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Basel III introduced unweighted capital standard and new regulatory liquidity standards to complement the revised risk-weighted capital requirements. This change in banking sector regulation raised questions on how the capital and liquidity requirements interact and how they should be jointly treated. In the paper, we assess how a regulatory and a subsequent economic shock, and banks’ subsequent response to it, affects compliance with the four regulatory requirements. We find that the capital and liquidity requirements can act as both, substitutes and complements, depending on the adjustment strategy banks choose to react to these shocks. We assert that to be able to properly calibrate macroprudential policy measures such as the counter-cyclical capital buffer, it is vital for macroprudential authorities to look at the initial levels of the other required ratios as well as to monitor banks’ subsequent response.

Defined benefit pension funds invest in illiquid asset classes for return, diversification or liability hedging reasons. So far, little is known about factors influencing how much they invest in illiquid assets. We conjecture that liquidity and capital requirements are pivotal in this decision. Short-term pension payments and margining on derivative contracts generate liquidity requirements, while regulations impose capital requirements. Consistent with our model we empirically find that these requirements create a hump-shaped impact of liability duration on the fraction of risky assets invested in illiquid assets. Further, we report that pension fund size, type, and funding ratio impact illiquid assets allocations.

This paper compares and contrasts the resilience of the financial system, in particular banks, during the Global Financial Crisis and COVID-19 We show that banks are now part of the solution, rather than part of the problem, thanks to regulatory and institutional reforms over the past decade Heeding the lessons from the Global Financial Crisis has paid dividends We outline some early lessons from the COVID-19 crisis for the financial system going forward © The Author(s) 2020 Published by Oxford University Press For permissions please e-mail: journals permissions@oup com

Trabalho de Projeto do Mestrado em Economia apresentado à Faculdade de Economia Neste trabalho apresento quatro modelos de supervisão, considerando que o melhor é o institucional, por ser aquele que mais se adapta à conjuntura atual, na qual as instituições desempenham várias tarefas e com o modelo de supervisão institucional os supervisores têm em conta as especificidades das instituições. Apresento várias áreas da supervisão bancária (supervisão microprudencial, supervisão macroprudencial, requisitos de capital, requisitos de liquidez, supervisão comportamental e disciplina e transparência de mercado), referindo em que período surgiram tais preocupações e a forma como evoluíram. Mostro ainda como é que cada área se encontra regulamentada em Portugal, utilizando para tal os Acordos de Basileia, regulamentação europeia (regulamentos e diretivas) e regulamentação nacional (leis, decretos-lei, avisos e instruções do Banco de Portugal). A relação entre as várias áreas de supervisão é essencial para manter a estabilidade financeira, já que todas elas se complementam umas às outras. As áreas da supervisão utilizadas para lidar com as externalidades negativas são os requisitos de capital e liquidez. Para lidar com o poder excessivo dos bancos os supervisores utilizam a supervisão comportamental. Complementarmente, a disciplina de mercado promove a transparência de informação dos bancos para os clientes. Os requisitos de capital e liquidez são, sem dúvida, bastante importantes, na medida em que os bancos podem utilizá-los para absorver perdas e lidar com períodos recessivos nos mercados. Quando as circunstâncias o ditam os supervisores podem adotar medidas corretivas complementares às regras existentes. Apesar da grande evolução da supervisão e regulamentação bancária, e do seu contributo para a estabilidade financeira, há que ter em conta as suas limitações, nomeadamente o facto de o agravamento dos requisitos de liquidez e capital poder induzir os bancos a aumentarem o risco dos seus ativos. In this project work I present four supervision models, considering that the best is the institutional, because this is the one that fits best in the nowadays conjuncture, in which the institutions perform several tasks and with the institutional model the supervisors take the specifications of each institution into consideration. I also present several banking supervision areas (microprudential supervision, macroprudential supervision, capital requirements, liquidity requirements, behavioral supervision and market discipline and transparency), referring in which period they emerged and the way they evolved. I also show how each supervision area is regulated in Portugal, using the Basel Accords, European regulation and directives and national regulation (laws, warnings and instructions from Banco de Portugal). The relation between all the areas is a key factor in order to maintain financial stability, since they all complement each other. The supervision areas used to deal with the negative externalities are the capital and liquidity requirements. To deal with the excessive power of banks supervisors use the behavioral supervision. Complementarily, the market discipline promotes information transparency from the banks to their clients. Capital and liquidity requirements are, without shadows for doubts, very important, to the extent that banks can use them to absorb losses and to deal with recessive periods. When the circumstances say so, the supervisors may adopt corrective measures that complement the existing regulation. Despite the great evolution of banking supervision and regulation and their contribute to financial stability, we must take into consideration their limitations, namely the fact that higher liquidity and capital requirements can induce banks to have riskier assets.

