Michael Barr addresses liquidity risk management
In a speech at the ECB Forum on Banking Supervision in Germany, Vice Chair for Supervision at the Federal reserve Michael S Barr addressed three issues: “how banks manage liquidity risk, the role of the central bank’s discount window lending in this process, and the importance of robust liquidity planning for good times and bad.”
Barr’s address began by shedding light on the acute liquidity pressures faced by several major US banks in March 2023. The crisis unfolded when uninsured depositors, upon scrutinizing the banks’ balance sheets, perceived insolvency risks. The speech underscored the imperative of robust interest rate and liquidity risk management to preempt and mitigate such crises effectively, noting that “despite their compliance with our capital rules, these banks lacked enough capital to reassure uninsured depositors that they had sufficient resources”.
Lessons learned from March stress events
The experience of Silicon Valley Bank (SVB) and Signature Bank served as a critical case study, revealing the vulnerability of banks to rapid deposit outflows. Notably, the unprecedented speed of bank runs in 2023 surpassed historical precedents, emphasizing the need for enhanced preparedness across financial institutions and for banks to be able to access a diversified range of liquidity options.
Discount window as a crucial tool
Barr stressed the indispensable role of the Federal Reserve’s discount window in providing a lifeline during liquidity stress. By offering predictable funding at a fixed interest rate, the discount window serves as a reliable backstop to private sector liquidity sources, ensuring immediate access to funding during critical stress events.
Operational readiness and collateral prepositioning
A key takeaway from the speech was the necessity for banks to be operationally ready to access the discount window. This involves regular testing and the prepositioning of sufficient collateral. Barr highlighted instances where banks faced challenges in swiftly identifying and moving collateral during stress events, emphasizing the need for continuous improvement in operational readiness.
Intersection with existing liquidity regulations
While acknowledging the positive impact of existing liquidity regulations, such as the liquidity coverage ratio and net stable funding ratio, Barr hinted at a potential need for reevaluation. The rapidity of bank runs and impediments to swiftly raising liquidity in private markets suggest a reassessment of these requirements to enhance their effectiveness in a fast-paced financial landscape. He noted too that some forms of deposit (for example those from venture capital or crypto firms or high-net-worth individuals) may be liable to faster runs.
International coordination and cooperation
Barr emphasized the critical role of international collaboration in addressing liquidity stress events. Cross-border collaborations with other central banks and regulatory authorities were highlighted as essential for gaining a comprehensive understanding of financial market dynamics and preventing adverse cross-border repercussions.
In conclusion, Barr’s speech provides some useful insight into the challenges and lessons learned from recent liquidity stress events. The emphasis on the discount window, operational readiness, and international cooperation underscores the critical role of effective liquidity risk management in maintaining financial stability. As financial institutions navigate the evolving dynamics of global markets, incorporating these lessons into their risk management practices becomes imperative for sustained resilience and stability.
Euronext Clearing expands to become a pan-European clearing house
Euronext Clearing has announced that it has expanded its clearing offering for Euronext cash markets to France, Ireland, the Netherlands, and Portugal. The clearing house now clears equities, ETFs, structured products, warrants, and bonds across six Euronext markets.
This transformation contributes significantly to building the backbone of the Capital Markets Union in Europe, reducing the fragmentation of European capital markets.
Euronext plans to expand its clearing activities to Euronext’s listed and commodity derivatives in Q3 2024. Through this expansion, Euronext will directly operate clearing activities for cash, listed derivatives, and commodities markets by the end of 2024, providing one single platform for clients to manage their collateral and access information on collateral, risk, and clearing.
Proceed with caution on digital pound say MPs
The UK Treasury Committee, a committee of MPs appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury and associated entities, has urged the government to consider several issues before giving the green light to a retail central bank digital currency (CBDC).
The conclusions from the report are summarized below.
- There are some potential benefits to a retail CBDC, but the extent of these benefits and whether a digital pound is the most effective method to achieve them remain unclear.
- In the event of a retail CBDC launch maintaining the UK’s financial stability is vital so to reduce risk of large-scale outflows from bank deposits into digital pounds, taking a more cautious approach of a lower initial limit on individual holdings than the £10,000-£20,000 limit proposed by the Bank of England and Treasury might be advisable.
- Any legislation used to introduce a CBDC should not allow user data to be used in any other way than already allowed.
- There must be clear, usable opt-outs for those that do not wish their data to be collected and used for commercial purposes.
- The option of offline payments to ensure accessibility by users with limited or unreliable internet connectivity should be explored.
- The Bank of England and Treasury should undertake further analysis on the monetary policy impact of paying interest on the digital pound.
COP28: EBA reaffirms commitment to sustainability in EU banking sector
The European Banking Authority (EBA) has released a statement ahead of the 2023 United Nations Climate Change Conference (COP28), reaffirming its commitment to enhancing climate-related and broader sustainability considerations in the EU banking sector.
