 2010. http://www.forbes.com/2010/07/30/bair-lehman-bank-failure-intelligent-investing-fdic.html. According to FSB’s Global Shadow Banking Monitoring Report, published on Nov 14th, 2013, the total size of the shadow banking system in the Euro nations and 20 other jurisdictions, including US and UK, rose rapidly from $26 trillion in 2002 to a peak of $62 trillion in 2007, before declining slightly to $59 billion in 2008, only to rebound strongly to $71 trillion in 2012, or roughly equal to nominal global GDP. The share of shadow banking in financial intermediation in these countries was 27 % in 2007 and 24 % in 2012. http://www.financialstabilityboard.org/publications/r_131114.pdf.

Brooke Masters, IOSCO drafts guidelines after Libor scandal, Financial Times, April 9, 2013. http://www.ft.com/intl/cms/s/0/1c71c518-a132-11e2-bae1-00144feabdc0.html#axzz2yw3u5tZB.

Reinhart, Carmen and Rogoff, Kenneth, This Time is Different: Eight Centuries of Financial Folly. Princeton University Press, 2011. Kindleberger, Charles P and Aliber, Robert Z, Manias, Panics, and Crashes. A History of Financial Crises. Fifth Edition, John Wiley and Sons, Inc. 2005.

Bezemer, Dick, Big finance is a problem, not an industry to be nurtured, Financial Times, November 3, 2013. http://www.ft.com/intl/cms/s/0/10c43a5a-4300-11e3-8350-00144feabdc0.html?siteedition=intl#axzz2ymsnoDq0. This issue has also been pointedly flagged recently by Lord Adair Turner, former Chairman of the UK Financial Services Authority. Adair Turner, Too Much of the Wrong Sort of Capital, Conference on Capital Management and Macro-prudential Regulation for Financial Stability and Growth, Centre for Advanced Financial Research and Learning (CAFRAL) and Reserve Bank of India, New Delhi, January 13, 2014. http://www.cafral.org.in/sfControl/content/DocumentFile/117201484504PM_IPD1.pdf.

In other words it does not take a ‘balance sheet’ view of the economic system that is necessary to prevent the build up of bubbles that ultimately lead to financial crises. Caruana, James, Global economic and financial challenges: A Tale of Two Views Bank for International Settlements, April 9, 2014. http://www.bis.org/speeches/sp140409.pdf.

Cecchetti, Stephen G and Kharroubi, Reassessing the Impact of Finance on Growth, in Mohanty, Deepak ed., Monetary Policy, Sovereign Debt and Financial Stability. The New Trilemma. Foundation Books and Reserve Bank of India, 2014.

Nick Timiraos, Five Years Later, Fannie Mae, Freddie Mac Remain Unfinished Business, The Wall Street Journal, Sept. 6, 2013, http://online.wsj.com/article/SB10001424127887323423804579022672911329450.html. Karen Croxson, Susan Lund and Charles Roxburgh, The Working Out of Debt, Mckinsey Global Institute, Mckinsey Quarterly, Jan. 2012. https://www.mckinseyquarterly.com/Working_out_of_debt_2914.

Gillian Tett, Debt impasse exposes Achilles’ heel of Finance, Financial Times, October 11, 2013. http://www.ft.com/intl/cms/s/0/2fa2f0ec-31c1-11e3-a16d- 00144feab7de.html?siteedition = intl#axzz2hgYD7Ejl.

Claessens, Stijn and Kodres, Laura, The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions, IMF Working Paper # 14/46, March 2014. http://www.imf.org/external/pubs/ft/wp/2014/wp1446.pdf.

Financial Stability Board, Strengthening Oversight and Regulation of Shadow Banking. An Overview of Policy Recommendations. August 29, 2013. http://www.financialstabilityboard.org/publications/r_130829a.pdf.

Title 1, Section 111 of the Dodd Frank Act authorized the creation of FSOC which is empowered (vide section 113 of the Act) to regulate any financial institutions, that it declares systemically important. This authority has already been exercised, and AIG, Prudential Financial and GE Capital have been declared as non-bank SIFIs to date. https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf.

