Its been while not posted about the regulatory stuff as in the past I’ve frequently expressed concern that the legacy of Dodd-Frank will be to promote artificial consolidation of the banking industry by driving small banks out of business and making large banks even more “Too Big to Fail.” This is for two reasons.
The first reason would be if Dodd-Frank perpetuates the so-called TBTF subsidy. This is the idea that being designated too big to fail creates an implicit government guarantee for creditors that permits large banks to access capital markets more cheaply than non-TBTF banks. Whether there is a continued subsidy, and if so, how large, seems to be still somewhat undetermined at this point. Continue reading “The Regulatory Burden on Smaller Banks through The Dodd- Frank”
The Bank of England has released two papers on CCPs, which explain loss–allocation rules, and how to balance the costs of default resources with the expected losses.
Paper 19, titled: “Central counterparties and their financial resources—a numerical approach”, maintains that new regulatory standards have required central counterparties to have robust processes in place to mitigate their counterparty credit risk exposures.
“At the same time, the standards allow CCPs to tailor their risk management models. This paper considers how CCPs can optimally determine the relative mix of initial margin and default fund contributions in a stylised setting, by balancing the costs of default resources with the expected losses they protect against,” . Continue reading “Central Counterparty Clearing (CCP) some thoughts from Bank of Englnad”
Derivatives have a long-standing history as financial instruments for managing financial risks stemming from changes in macroeconomic conditions. They thus represent important risk management tools for companies, authorities and financial institutions as they can be used to manage exposure to interest rate, currency, commodity price or other risks. Derivatives range from fully standardized to tailor-made products: fully standardised derivatives are usually traded on exchanges, whereas customised contracts are traded over-the-counter (OTC). Thus, as OTC derivatives markets are generally characterised by flexible and tailor-made products, satisfying the demand for bespoke
Continue reading “Changing landscape of OTC markets due to regulatory requirements in different geographies”
This month McKinsey Quarterly published a standout paper on the regulatory squeeze of the European banks with the concluding remarks that the new rules will lower returns, but banks may be able to regain some lost ground.
The analysis was based on the 2010 financial-year data, assumes that the cumulative regulatory impact expected over the next several years will be realized immediately. The Basel III and new regional and national regulations will help reduce retail banking’s average return on equity (ROE) in Europe’s four largest markets to 6 percent, from about 10—a 41 percent decline.
Interesting to see that fall on ROE in four markets :- Continue reading “European Banks & The Regulatory squeeze”