The paper inspects the credit impact of policy instruments that are commonly applied to contain systemic risk. It employs detailed information on the use of capital-based, borrowerbased and liquidity-based instruments in 28 European Union countries in 1995-2017 and a macroeconomic panel setup. The paper finds a significant impact of capital buffers, profit distribution restrictions, specific and general loan-loss provisioning regulations, sectoral risk weights and exposure limits, borrower-based measures, caps on long-term maturity and exchange rate mismatch, and asset-based capital requirements on credit to the non-financial private sector. Furthermore, the business cycle and monetary policy influence the effectiveness of most of the macroprudential instruments. Therein, capital buffers and sectoral risk weights act countercyclically irrespectively of the prevailing monetary policy stance, while a far richer set of policy instruments can act countercyclically in combination with the appropriate monetary policy stance.

This paper examines changes in bank capital and capital regulations since the global financial crisis, in the Europe and Central Asia region. It shows that banks in Europe and Central Asia are better capitalized, as measured by regulatory capital ratios, than they were prior to the crisis. However, the increase in simple equity ratios for the same banks has been smaller over the past 10 years. The increases in regulatory capital ratios have coincided with a reduction in the stringency of the definition of Tier 1 capital and reduction in risk-weights. Further analyses show that bank risk in Europe and Central Asia is more sensitive to changes in simple leverage ratios than in regulatory capital ratios, consistent with the notion that equity ratios only include high-quality capital and do not rely on internal risk models to compute risk-weights. Although there has been some effort to increase capital and liquidity requirements for institutions deemed systemically important, the region has been lagging in addressing the resolution of these institutions.

How do capital and liquidity buffers affect the evolution of bank loans in periods of financial and economic distress? To answer this question we study the responses of 219 individual banks to aggregate demand, standard and unconventional monetary policy shocks in the euro area between 2007 and 2015. Banks' responses are derived from a factor-augmented VAR, which relates macroeconomic aggregates to individual bank balance sheet items and interest rates. We find that banks with high capital and liquidity buffers show a more muted response in their lending to adverse real economy shocks. Capital and liquidity buffers also affect bank responses to monetary policy shocks. High bank capitalisation reduces the degree to which banks increase the average duration of loans to the non-financial corporate sector, while high bank liquidity strengthens the positive response to policy easing of both long- and short-term loans to the non-financial corporate sector. The latter findings substantiate the relevance of interactions between prudential controls and monetary policy.

We develop a nonlinear dynamic general equilibrium model with a banking sector and use it to study the macroeconomic impact of introducing a minimum liquidity standard for banks on top of existing capital adequacy requirements. The model generates a distribution of bank sizes arising from differences in banks' ability to generate revenue from loans and from occasionally binding capital and liquidity constraints. Under our baseline calibration, imposing a liquidity requirement would lead to a steady-state decrease of about 3 percent in the amount of loans made, an increase in banks' holdings of securities of at least 6 percent, a fall in the interest rate on securities of a few basis points, and a decline in output of about 0.3 percent. Our results are sensitive to the supply of safe assets: the larger the supply of such securities, the smaller the macroeconomic impact of introducing a minimum liquidity standard for banks, all else being equal. Finally, we show that relaxing the liquidity requirement under a situation of financial stress dampens the response of output to aggregate shocks.

