This Week in Basel - March 11

A weekly roundup of news and information eminating from and related to the Bank for International Settlements (BIS) in Basel, Switzerland.

BIS Quarterly Review

There was a lot of news coming out of Basel this week with the publication of the Quarterly Review from the BIS. Some parts of the Quarterly Review are highlighted below, but click here if you want to see the whole review.

The effects of the Great Financial Crisis still linger, economically and politically

Claudio Borio, the head of the monetary and economic department at the BIS, asserts that factors weighing on parts of the global economy have more to do with the continued drag from the Great Financial Crisis than secular stagnation. Borio points to the boost felt after the election in the US as an indicator that a previous lack of momentum was not based on stagnation. As he has done in the past, Borio points to the less than enthusiastic response from fiscal policymakers as something that weighed down the recovery from the previous crisis and might fail to steer the economy clear of the next crisis.

Regarding future crises, Borio notes that “traditional indicators have been flashing amber or red” not only in emerging economies, including those that aren’t reliant on commodities, but also more advanced economies like those in Sweden and Switzerland. The role of nationalism and protectionist policies also poses a threat to global financial stability, according to Borio. If the winds of political change that have swept the UK and US continue to blow through countries like the Netherlands, France and Germany, then there is a very good chance Borio’s theory about protectionist policies will soon have real-world test cases.

Politics driving investor behavior more than economics

Speaking of Claudio Borio and politics ... As part of the BIS Quarterly Review, Borio noted how politics have begun to weigh more heavily in investment decisions than central bank guidance. "Politics tightened its grip over financial markets in the past quarter, reasserting its supremacy over economics," Borio said.

While such a move indicates a shift by investors away from post-crisis central bank dependence, one could argue that it is the massive pendulum swings in policymaking that politics stands to spur in key countries that is really driving the shift. The days of incremental changes in the political landscape have ended in places like the US and the UK. Case in point would be the US: Hillary Clinton would have brought about little change in financial regulatory regimes in the US. The election of Donald Trump might rattle the US financial regulatory regime to its core. Investors have simply recognized the opportunity that comes when regulators are muted. Whether they recognize the longer term risks remains to be seen.

New credit-loss rules to bring changes for banks, supervisors

Banks, regulators and market participants will have to make changes as new rules that govern provisioning for expected credit losses are implemented. Based on survey data, central banks and other supervisors may need to take a more active role in encouraging financial institutions to invest more resources in preparing for credit losses.

Banks spot chance to change FRTB risk testing

Bank executives are hoping to get changes made to rules on profit-and-loss risk testing in the Fundamental Review of the Trading Book. The executives, who have contended that the test is badly designed and would be impossible to pass, see a fresh opportunity to air their views after structural changes were made to the Basel Committee on Banking Supervision's panel overseeing the rules.

On consumer protection

As newly empowered policymakers in the US set their sight on the country’s Consumer Financial Protection Bureau, they would do well to read this speech from Philip Lane, the governor of the Central Bank of Ireland. Lane outlines the role financial regulations play in protecting consumers. Irish consumers obviously felt the pain when the Celtic Tiger went from a roar to a whimper, but at least Lane’s comments acknowledge the importance such protections play going forward. In the US, the CFPB is loved by consumers and hated by bank lobbyists and the policymakers they support. The former are well aware of the importance of comments like Lane’s, while the latter probably wants to pretend such sound arguments don’t exist.

TWIB Notes