JP Morgan issued bad quality mortgages and sold these off as MBS. Five years after the crisis it has been penalised for this with a fine of $13 billion, one of the largest settlements so far connected to the financial crisis, Devlin Barrett and Dan Fitzpatrick, J.P.Morgan, U.S Settle for $13 Billion, The Wall Street Journal, Nov, 19, 2013. http://online.wsj.com/news/articles/SB10001424052702304439804579207701974094982.

“Dredging Wall Street’s dark pools”, Financial Times, June 26, 2014. http://www.ft.com/intl/cms/s/0/5c05f9da-fd23-11e3-bc93-00144feab7de.html#axzz36V77Z7vi.

“IOSCO principles of addressing dark liquidity”. http://www.iosco.org/news/pdf/IOSCONEWS210.pdf, May 20, 2011.

UNCTAD report, “Don’t blame the physical markets: Financialization is the root cause of oil and commodity price volatility”, Policy brief, September, 2012. https://www.unctad.org/en/PublicationsLibrary/presspb2012d1_en.pdf.

Tett Gillian, “Finance can cope with cheap oil”, Financial Times, January 15, 2015. http://www.ft.com/cms/s/0/f3a430a6-9cbd-11e4-971b-00144feabdc0.html.

Sam Fleming, Shadow banking nears pre-crisis peak, Financial Times October 30, 2014. http://www.ft.com/intl/cms/s/0/71f5fd1e-6045-11e4-98e6-00144feabdc0.html?siteedition=intl#axzz3HiBqbOe9.

Tett, Gillian, The real titans of finance are no longer in the banks. Financial Times, February 13, 2014. http://www.ft.com/intl/cms/s/0/28a6bcb0-93e6-11e3-a0e1-00144feab7de.html#axzz2ymsnoDq0. FT Reporters, Hedge fund chiefs and former bankers enter the shadows, Financial Times, June 19, 2014, http://www.ft.com/intl/cms/s/0/f14991aa-f7a6-11e3-b2cf-00144feabdc0.html?siteedition=intl#axzz34zaoUUix.

IMF Global Financial Stability Report, October 2014, Chapter 2- Shadow banking around the globe: How large, and how risky?, http://www.imf.org/external/pubs/ft/gfsr/2014/02/pdf/c2.pdf.

Simon Samuels, Withering regulations will make for shriveled banks, Financial Times, January 13, 2015. http://www.ft.com/intl/cms/s/0/346cbe4c-9a79-11e4-8426-00144feabdc0.html?siteedition=intl#axzz3OhltPntv.

Hannon Paul, “Europe Should Regulate Shadow Banking, Says European Central Bank’s Vitor Constancio”, The Wall Street Journal, October 20, 2014. http://www.wsj.com/articles/europe-should-regulate-shadowbanking-says-european-central-banks-vitor-constancio-1413809526

Paul McCulley Make shadow banks safe and private money sound. Financial Times, June 16, 2014. http://www.ft.com/cms/s/0/f5b30bce-f321-11e3-a3f8-00144feabdc0.html#axzz36JUlOG3k.

Strengthening Oversight and Regulation of Shadow Banking, An Overview of Policy Recommendations, Financial Stability Board, August 29, 2013. http://www.financialstabilityboard.org/publications/r_130829a.pdf.

Financial Stability Board, Strengthening Oversight and Regulation of Shadow Banking. Regulatory Framework for hair-cuts on non-centrally cleared securities transactions. October 14, 2014.

The Liikanen Review. Into the Ring, The Economist, October 6, 2012. http://www.economist.com/node/21564233.

Caplen Brian, “Ring-fencing raises fresh challenges for UK banks”, The Banker, January 6, 2015 http://www.thebanker.com/Editor-s-Blog/Ring-fencing-raises-fresh-challenges-for-UK-banks?utm_campaign=Copy+of+The+Banker+e-news+13th+January+Regulation&utm_source=emailCampaign&utm_medium=email&utm_content.

