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2018 | OriginalPaper | Buchkapitel

7. Why Bank Separation Must Complement the Leverage Ratio

verfasst von : Adrian Blundell-Wignall, Paul Atkinson, Caroline Roulet

Erschienen in: Globalisation and Finance at the Crossroads

Verlag: Springer International Publishing

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Abstract

The authors’ empirical evidence is used to show that there is no reasonable capital rule that can protect the financial system in the face of events like 2007–2008: large interconnected banks would need 4 times the amount of capital to avoid default without government aid. They argue that separating deposit-guaranteed banks from investment banking, while maintaining a leverage ratio, is the policy mix supported by empirical evidence. They suggest the best threshold for separation should be derivatives exposure (with no netting) at or above 10%. They compare their own legal separation proposal to the Volcker rule, the UK Vickers rule and to those European proposals that were quietly dropped to please banks. They rebut 5 criticisms of separation proposals and review the 2017 Mnuchin Treasury modification of the Volcker Rule.

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Vorheriges Kapitel The Determinants of the Riskiness of Banks

Nächstes Kapitel Assessing the Finalised Basel III Banking Regulation Regime

With the elasticities shown in Fig. 6.2, it seems likely that no reasonable cut in leverage would have sufficient impact to offset that of a large rise in derivatives as a share of assets.

See UK Government (2011b); See section 619 of Dodd-Frank in US Congress (2010); Liikanen, E. (2012); and FINMA (2013).

For example, see Ötker-Robe et al. (2011), p. 2.

See Duffie (2012) for the former, and Goodhart (2013) for the latter.

See Blundell-Wignall et al. (2013a). The DTD model of equation is first solved as in the appendix to Chapter 6. The DTD is then set to 3.0, and (for maturity of T = 1) target bank capital K* is calculated by solving for the V/D ratio that satisfies that condition for any bank below the critical 3.0 standard deviation threshold: i.e. 3.0 $\sigma_{t} - \left( {r_{f} - \frac{{\sigma_{t}^{2} }}{2}} \right)\, = \,\log \left( {\frac{{V_{t} }}{{D_{t} }}} \right)\, = \, \propto_{t}$. Given that D = TA − K, where TA is total assets, it is then possible to calculate K* holding σ and V at their original solved values, given the historical observations of TA: $K_{t}^{ * } = {\text{TA}}_{t} - \frac{{V_{t} }}{{{\text{e}}^{{\alpha_{t} }} }}$. The gap K* − K is then computed for each bank and summed over the system. The idea is to see what ex ante amount of extra capital would be needed, without taking into account any subsequent impact on σ and V that an actual injection of K* − K might have on σ, and other variables.

See, for example, OECD (2009).

See Blundell-Wignall et al. (2013b).

The parent may try to use double gearing if permitted: instead of raising $100 in equity, it borrows half as debt. Debt and equity would be invested as ‘equity’ into the subsidiaries, then the rate of return on equity and the leverage ratio could be doubled versus true equity. It is imperative that the concept of capital to which leverage ratio rules apply should be for equity only.

See Brunsden (2017).

The OECD views were solicited by the secretariat of the Commission, see UK Government (2011a).

Consistent with the Duffie (2012) views.

See https://dealbook.nytimes.com/2014/12/12/citigroup-becomes-the-fall-guy-in-the-spending-bill-battle/.

An exception is structured finance swaps (ABS swaps). See Warren (2015).

For example, banks could not accept that market making was to be moved to a subsidiary.

See FINMA (2013).

Australian Government. (2007). Financial Sector Legislation Ammendment (Restructures) Bill 2007, Federal Register of Legislation, Available at: https://www.legislation.gov.au/Details/C2007B00112.

Blundell-Wignall, A. Atkinson, P. E., & Roulet, C. (2013a). “Bank Business Models and the Separation Issue”. OECD Journal, Financial Market Trends, 2012(2), 1–23.

Blundell-Wignall, A., Atkinson, P. E., & Roulet, C. (2013b). Integration Versus Interdependence and Complexity in Global Trade and Finance in the Post-war Period. In Morten & Gnan (Eds.), 50 Years of Money and Finance: Lessons and Challenges, SUERF 50th Anniversary Volume. Brussels: Larcier.

Brunsden, J. (2017, October 24). European Commission Withdraws Bank Separation Proposal. Financial Times. Available at: https://www.ft.com/content/ddbedcd9-2dea-3b68-b8e2-2e1bc1eda13f.

Duffie, D. (2012). Market Making Under the Proposed Volcker Rule (Working Paper). Stanford University Graduate School of Business. Available at: www.darrellduffie.com/uploads/policy/DuffieVolckerRule.pdf.

FINMA. (2013, July). FINMA Position Paper on the Resolution of Systemically Important Banks, Swiss Financial Market Supervisory Authority (FINMA), Switzerland. Available at: www.finma.ch/e/aktuell/Pages/mm-pos-sanierung-abwicklung-20130807.aspx.

Goodhart, C. A. E. (2013). “The Optimal Financial Structure”, LSE Financial Markets Group Paper Series, Special Paper 220. Available at: http://www.lse.ac.uk/fmg/assets/documents/papers/special-papers/SP220.pdf.

Liikanen, E. (2012, October). High-Level Expert Group on Reforming the Structure of the EU Banking Sector: Final Report. Brussels. Available at: http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/report_en.pdf.

Mnuchin, S. T., & Phillips, C. S. (2017). A Financial System That Creates Economic Opportunities: Banks and Credit Unions. Report to President Donald J. Trump. Executive Order 13772 on Core Principles for Regulating the United States Financial System. US Department of the Treasury, Washington.

OECD. (2009). The Financial Crisis: Reform and Exit Strategies. Paris: OECD. Available at: www.oecd.org/dataoecd/55/47/43091457.pdf.

Ötker-Robe, I. J. Fiechter, J. Surti, M. Hsu, A. O. Santos, A. Ilyina. (2011). “Subsidiaries and Branches: Does One Size Fit All?.” SSRN Electronic Journal. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1805316.

UK Government. (2011a, April). Interim Report: Consultation on Reform Options. Independent Commission on Banking. London. Available at: https://s3-eu-west-1.amazonaws.com/htcdn/Interim-Report-110411.pdf.

UK Government. (2011b, September). Independent Commission on Banking: Final Report Recommendations (Vickers Report). London. Available at: http://webarchive.nationalarchives.gov.uk/20131003105424/https:/hmt-sanctions.s3.amazonaws.com/icb%20final%20report/icb%2520final%2520report%5B1%5D.pdf.

US Congress. (2010). Dodd-Frank Wall Street Reform and Consumer Protection Act (2009). H.R. 4173—111th Congress. Available at: www.govtrack.us/congress/bill.xpd?bill=h111-4173.

Wallis, S. (1997). Financial System Inquiry Final Report. Canberra: Treasury. Available at: http://fsi.treasury.gov.au/content/FinalReport.asp.

Warren, D. R. (2015). Developments in Banking Law. Review of Banking and Financial Law, 34 (pp. 439–450, Section V, on ‘Congress’s Rollback of the Dodd-Frank Swaps Push-Out Rule’).

Titel: Why Bank Separation Must Complement the Leverage Ratio
verfasst von: Adrian Blundell-Wignall
Paul Atkinson
Caroline Roulet
Verlag: Springer International Publishing
Buch: Globalisation and Finance at the Crossroads
Print ISBN: 978-3-319-72675-5

Electronic ISBN: 978-3-319-72676-2

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-72676-2_7