The liquidity requirements and the available liquidity are aspects that are influenced by order-independent and order-specific business processes; they represent dynamic parameters over time, making it difficult for many companies to plan and ensure liquidity. Apart from the complexity of material and financial flows, it is the time gap in the flows of the order fulfillment process which complicates the determination of future liquidity requirements. This paper presents a causal model based on cause-and-effect networks, which takes an integrated look on the material and financial flows derived from the value creation process to identify future liquidity requirements.

Implementacija globalnih bančnih standardov Basel III je namenjena zagotovitvi stabilnejšega finančnega sistema, ki med drugim skrbi za odgovorno in nemoteno delovanje celotnega gospodarskega sistema. Baselski komite je v odgovor pomanjkljivostim prejšnjih akordov, ter še pomembneje v odgovor posledicam globalne bančne krize predstavil vrsto predlogov, ki celostno obravnavajo področje bančne regulacije. Predstavljene nadgradnje, ter še posebej novosti, ki jih s seboj prinašajo novi akordi pa po drugi strani za banke predstavljajo določene izzive, ki se pojavljajo pri implementiranju predlaganih zahtev. V tem magistrskem delu smo obravnavane akorde predstavili v podobi, kot jih je javnosti predstavil Baselski komite. S tem želimo predstaviti celotno širino novih zahtev, v nadaljevanju pa analizirati aktualno stanje implementacije predlaganih zahtev pri obeh izbranih bankah. Prvi del tega dela se tako nanaša na celostno teoretično predstavitev nadgradenj in novitet akordov Basel III. Drugi del magistrskega dela pa je namenjen predstavitvi in analizi aktualnega stanja implementacije predlogov Baselskega komiteja v vsaki izmed izbranih bank. Vseskozi smo za lažjo navigacijo uporabljali enako zaporedje predstavljenih zahtev, tudi v empiričnem delu pri analizi izbranih bank. Obe poslovni banki, ki poslujeta v slovenskem bančnem sistemu, sta bili izbrani na podlagi primerljivega tržnega deleža skupne bilančne vsote, a z kontrastnim ozadjem lastništva. S tem želimo testirati ne samo dve medsebojno različni banki, temveč poglavitno tudi vlogo izvora lastništva, ter njegov vpliv na stanje implementacije zahtev akordov Basel III. Na podlagi analize, ter kasnejše primerjave podatkov smo prišli do zanimivih rezultatov, ki bralcu omogočajo prikaz stanja že doseženih zahtev pri obeh primerjanih bankah. Introduction of global framework for banking regulation, or as known as Basel III Accords, had its purpose in providing more stable and resilient financial system, which represents foundation for healthy economy. Basel Committee has answered on shortcomings of previous Accords and in addition to the painful lessons from the past global financial crisis, introduced several proposals with problem solving agenda. On the other hand, these presented upgrades and especially novelties from new Accords passed the ball towards the banks, who must now fulfil these requirements for successful implementation of the regulation framework. In this paper, we are presenting the new Accords in integrated way, as they were introduced to the public by the Basel Committee. This approach provides the best way to present the width of the requirements in addition to analysis of the current status of implementation in selected banks. In the first part of the paper, we covered theoretical content with integrated approach, which was later on transferred to empirical part. Throughout this paper we used the same sequence of presented requirements of the new Accords, which allows the reader better navigation and understanding. Second part covers the research, where we analyzed the current status of implementation of the new Accords in two selected commercial banks with comparable balance sheet total. Both banks operate in Slovenian banking system, but have contrast ownership. That allows us to research and compare, not just two different banks, but also the role of the source of ownership and its application to the implementation of the new Accords. The analysis and comparison of the acquired data got us quite interesting results, which allows reader the comprehensive display of current implementation status for both selected banks.

