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Bank
Supervision
 Why Banks Failed the Stress Test
Speech by Mr. Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Marcus-Evans Conference on Stress-Testing, London. February 9-10, 2009.
Last year might well be remembered as the year stress-testing failed. Failed those institutions who invested in it in the hope it would transform their management of risk. Failed the authorities who had relied – perhaps over-relied – on the signal it provided about financial firms’ risk management capabilities. And, perhaps most important of all, failed the financial system as a whole by contributing, first, to the decade of credit boom and, latterly, the credit bust. The purpose of these comments is to diagnose some of market failures or frictions in stress-testing practices highlighted by the crisis; and, more speculatively, to suggest some practical ways in which stress-testing might deliver answers which are “roughly right”.
 Loan Loss Provisioning and Pro-cyclicality
John C. Dugan. Comptroller of the Currency. OCC. United States. March 2009
The loan loss reserve can have an important macroeconomic benefit. By allowing banks to recognize losses early, it should result in charges against earnings (and possibly capital) during the part of the economic cycle when times are good, as banks anticipate higher future losses when the cycle turns negative, and less such charges when times are bad, as banks anticipate lower future losses when the cycle turns positive. The loan loss reserving process can have the important economic benefit of being “counter-cyclical. But, why did our loan loss reserving system produce such a low level of reserves at the beginning of this downturn? What credible changes should we consider to avoid that pro-cyclical outcome in the future?
 Financial Reform to Address Systemic Risk
Speech by Mr. Ben S Bernanke, Chairman of the Board of Governors of the US Federal Reserve System, at the Council on Foreign Relations, Washington D.C. March 10, 2009.
Policymakers should begin thinking about the reforms to the financial architecture, broadly conceived, that could help prevent a crisis similar to the current one in the future. First, we must address the problem of financial institutions that are deemed too big – or perhaps too interconnected – to fail. Second, we must strengthen what I will call the financial infrastructure – the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets – to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality – that is, do not overly magnify the ups and downs in the financial system. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing.
 Template for a Multilateral Cooperation and Coordination Agreement (MOU)
Committee of European Banking Supervisors.
January 27, 2009
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Modernizing Bank Supervision and Regulation
Testimony of Mr. Daniel K Tarullo, Member of the Board of Governors of the U.S. Federal Reserve System, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate. Washington D.C. March 19, 2009.
The several components of a broad policy agenda to address systemic risk will be discussed: consolidated supervision, the development of a resolution regime for systemically important nonbank financial institutions; more uniform and robust authority for the prudential supervision of systemically important payment and settlement systems; consumer protection; and the potential benefits of charging a governmental entity with more express responsibility for monitoring and addressing systemic risks in the financial system. In addition, the actions the Federal Reserve is taking under existing authorities will be discussed and the areas in which legislation is needed will be identified.
Draft High-level Principles of Remuneration Policies
Committee of European Banking Supervisors. March 6, 2009. The recent market turbulences have, amongst other things, highlighted the risks inherent in firms' having inadequate remuneration policies and structures. The absence of a coherent and adequate remuneration policy generates potential risks for the financial institution that need to be adequately analyzed and contained. This document presents a list of principles that aims to address some aspects that are critical to a well functioning remuneration policy, while recognizing that the responsibility for the policy rest ultimately with the institutions themselves.
 The Global Financial Crisis – Can We Withstand the Shock?
Address by Dr. Marion Williams, Governor of the Central Bank of Barbados, at the Luncheon Meeting of the Barbados Chamber of Commerce, Needhams Point, St Michael. February 25, 2009. I will speak primarily about how the financial system of Barbados is positioned to withstand global financial and economic pressures. While the financial sector is not perfect it is well run. International organizations confirm this, even when specific areas of weakness have been highlighted. However, unless we create a confidence problem, it is the global economic recession that is likely to affect us most.
Recommended
Readings
 World Economic Outlook: Crisis and Recovery
International Monetary Fund. April 2009.
Global Financial Stability Report: Responding to the Financial Crisis and Measuring Systemic Risks
International Monetary Fund. April 2009.
 Declaration of the G-20 on Strengthening the Financial System
London Summit . April 2, 2009.
The Perimeter of Financial Regulation
Ana Carvajal, Randall Dodd, Michael Moore, Erlend Nier, Ian Tower , and Luisa Zanforlin. Monetary and Capital Markets Department. International Monetary Fund. March 26, 20009. The G-20 has called for a review of the scope of financial regulation, with “a special emphasis on institutions, instruments and markets that are currently unregulated”. Arguments were used to argue for limiting the scope of prudential regulation, including that market discipline and self-regulation would be an effective brake for risk taking and that the application of regulation to a wider range of nonbanks would be too costly and would reduce innovation. A discussion of extending the regulatory perimeter should, therefore, weigh carefully the experience of the past two years against these considerations. It will also be important to understand whether the assumptions underlying the existing regulatory model for banks are fatally flawed, or whether better regulation and supervision of the banks would be adequate.
 Implicit Exchange Rate Risk in the Banking System of Uruguay: Regulatory Changes and Post-Crisis Evolution
Jorge Sander, Magdalena Mailhos, Pablo Bazerque and Martín Vallcorba. Banco Central del Uruguay . This document analyzes the banking regulatory changes introduced in Uruguay after the banking crisis of 2002. These changes are related to the treatment of implicit exchange rate risk - also known as “credit exchange rate risk” - which is derived from currency mismatch between the debt and the income of the debtors of the banking system. The results obtained show a systematic reduction in the level of implicit exchange rate risk, reflecting the incentives introduced with the regulation. This constitutes an indicator of a greater soundness and stability of the Uruguayan banking system, in comparison with 2002.
(text in Spanish)
 FDIC Quarterly Banking Profile. First Quarter 2009
 Financial Stability Report
Banco de España. May, 2009.
(text in Spanish)
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