In exercise of its powers, FSOC assigned SiFI status to three non-bank financial companies, i.e. AIG, Prudential Financial and GE Capital Corporation Inc. Several Financial market utilities (mostly clearing corporations) were also assigned SIFI Status. For a complete list of FMU-SIFI, see http://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx.

Understanding The Fed's Proposed Capital Surcharges For The Largest U.S. Banks”, Forbes, December 11, 2014, http://www.forbes.com/sites/greatspeculations/2014/12/11/understanding-the-feds-proposed-capital-surcharges-for-the-largest-u-s-banks/ Tracy Ryan, Mcgrane Victoria and Baer Justin, “Fed lifts capital requirements for big banks”, The Wall Street Journal, July 20, 2015, http://www.wsj.com/articles/fed-set-to-finalize-amount-of-capital-big-banks-must-maintain-1437410401.

The Japanese experience in the 1990s is instructive in this regard. Akihiro, Kanaya and Woo, David, The Japanese Banking Crisis of the 1990 s: Sources and Lessons. IMF Working Paper WP/00/07 January 2000. http://www.imf.org/external/pubs/ft/wp/2000/wp0007.pdf.

In March 2013 Cyprus confiscated around 10 % of all deposits in Cyprus banks as part of a €10 billion Euro zone bail-out.

Sheila Bair,‘ No more bank bail-outs’ can be an empty slogan, Financial Times, August 7, 2014.

IMF, Global Financial Stability Report March, 2014, Chapter 3 http://www.imf.org/External/Pubs/FT/GFSR/2014/01/pdf/c3.pdf.

The United Kingdom is part of the wider European Union, but not a member of the Euro Zone, and so its treasury does have the central bank backstop to bail out its banks, albeit at a great macro-economic cost.

Is Europe over banked” European Systemic Risk Board, June, 2014. https://www.esrb.europa.eu/pub/pdf/asc/Reports_ASC_4_1406.pdf.

Mundel, R.A, International Economics. New York: Macmillan, 1968. A Theory of Optimum Currency Areas. pp. 177–186. http://www.columbia.edu/~ram15/ie/.

Katy Barnato, Chart of the Day, Too big to fail has not gone away, CNBC article, January 30, 2014. http://www.cnbc.com/id/101376353.

Martin Wolf, Europe’s banks are too feeble to spur growth, Financial Times, October 28, 2014. http://www.ft.com/intl/cms/s/0/cb939e1a-5dc7-11e4-897f-00144feabdc0.html#axzz3HiBqbOe9 Tom Braithwaite, Alternative bank tests find that French banks are weakest in Europe. Financial Times, October 27, 2014. http://www.ft.com/intl/cms/s/0/fad2c772-5dd7-11e4-b7a2-00144feabdc0.html?siteedition=intl#axzz3HiBqbOe9 Viral Acharya and Sascha Steffen, Falling short of expectations? Stress testing the European banking system. January 15, 2014. http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/pdfs/AQR%20stress%20tests%20-%2015%20Jan%202014.pdf.

Phakawa, Jeasakul, Cheng, Lim Hoon and Lundback, Erik, Why Was Asia Resilient? Lessons from the Past and for the Future, IMF Working Paper # 14/38, February 2014. http://www.imf.org/external/pubs/ft/wp/2014/wp1438.pdf.

Instruments typically used by EMEs included Counter-cyclical capital buffer (IMF recommendation as the first line of defence), loan-to-value caps (LTV’s), taxes/levies (sector specific risk weights, high reserve requirements, loan loss provisioning), and constraints on the composition of assets and liabilities of financial institutions. Moreno Ramon, Policymaking from a ‘Macro-prudential’ Perspective in Emerging Market Economies, Bank for International Settlements, January, 2011, http://www.bis.org/publ/work336.htm.

