FedFin has undertaken extensive work since 2011 analyzing the cumulative costs of the new regulatory framework—work now informed by a seminal report from the Bank for International Settlements that poses critical strategic and policy challenges. FedFin’s proprietary work assesses these strategic issues for individual firms, assessing the costs of current and prospective requirements for individual business lines and/or a franchise as a whole. Our policy work, conducted over FedFin’s name, lays out the implications we believe these strategic drivers have for the structure and stability of financial markets. Our most recent work in this area may be found here. We are pleased, but also deeply worried, by the new Bank for International Settlements paper that finds an array of possible prudential and monetary-policy problems as the new rules come into full force.
FedFin clients earlier this week received an in-depth analysis of the year-long study by the BIS’s Committee on the Global Financial System. Reflecting the strong commitment of central bankers to the post-crisis framework, the report hedges many of its bets. Nonetheless, its analysis is sobering, comprising as it does the first cumulative-impact assessment of the global leverage, liquidity, credit-exposure, and macroprudential rules. The Basel III leverage standard drives many of the adverse consequences, especially for monetary-policy execution; we note that these effects are likely to be considerably larger in the U.S. due to tougher leverage and liquidity rules here for the largest banks.
We also note that we do not think this report’s conclusion will lead regulators—especially in the U.S.—to roll back the leverage or the liquidity-coverage standards. However, we do expect it to temper action around the world on the net stable funding ratio, especially with regard to matched-book repos, and for final FRB action on the single-counterparty credit limits.
The report also adds more force to those at the FRB who believe it essential for the central bank to become a market-maker of last resort, making the constraints here imposed on the FRB by pending Warren-Vitter legislation all the more frightening to the Fed and all the more urgent to critics within and beyond the System. We expect the report also to be taken very, very seriously as the FRB begins to reduce its portfolio to normalize interest rates. CGFS analytics show that large U.S. banks will have limited capacity to handle asset sales, increasing the FRB’s need to let its book run off and exacerbating market worries about USG liquidity and supply.
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