The Institute of International Finance reckons the combined impact of new banking regulations may be to trim GDP by 0.7% a year over the next five years and could cost some 7.5m jobs over the period. Arguably, an upwardly-biased estimate but the tighter regulation of Basel III certainly does not come for free….
Banking regulation: Capital punishment, The Economist, 10 Sep 2011
“The financial system…makes choices about haircuts. The haircuts in question are the amount of collateral a borrower places with the lender over and above the face value of borrowing. But collateral haircuts tend to behave rather differently to personal haircuts. They fall when the financial temperature is increasing and rise when the chill sets in. This strategy is explicitly pro-cyclical. It will tend to result in financial markets being hot-headed in the summer and frozen-eared in the winter….This haircut cycle played an important causal role in the crisis…Hot heads make for bad decisions, frozen ears for uncomfortable ones. Financial markets have felt the effects of this change in the weather more dramatically than most. Suitably designed, macroprudential policy can help moderate those swings in temperature, thereby improving the health of the financial system. “
A.G. Haldane, BoE Executive Director, 1 August 2011
“In the good old days, haircuts were made in barbershops, not on financial markets. Until the late 80ies, economists writing about haircuts in the “American Economic Review” (AER) referred to real hairdressing. The first economist to use the term in the AER with regard to finance was Herbert Bear, a researcher with the Federal Reserve Bank of Chicago, in 1989. It took another 15 years and the default of Argentina until financial haircuts made it into “The Economist” for the first time, after all.”
The science of haircuts, economicsintelligence.com.
Some useful references on the interconnectedness of financial markets and the analogy with the spread of contagious diseases….
Economic epidemiology, The Economist, 15 Jun 2012
Systemic risk in banking ecosystems, Nature, Feb 2011
Rethinking the financial network, BoE Executive Director Haldane speech, April 2009
Attempts to turn mobile phones into digital wallets gather pace…The Economist, 26 May 2011
“Over 90% of central banks oblige depository institutions(commercial banks) to hold minimum reserves against their liabilities, predominantly in the form of balances at the central bank. The role of these reserve requirements has evolved significantly over time. The overlay of changing purposes and practices has the result that it is not always fully clear what the current purpose of reserve requirements is, and this necessarily complicates thinking about how a reserve regime should be structured…..”
The IMF has produced a timely background paper that describes the three main purposes for reserve requirements – prudential, monetary control and liquidity management – and suggests best practice for the structure of a reserves regime. As well as discussing the use of reserves remuneration as a policy signal, the paper illustrates current practices using a 2010 IMF survey of 121 central banks.
Central Bank Balances and Reserve Requirements, IMF Working Paper, February 2011
IMF material on global imbalances, capital flows, global reserve system, global financial safety nets, surveillance and policy co-ordination….http://www.imsreform.org/
Historical details of events leading up to the founding of the Federal Reserve in 1913…
Financial Crises, Reform, and Central Banking: Establishing the Federal Reserve, Liber8, St Louis FRB, Jan 2011
A good measure of the finance sector’s contribution to the economy is not as easy as it looks…
A mirage, not a miracle, The Economist, 15 Jul 2010
The unique and curious money of Yap…
Island Money, FRB Cleveland, Feb 2004