Financial globalization: Reset or Retreat? Global capital markets 2013, Mckinsey Global Institute, March 2013. http://www.mckinsey.com/insights/global_capital_markets/financial_globalization.

See fn.21.

Report to G20 Leaders on monitoring implementation of Basel III regulatory reforms, Basel Committee on Banking Supervision, August, 2013. https://www.bis.org/publ/bcbs260.pdf.

Asia’s Warning About Basel Bonds, The Wall Street Journal, October 9, 2013. http://online.wsj.com/article/SB10001424052702303382004579124773181520290.html.

The Reserve Bank of India recently offered one year’s extension to Indian banks to implement Basel III norms. The norms will now be phased in from March, 2019 instead of March 2018, on par with the international timeframe. http://rbi.org.in/Scripts/NotificationUser.aspx?Mode=0&Id=8806.

Sherpa, Dawa, Shadow Banking in India and China. Causes and Consequences. Economic and Political Weekly, vol. 48, no. 43, October 26, 2013. In India, Non-Banking Financial Companies (NBFCs) account for about only 10 % of total credit.

McKinnon, Ronald I. (1973). Money and Capital in Economic Development, Washington, DC: Brookings Institution. Shaw, Edward (1973). Financial Deepening in Economic Development (New York: Oxford University Press). These works by McKinnon and Shaw have been seminal in both defining and outlining financial repression in financial markets. More recently Hernando de Soto has underscored the link between property rights and access to formal credit markets. De Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books.

Rangarajan, C, Report of the Committee on Financial Inclusion, February, 2008. http://pib.nic.in/newsite/erelease.aspx?relid=35141.

Home loans delinquency in India is very low, at under 4 %. National Housing Bank, Report on Trend and Progress of Housing in India 2012. http://www.nhb.org.in/Publications/Report-Trend-and-Progress-ofHousing-in-India-2012.pdf. Another reason why housing loan delinquency is low in India is because the borrower tends to collusively/deliberately declare a lower value for the underlying asset in a bid to dodge taxes. This, ironically, makes the loan safer, as the borrower is constrained to bring in more equity from the shadow economy. For estimates of the size of India’s shadow economy see Black Money: White Paper. Ministry of Finance, Department of Revenue, Central Board of Direct Taxes, New Delhi, May 2012. http://finmin.nic.in/reports/WhitePaper_BackMoney2012.pdf.

Acharya, Viral V, Khandwala, Hemal and Oncu, T Sabri, The Growth of a Shadow Banking System in Emerging Markets: Evidence from India, http://www.cafral.org.in/sfControl/content/Speech/1118201381240PMPaperTheGrowthofaShadowBankingSysteminEmergingMarkets.pdf.

De Soto, op.cit; Rangarajan op.cit.

Jamil Anderlini, China bank regulators caught in turf war, Financial Times, April 9, 2014. http://www.ft.com/intl/cms/s/0/0eb56cf4-bfc7-11e3-b6e8-00144feabdc0.html.

Sam Fleming, Shadow banking nears pre-crisis peak, Financial Times October 30, 2014. Gabriel Wildau, Sliced and diced loans take-off in China, Financial Times, February 19, 2015.

Citibank, HSBC and Standard Chartered, the three major foreign banks in India with a strong retail presence, took major hits on their consumer banking portfolios after 2008 with rising domestic defaults. However, these banks cleared up the mess and focussed on institutional lending. Since 2009 there has been a steady growth in the capital levels of foreign banks of around 14–15 % year-on-year between 2009 and 2013. Barclays and Royal Bank of Scotland, which took similar hits on their consumer and retail banking portfolios during this period, and whose parent banks also faced the prospects of collapse, however exited from retail banking altogether. Arnold Martin and Dunkley Emma, RBS becomes a shadow of its former self, Financial Times, January 13, 2015, http://www.ft.com/cms/s/0/a2f39e78-9b1c-11e4-882d-00144feabdc0.html#axzz3PZ5GzNiN Some banks like Morgan Stanley and UBS have given up their bank licenses in India. What is to be noted is that banks based out of US, Europe and UK were severely impacted by the financial crisis and the policy response forced them to raise capital and de-leverage. As a result, these giant organisations with a wide transatlantic presence took a strategic decision to review their investments in non-core segments/markets and withdraw partially or completely where deemed necessary. The pain for foreign banks in India has been the retail arm which has been floundering thanks to a failing macro environment and job losses and it is from this segment that several foreign banks have sought exit (Collated from Reports on Trend and Progress of Banking in India over the last 5 years) http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/04CTP201113F.pdf.

