Ratings agencies | Jean Claude Trichet Discusses Ratings Agencies and Greek Bailout. Posted by Anthony Harrington, May 12, 2010 Anthony Harrington In Part 1 we looked at EU President Barroso’s warning to the ratings agencies. A day after President Barroso’s speech, Jean Claude Trichet, the President of the European Central Bank faced some hostile questioning from the world’s financial and political press (see the webcast) and the subject of the ratings agencies again came to the fore. Unlike President Barroso, however, Trichet did not venture voluntarily into this particular battle. He was pushed and prodded into it by repeated questioning from the press, who seized on one small point he made during a press conference whose main purpose was to communicate two things: one, the reasoning behind the Governing Council of the ECB’s decision to keep rates on hold, and two, the fact that the ECB had “personally” looked at and approved the Greek remedial plan (austerity measures, to you and I) and given its go ahead for the bail out.
Revising Basel II—But at What Cost? - Full Article. Executive Summary This article examines: Why Basel II is now seen as too pro-cyclical.The unfortunate timing which saw the implementation of Basel II taking effect just as the global recession took hold.The Basel Committee is already reshaping Basel II to take account of the weaknesses discovered so far.The future of securitization in the post crash world is now under consideration.The shape of regulation to come.
Back to top Introduction Pro-cyclicality and Its Issues The future regulation of banking is currently a major area of focus for supervisors and policy-makers, in particular, with the G20 recently committing to strengthening how banks are regulated. A pro-cyclical measure has the unfortunate effect of reinforcing the direction of a particular cycle. A Case of Bad Timing One of the peculiarities of the global crisis, in the context of Basel II, is the timing. There were also issues with credit-rating agencies. The Basel Committee Rethink The Future Regulation of Securitization. Tackling pro-cyclicality in banking regulation. RatingsUSP. www.imes.boj.or.jp/english/publication/conf/2009/Session4.pdf. Economics. Managing procyclicality in financial system. Recent turmoil in global financial markets and subsequent collapse of many banks and financial institutions in the West has highlighted the importance of systemic events that illustrates the disruptive effects of procyclicality.
In simple terms, procyclicality refers to the interactions between the financial system and the real economy which are mutually reinforcing. Such interactions tend to amplify the amplitude of the business cycle, thereby heightening the risk to financial stability. Procyclicality assumes the existence of two cycles, viz. the business cycle and the financial cycle, which interacts and reinforces each other. However, economic and financial decisions underlying the two cycles are not independent. Typically a business cycle starts with a period of low macroeconomic volatility usually brings about an expansionary phase of the cycle. Financial system procyclicality can be traced to two fundamental sources. The second source is distortions in incentives. Fiscal policy: One way or another, euro budgets matter. FSA relaxes bank capital rules. Poor's Manual of Railroads - Henry Varnum Poor. www.banque-france.fr/uploads/tx_bdfgrandesdates/090504.pdf. Fiscal policy: Let go of the brakes.
Financial sector pro-cyclicality: Lessons from the crisis, Part II. As discussed in our first column, two key determinants of pro-cyclicality are leverage and managers’ excessive appetite for risk, induced by inadequate remuneration schemes. In this column, we discuss policy options to keep them in check.1 In principle, leverage as an indicator of balance sheet soundness should be made redundant by supervisory capital ratios; managers’ incentives, in turn, should be kept under control by the proper functioning of market practices.
However, the recent events have made clear that loopholes in capital regulation may let managers increase leverage undisturbed and that market forces may be unable to properly self-regulate remunerations. We focus on policy proposals for changes to capital regulation and managers’ remuneration schemes. Some have been already been floated on an individual basis in the wake of the crisis; others have been around for a while. The first issue is how regulation links capital to risk, i.e. Basel II’s capital function. Flannery, M. www.financialstabilityboard.org/publications/r_0904a.pdf. www.imf.org/external/pubs/ft/spn/2009/spn0909.pdf.
What is pro-cyclicality? In-depth analysis on Credit Writedowns Pro. You are here: Economics » What is pro-cyclicality? Looking up the term procyclical on the Internet, I see the Wikipedia entry defines it as: Procyclical is a term used in economics to describe how an economic quantity is related to economic fluctuations. It is the opposite of countercyclical…In business cycle theory and finance, any economic quantity that is positively correlated with the overall state of the economy is said to be procyclical. I talked about this in the first context in 2008. Balanced budget amendments are another one of these artificial constraints that look better on paper than they do in reality because they are procyclical. In the euro zone, the stability and growth pact provides a 3% deficit hurdle which almost all of the euro zone breached during the recession. The same problems were apparent in the US states where balanced budget amendments are the order of the day. This is a recipe for disaster.
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