Impact of Regulatory Reforms on Large and Complex Financial Institutions
IMF Staff Position Notes, November 3, 2010
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Bibliographic details
- Authors: Inci Ötker, Ceyla Pazarbasioglu
- Published: November 3, 2010
- Series: IMF Staff Position Notes
- DOI: https://doi.org/10.5089/9781462345496.004
Background and objectives
- Financial sector reforms are being considered to address risks posed by large and complex financial institutions (LCFIs).
- The vast majority of global finance is intermediated by a handful of these institutions with growing interconnections within and across borders.
- Common trends that contributed to the recent global crisis included:
- sharp increases in leverage,
- significant reliance on short-term wholesale funding,
- growth of off-balance-sheet activities,
- maturity mismatches,
- increased share of revenues from complex products and trading activities.
- Key objective of the reforms: promote a less leveraged, less risky (or better cushioned), and thus a more resilient financial system that supports strong and sustainable economic growth.
Findings on capital standards and bank resilience
- The recent proposals of the Basel Committee on Banking Supervision (BCBS) on capital standards represent a substantial improvement in the quantity and quality of capital in comparison with the pre-crisis situation.
- Analysis suggests that, subject to usual caveats associated with limited data disclosures and availability:
- phase-in arrangements will allow most banks to move to these higher standards through earnings retention, assuming a modest economic and earnings outlook.
- should banks generate strong earnings in the coming years, and distribute lower dividends, they could rebuild common equity capital ratios faster than required under the current phase-in periods.
- The ultimate effect of the reforms on business models remains to be seen until the regulations take their final shape.
Impact on investment-banking-type activities and other regulatory measures
- The new capital standards will have a significant impact on investment-banking-type activities, including through tighter requirements for trading book exposures.
- Investment banking activities will also be affected by a host of other regulatory initiatives, including:
- the new accounting rules,
- higher standards for securitization, derivatives, and trading businesses,
- measures to restrain certain activities.
- LCFIs with an investment banking focus have flexible business models and can adjust their strategies easily to mitigate the effects of the regulatory reforms, notwithstanding a multitude of regulations affecting their activities.
Publication and document specifics
- Authors: Inci Ötker, Ceyla Pazarbasioglu
- Publication date: November 3, 2010
- Series: Staff Position Note No. 2010/016
- Issue: 016
- Volume: 2010
- Pages: 38
- DOI: https://doi.org/10.5089/9781462345496.004
- ISBN: 9781462345496
- ISSN: 2617-6742
- Subjects and keywords include: Banking; Capital adequacy requirements; Commercial banks; Countercyclical capital buffers; Financial institutions; Financial regulation and supervision; Financial services; Investment banking; Liquidity requirements; bank; Basel capital regulation; conservation buffer; derivatives business; liquidity risk profile; SPN; Global; Europe; North America.
IMF Staff Position Note: "Impact of Regulatory Reforms on Large and Complex Financial Institutions" (Staff Position Note No. 2010/016), Inci Ötker and Ceyla Pazarbasioglu, November 3, 2010.