A case in point being the Reserve Bank of India’s proposal for setting up wholly owned subsidiaries (WOS) by foreign banks in India, http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2758.

Nathaniel Popper and Peter Eavis, New rules spur a humbling overhaul of Wall Street banks, The New York Times, February 19, 2015.

Satyajit Das, New rules only lower bank risk in theory, Financial Times, April 27, 2015.

Michael Skapinker, Executive Pay: The battle to align risks and rewards, Financial Times, April 30, 2015.

Barney Jopson and Sam Fleming, Ex-Fed chief calls for regulatory revamp, Financial Times, April 20, 2015.

Jenkins, Robert, Regulators’ attempt to hold back the financial tide are futile, Financial Express, April 16, 2014.

5 Years After The Crisis, Big Banks Are Bigger Than Ever (CHART) The Huffington Post, October 9, 2013, http://www.huffingtonpost.com/2013/09/10/biggest-banks-even-bigger_n_3900363.html.

It is in this light that one should view the arguments of Admati and Hellwig (footnote 15) and the recent market guidance of the Fed Chair regarding the likelihood of additional capital buffers, over and above the Basel III requirements and the higher leverage ratios for US banks, for the biggest US banks to feed the economy and also to secure itself from a possible domino collapse of its shadow counterparts as regulation for the latter is still work in progress. Goldstein, Steve, Fed boss warns capital standards for biggest banks may have to go up more. Market Watch, April 15, 2014. http://www.marketwatch.com/story/yellen-says-big-banks-may-needmore-capital-2014-04-15.

Satyajit Das, The credit bubble redux. Business Standard, July 4, 2014. Neil Irwin, Welcome to the Everything Boom, or Maybe Everything Bubble, The New York Times, July 7, 2014. http://www.nytimes.com/2014/07/08/upshot/welcome-to-the-everything-boom-or-maybe-theeverythingbubble.html?emc=edit_th_20140708&nl=todaysheadlines&nlid=67255145&_r=0.

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Thus Claudio Borio of the Bank for International Settlements has argued that there is a distinct fin ancial cycle, in addition to the business cycle, and that central banks need to take stock of the interface between the two while setting monetary policies. Borio, Claudio, The Financial Cycle and Macro-economics: What Have We Learnt? BIS Working Paper #395, December 2012. http://www.bis.org/publ/work395.pdf. In a more recent influential paper Helene Rey argues that the monetary policies of major central banks are what drive global financial cycles. Rey, Helene, Dilemma not Trilemma, The Global Financial Cycle and Monetary Independence, London Business School, CEPR and NBER, August 2013. http://www.voxeu.org/article/dilemma-not-trilemma-global-financial-cycle-and-monetary-policyindependence.

The current thinking amongst central bankers continues to be their role is to focus on ‘price stability’, and that it is for macro-prudential policies to ensure financial stability. Fed Chair, Janet Yellen Speech at IMF Conference, Washington, DC July 2, 2014. http://www.federalreserve.gov/newsevents/speech/yellen20140702a.html.

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Titel: Financial Regulatory Reform: A Mid-term Assessment from an Emerging Market Perspective
verfasst von: Alok Sheel
Meeta Ganguly
Verlag: Springer India
Buch: Global Economic Cooperation
Print ISBN: 978-81-322-2696-3

Electronic ISBN: 978-81-322-2698-7

Copyright-Jahr: 2016
DOI: https://doi.org/10.1007/978-81-322-2698-7_10