This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance and equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks’ optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benefits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank efficiency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.

This paper provides a framework for modeling the risk-taking channel of monetary policy, the mechanism how financial intermediaries' incentives for liquidity transformation are affected by the central bank's reaction to financial crisis. Anticipating central bank's reaction to liquidity stress gives banks incentives to invest in excessive liquidity transformation, triggering an 'interest rate trap' - the economy will remain stuck in a long lasting period of sub-optimal, low interest rate equilibrium. We demonstrate that interest rate policy as financial stabilizer is dynamically inconsistent, and the constraint efficient outcome can be implemented by imposing ex ante liquidity requirements.

This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance ad equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benefits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank efficiency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.

This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance ad equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benefits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank efficiency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.

This paper discusses liquidity regulation when short-term funding enables credit growth but generates negative systemic risk externalities. It focuses on the relative merit of price versus quantity rules, showing how they target different incentives for risk creation. When banks differ in credit opportunities, a Pigovian tax on short-term funding is efficient in containing risk and preserving credit quality, while quantity-based funding ratios are distorsionary. Liquidity buffers are either fully ineffective or similar to a Pigovian tax with deadweight costs. Critically, they may be least binding when excess credit incentives are strongest. When banks differ instead mostly in gambling incentives (due to low charter value or overconfidence), excess credit and liquidity risk are best controlled with net funding ratios. Taxes on short-term funding emerge again as efficient when capital or liquidity ratios keep risk shifting incentives under control. In general, an optimal policy should involve both types of tools.

This paper formulates a dynamic model of a bank exposed to both credit and liquidity risk, which can resolve financial distress in three costly forms: fire sales, bond issuance and equity issuance. We use the model to analyze the impact of capital regulation, liquidity requirements and taxation on banks' optimal policies and metrics of efficiency of intermediation and social value. We obtain three main results. First, mild capital requirements increase bank lending, bank efficiency and social value relative to an unregulated bank, but these benefits turn into costs if capital requirements are too stringent. Second, liquidity requirements reduce bank lending, efficiency and social value significantly, they nullify the benifits of mild capital requirements, and their private and social costs increase monotonically with their stringency. Third, increases in corporate income and bank liabilities taxes reduce bank lending, bank effciency and social value, with tax receipts increasing with the former but decreasing with the latter. Moreover, the effects of an increase in both forms of taxation are dampened if they are jointly implemented with increases in capital and liquidity requirements.

In El Salvador, the banking safety net emergency liquidity assistance, resolution and deposit insurance- faces particular challenges given it operate in the context of official dollarization. The economy was officially dollarized in 2000 with the adoption of the law on financial integration and of the United States (US) dollar as legal tender. Dollarization constrains a central bank's ability to act as a lender of last resort (LOLR) and provide emergency liquidity assistance (ELA). This note discusses the weaknesses of the current framework and recommendations to ensure the safety net functions more effectively and efficiently. To address systemic liquidity risk in the context of official dollarization, the Banco Central de Reservas (BCR) should be provided with more powers and funds to provide emergency liquidity assistance to banks. The bank resolution scheme, which has not been tested, and the deposit insurance fund, which has insufficient funds, both need to be strengthened. Appropriate roles and formal mechanisms to monitor and manage systemic risk and events should be put in place. However the roles and responsibilities of the various institutions involved in the safety net are not always consistent with their objectives, powers, and mandates, while a well-specified strategy to preserve the stability of the system (e.g., with clear responsibilities for monitoring systemic risks and taking macro prudential decisions) and definition or formal measurement of systemic risk have not yet been established. Furthermore, coordination with foreign supervisors of international banks does not include designing contingency plans to address a possible cross-border event. This paper is divided into following four parts: part one is introduction; part two gives systemic liquidity management and emergency liquidity assistance; part three is bank resolution and deposit insurance; and part four gives crisis management arrangements.

Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank’s failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banks’ asset portfolios.

Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank's failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banks' asset portfolios.