The Regulatory Risk Strikes Back

Back to blogging (happy new year everyone), after a pretty busy two last months of the year. I have read quite a few interesting research papers that are worth mentioning on this page. They’re going to keep me busy for the next few weeks.

But first, a short post for today. I have noticed an increasing backlash against finance regulation in the second half of last year. It looks like an increasing number of academics is worrying about the potential collateral damages and hidden risks of the new regulatory framework. Meanwhile politicians are also worrying that economic growth could get affected (as well as donations by finance firms?…), which is convenient given that they favoured short-term vote-grabbing by bashing banks for years after the crisis.

According to SNL (gated link), the BIS, the temple of all banking regulation, warned that

despite its risk reduction benefits, central clearing could present other forms of systemic risk, in particular that the concentration of the management of credit and liquidity risk “may affect system-wide market price and liquidity dynamics in ways that are not yet understood”

Even more surprising, the head of supervision at the central bank of Italy declared that the new bail-in rule could “exacerbate – rather than alleviate – the risks of systemic instability caused by the crisis of individual banks.” I thought European policymakers were proud of their bail-in/resolution directive. Apparently not all of them.

In Germany, Merkel adds her voice to the growing ‘let’s put everything in common’ trend that has been dominating EU top circles over the past few years: she’s opposed to the European bank deposit guarantee scheme. And she’s probably right, given that research has demonstrated that deposit guarantees actually worsened financial stability.

And of course, the banking sector keeps complaining about regulation and monetary policy, as it has been doing for years now (rightly or wrongly, but always accused of lobbying at the expense of society): Danske Bank warns that negative rates are increasingly damaging the financial industry (margin compression, here we go again).

Some of the above claims are actually substantiated by some of the papers I will talk about over the next few weeks. So stay tuned.