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Macroprudential policy is still a relatively new policy area ("more art than science"). Unlike monetary policy, it still does not have any tested and robust strategies to follow. Using a novel strategy index, we explore and critically review macroprudential strategy documents published in 30 countries in 2014–2023. The overall results point to fairly high quality of strategies, with low level of heterogeneity in the total score. Most strategy documents were published by central banks responsible for macroprudential policy. The score for strategies in European Union (EU) countries is higher and more homogenous than in non-EU countries. Elements least frequently included in the strategies include challenges for macroprudential policy (like cyber or climate risks) and its interactions with other policy areas. Macroprudential strategies were mostly issued after the credit boom. The results provide relevant policy implications on future revisions of this kind of document. [ABSTRACT FROM AUTHOR]

Despite widespread recognition among financial regulators and central banks that climate change may threaten financial stability, the causes and consequences of climate-related systemic financial risk remain underexplored. Stress testing has emerged as one of the most prevalent regulatory tools for addressing climate-related financial risks, and this article analyzes the role of stress testing in mitigating the effects of climate change on financial stability. Specifically, it synthesizes the multi-disciplinary literature on climate-related financial risk, financial stability, and stress testing to develop a framework for evaluating the capacity and effectiveness of stress tests for measuring and managing climate-related systemic financial risk. It then takes stock of climate stress testing proposals and early practices globally and applies the evaluative framework in comparative case studies of the Bank of England and US Federal Reserve. It concludes that stress testing can support the measurement and management of both microprudential and macroprudential climate-related financial risks, but the benefits of stress testing vis-à-vis climate change and financial stability are largely unrealized. Addressing the disconnect between climate stress testing policy motivation and implementation as well as the divergence between leading and lagging jurisdictions will require both interagency and international regulatory cooperation. [ABSTRACT FROM AUTHOR]

Shareholders are the residual claimants on the assets of a corporation. Creditors are fixed claimants whose interest lies in the solvency of the borrower. Consequently, shareholders are usually thought to have optimal incentives to maximise the value of the corporation. The article challenges this common wisdom and proposes to reform bank governance granting (some) ex-ante governance rights to bank creditors. This aims at fine-tuning bank governance and incumbent substantive regulation, in particular the resolution framework for distressed banks, and enhances the quality of bank decision-making in terms of risk-taking. At the same time, the proposed reform should increase the ex-ante credibility of resolution. The second part of the article operationalises this construct focusing on the specific case of the European Banking Union and discusses the design of the governance status of bail-inable creditors. The analysis demonstrates how bail-inable creditors can correct for shareholders' perverse incentives and make debt governance work in banking. The policy proposal advanced in the paper would complement substantive regulation and prudential oversight. The governance role of creditors has the potential to be particularly helpful in preventing disproportionate risk-taking decisions in good times, when regulatory and supervisory standards are lax and systemic risk piles-up. [ABSTRACT FROM AUTHOR]

ECB officials have recently poured scorn on the notion that the ECB could introduce a central bank digital currency (CBDC) in the Eurozone, with one labelling such an initiative as "economically inefficient and legally untenable." This article assesses the justifications for these claims from legal and economic perspectives. It finds that, based upon prevailing ECB policies and the myriad options available for CBDC design, such claims are flawed. The article further explains that the ECB's reticence to consider the introduction of CBDC may impair the development of payments systems and obstruct financial inclusion. [ABSTRACT FROM AUTHOR]

Cross-border banking presents a unique set of challenges in the EU from the perspective of arranging administrative oversight structures. Structuring cooperation between different EU and national authorities in a way which is conducive to trust-building and mutual engagement is an essential condition for overcoming disintegrative tendencies in the internal market. To assess how the existing EU arrangements fare in this regard in the context of EU resolution law, this article comparatively analyses the different models of multilevel administrative cooperation in the post-crisis EU framework. These are specifically the centralised model of the European Banking Union (Single Resolution Mechanism) and the relatively looser networked model of the resolution colleges. The multilevel cooperation under both models is nuanced given the distinct roles of the national resolution authorities, EU agencies and the differentiated status of non-euro area Member States in the EBU (Croatia, Bulgaria). The article's findings allow to identify specific problems of constitutional nature pertaining to the accountability of administrative cooperation, equality of Member States and the implications of Meroni doctrine's distortive effects. [ABSTRACT FROM AUTHOR]

The present work seeks to rationalize the procyclical movements of credit, deposits and bank leverage, basic elements that justify the existence of macroprudential policies, and the effects of capital requirements on the business cycle and financial stability. For this purpose, we use an extension of the theoretical framework of Bernanke et al. [Handbook of Macroeconomics, Elsevier, New York, pp 1341–1393, 1999], which includes the presence of banks through the existence of a second asymmetry between banks and depositors. This extension allows us to understand the role of bank capital on the business cycle and, in this way, how credit channels and financial stability are affected by the inclusion of capital requirements as has been proposed in the Basel III Agreement. The results suggest that capital requirements act as a significant financial accelerator in the presence of productivity and monetary shocks. In addition, during expansions, banking capital regulation helps not only the real part of the economy perform better but also the financial part, through lesser leverage for entrepreneurs and banks. Our results also suggest that an asymmetric regulation constraint throughout the business cycle is preferable to a fixed one. [ABSTRACT FROM AUTHOR]

Although a number of steps have been taken to reduce the risk of financial stability, some significant weaknesses remain. This paper examines whether stricter regulation of incentive compensation is the missing piece needed to reduce risk to acceptable levels. Unfortunately, this survey of studies on the relationship of risk to bank CEO and bank employee compensation suggests both have some potential but that significant concerns remain in both cases. At this point, we cannot confidently say that compensation regulation is the missing piece. [ABSTRACT FROM AUTHOR]