In the statement, the EBA discusses the role of banks in transitioning towards a more sustainable economy. It highlights that banks can play a significant role by providing financing to achieve net-zero targets and manage climate-related risks.
The EBA also reiterates its commitment to providing a regulatory framework to support the transition and ensure the banking sector remains robust. Additionally, the EBA will continue to enhance the prudential framework to better capture environmental risks.
FCA releases November regulatory initiatives grid
The Financial Conduct Authority (FCA) has released the November regulatory initiatives grid. The grid provides a comprehensive view of regulatory plans from all UK financial services regulators for the next year.
FCA proposes investment advisers to set aside capital to cover compensation costs
The FCA has announced today proposals to require investment advisers to set aside capital to cover compensation costs and ensure the polluter pays when consumers are harmed.
The proposals would require investment advisers to:
- calculate their potential redress liabilities at an early stage,
- set aside enough capital to meet them and
- report potential redress liabilities to the FCA.
Any firm not holding enough capital will be subject to automatic asset retention rules to prevent them from disposing of their assets.
The FCA expects to publish the next steps in the joint review of the Advice Guidance Boundary, which it is conducting alongside the Government in the coming weeks.
EAC urges UK Government to take further action to achieve net zero goals
The UK Environmental Audit Committee (EAC) has released a report evaluating financial institutions’ role in the UK’s transition to net zero. The report recognizes the government’s efforts but challenges it to take further action to achieve its targets. The report also highlights deficiencies that need to be addressed.
- Although the UK government aims to become the first net zero-aligned financial center, many UK financial institutions are still financing non-Paris Agreement-aligned companies.
- Initial public offerings of new fossil fuels are still being approved in the UK.
- Companies are required to reveal their net zero transition plans on a “comply or explain” basis. However, companies can bypass this requirement by simply disclosing they do not have a plan. The EAC is concerned that leaving decisions on publishing transition plans to the market alone will not change behavior.
- The government has given the Green Technical Advisory Group (GTAG) the task of delivering a green taxonomy for the UK. However, due to delays initiated by HM Treasury, there is currently no fixed completion date.
The UK government should:
- Require companies to have and publish net zero transition plans. Companies that publish transition plans should follow a compulsory framework to ensure accountability and consistency.
- Set out an implementation timetable for SDR and commit to making TNFD reporting mandatory.
- Introduce a green taxonomy for the UK as soon as possible and ensure that it becomes mandatory after the period of voluntary reporting ends.
- Commit to a date by which the government will no longer issue new oil and gas licensing rounds to accelerate the transition from fossil fuels and secure energy supplies.
- Turn the government’s external research on investment tracking methodologies into a formal mechanism to track net zero and nature-related financial flows and investment in high-carbon projects, either by using an existing independent body or creating a new one.
- Leverage the UK’s global leadership position to align other financial centers with net zero objectives and encourage more consistent rules and systems across borders.
- Move quickly to adopt a Carbon Border Adjustment Mechanism (CBAM).
EAC Chair, Rt Hon Philip Dunne MP, said, “The Government should implement swiftly its initiatives on mandatory transition plans, a UK green taxonomy, and carbon leakage mitigation measures. Any delay is likely to send mixed messages to the financial sector that the UK is wavering on its ambitions, as set out at COP26, to become the first net zero-aligned financial center.”
Australian Federal Court orders RACQ to pay $10 million penalty
RACQ Insurance Limited (RACQ) has been fined $10 million by the Australian Federal Court for misleading customers in its product disclosure statements (PDS) regarding the discounts available for certain types of insurance coverage.
The PDSs for RACQ’s Motor, Home, Caravan & Trailer and Unique Vehicle insurance policies contained statements indicating that discounts would be applied to customers’ insurance premiums. However, the Court found that these statements could be misleading since the discounts were only applied by RACQ to the base insurance premium and not to additional premiums paid for certain optional extras.
New research paper explores the evolution of consumer payments in Australia
The Reserve Bank of Australia has recently conducted its sixth triennial Consumer Payments Survey (CPS). The survey provides comprehensive data on how Australian consumers make payments and qualitative information on payment preferences and attitudes. It is one of the main sources of information on the use of and attitudes towards different payment methods in Australia.
The study found that the COVID-19 pandemic has significantly changed payment behavior. In particular:
- Most in-person payments are now made by tapping cards or mobile devices, even for small purchases.
- The groups who traditionally used cash more frequently for payments, like the elderly, those on lower incomes, and those in regional areas, saw the largest declines in cash use.
Additionally, although Australians are aware of and use a range of newer payment methods, such as digital wallets and buy now pay later services, they still make up a small share of payments.
Alongside the survey, the Reserve Bank has added a Consumer Payments Explorer, an interactive tool that allows users to explore the payment methods of Australians, which firms might find helpful.
A selected summary of key developments for regulated financial institutions
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