Throughout his long and distinguished career, David Mayes was concerned with a wide range of subjects. This paper focuses on three of them: on monetary and financial history, on monetary stability, and on financial stability. We use the first of these to open up exploration of the second and third. A relationship is often asserted between monetary and financial stability, but how close and how durable is it? Is it one that holds through a long span of history, or is it contingent on a range of factors and therefore comes and goes? To address this, we use here data exclusively from Britain. [ABSTRACT FROM AUTHOR]

Four major Australian banks span the Australian and New Zealand banking system. Applying the financial trilemma model, this article investigates possible approaches for cooperation in the supervision and resolution of these cross-border banks. The article first reviews the current arrangement in the Trans-Tasman Council of Banking Supervision, which is based on a soft law approach. Next, this article explores a trans-Tasman banking union, which would encompass joint supervision and joint resolution based on burden sharing. The challenge is political. Are the two countries willing to join forces in banking policies and thus give up part of their sovereignty in this field? And can New Zealand, as the smaller one of the two, ensure an effective voice in joint arrangements? [ABSTRACT FROM AUTHOR]

The regulation of short-term consumer credit markets is heatedly debated around the world. This article uses economic research as a basis for a qualitative assessment of the regulation of the short-term consumer credit market and discusses the experience of the recent regulations implemented in Finland. According to research, the interest rate ceiling is an inefficient way of regulating the short-term consumer credit market. In contrast, the regulations should be based on price transparency and results from behavioral economics. [ABSTRACT FROM AUTHOR]

Though cross-border banking, stimulated by globalization and financial integration in the recent past, is said to offer growth-enhancing benefits such as competition and efficiency, financial inclusion, and diversification of risk, these benefits seem not to have materialized markedly in Sub-Saharan Africa (SSA), an outcome attributable to efficiency barriers, currency differences, political instability, linguistic divisions, weak legal environment, and lack of regulatory coordination. However, given that many have flagged heterogeneity of regulatory architecture, inadequate institutional infrastructure, and other requisite environmental factors as more pivotal reasons for the delayed realization of cross-border banking's many benefits in SSA, we invoke lessons from the Euro area's successful experience in cross-border banking, to propose effective ways of harvesting its benefits in SSA. This paper, therefore, advances the initiation of a centralized regulatory authority as a potentially efficacious way of extracting fuller harvests from cross-border banking in SSA. More specifically, lessons from the Euro area suggest that strong collaboration among supervisors across SSA should be encouraged as to foster the establishment of a centralized regulatory authority for enabling successful cross-border banking and other financial services. Furthermore, the following regional initiatives can serve as robust antecedents of the centralized regulatory authority: single or more integrated regional markets, a regional deposit insurance scheme, and 1–2 dominant convertible currencies that can minimize exchange rate risks. [ABSTRACT FROM AUTHOR]

The study provides an insight on the regulatory requirements that banks have been complying with since the financial crisis of 2009. Precisely, it focuses upon the Bank Recovery and Resolution Directive's full implementation and effectiveness. An empirical analysis on the European banks' CDS market sheds light on the mechanisms driving its current and historical developments, emphasizing the motivations for the change in the regulatory architecture. The policies will be proved to be effective in changing investors' risk perception, that is, a shift of risk burden from senior bondholders towards subordinated debt holders, as well as a breakdown of the link between banks and sovereigns' default probabilities, the so-called doom loop. Ultimately, a comparative analysis on banks' capital requirements, return on equity, leverage and risk weighted assets provides evidence on the impact regulations have on the European banks' business strategies, thereby shaping the New Normal. In conclusion, the paper discusses whether the current regulatory regime will be able to prevent future sources of instability. [ABSTRACT FROM AUTHOR]

This article examines, through a Monte Carlo simulation study, the impact of considering different Loss Given Default (LGD) definitions, as allowed by the regulation, in the accuracy of LGD calculation at portfolio level. The article suggests that the way the regulation is interpreted can have dramatic effects on LGD measurement and, consequently, on the capital that banks are required to hold for regulatory purposes. The findings herewith can be deemed quite robust given that they are observed under different Monte Carlo simulation settings – for Retail and Corporate portfolios, as well as for different phases of the economic cycle. The effect of introducing correlation between LGD and EAD is also analyzed. The implications of the findings presented in this article range from policy actions to the practical way banks determine LGD, encompassing also issues of level playing field and financial stability. Future research along the lines presented here can be extended to understand and, eventually, shed some additional light on the cyclicality of Basel II. [ABSTRACT FROM AUTHOR]

This paper reviews prevailing credit derivatives markets regulation and comments on the need to regulate these markets in light of the recent financial crisis. Although credit derivatives may have beneficial effects such as enhancing the resilience of the financial system, these benefits can only be reaped if credit derivatives are used prudently and responsibly by all market participants. We argue that the current regulatory regime is not sufficient to induce market participants to use credit derivatives in a desirable way. Rather, the existing system, which is mainly based on self-regulatory initiatives, should be accompanied by supervisory action such as the introduction of mandatory disclosure of credit derivative transactions or collateral requirements for all credit derivative transaction counterparties. The combination of self-regulatory initiatives together with strict supervisory action seems to be well suited to help in preventing market participants from misusing credit derivatives, therewith dampening the dangers these instruments might pose to the stability of the financial system.Journal of Banking Regulation (2009) 10, 179–201. doi:10.1057/jbr.2009.3 [ABSTRACT FROM AUTHOR]