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The Winds of Change: the Regulatory Backdrop
Presentation to the APEC Study Centre: Joint Regional Symposium
R. Sean CraigIMF Resident Representative in Hong Kong SAR
Asia and Pacific and Monetary and Capital Markets Departments
Manila, June 27th, 2011
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The presentation reflects the views of the author not the IMF
Disclaimer
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Impact of the global financial crisis on availability of credit
The crisis triggered wholesale banking system reforms
These reforms will influence the availability of credit ahead
What steps will help ensure that credit is available to support
economic recovery and growth?
Outline
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Bank credit is recovering more slowly than markets but EMs do well
Portfolio Flows, Real Credit and Real Equity Prices
(z score)
-5
-4
-3
-2
-1
0
1
2
3
Mar
-06
Jul-
06
No
v-0
6
Mar
-07
Jul-
07
No
v-0
7
Mar
-08
Jul-
08
No
v-0
8
Mar
-09
Jul-
09
No
v-0
9
Mar
-10
Jul-
10
No
v-1
0
Mar
-11
Real credit growth
Real equity prices Portfolio flows
-20
-10
0
10
20
30
40
50
Brazil
China
India
Indonesia
Real Credit Growth in Selected EMs(year-over-year percent change)
2006 2007 2008 2009 2010
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Lending conditions remain tight as crisis still weighs on US and European credit
-40
-20
0
20
40
60
80
100
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
UnitedKingdom
Japan
Euro area
United States
Bank Lending Conditions
(net percentage of domestic respondents tightening standards for loans)
-30
-10
10
30
50
70
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
United States
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
Euro area
SMEs
Tighter
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
United Kingdom
All firms
Tighter
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The financial crisis highlighted three vulnerabilities now targeted by
regulatory reforms that will affect credit availability
The failure of capital to provide adequate protection against loss
Delayed recognition of credit impairment
Need for stronger liquidity
The BCBS initiated major reforms of banks’ capital and liquidity
rules to address the vulnerability know as Basel III
Regulatory reform and credit availability
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Bank capital ratios will rise substantially by 2019 with add-ons
SIFIs will have to hold capital beyond this of 1% to 2.5%.
Some countries implement BIII on an accelerated schedule
Strengthening capital regulation
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Impact quite significant for Core T1
Large for banks in Group 1 with bigger interbank/trading book
exposures. €557 bn for Group 1 banks to get to 7%
Impact of BIII on capital in QIS
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Asian EM banks have CAR well above the new minimum, but
rapid credit growth will push down CAR, requiring new capital
Impact of BIII varies across countries
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The quality of capital is improved to raise loss absorption with
more common equity and less hybrid capital
Risk weighting adjusted to better reflects credit risk
Supervision strengthened to ensure regulation implemented
Accounting reforms of IFRS to allow more forward looking
provisioning
Some impact of BIII on credit but BCBS QIS find it to be modest
Regulatory reforms affecting credit access
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The experience of crises show that there is no tradeoff between
strong regulation and credit availability over the long run
Rapid credit growth facilitated by lax regulation leads to financial
crisis and a large contraction of credit
Expanding access to credit over the long term involves
strengthening the credit culture
Misaligned incentives that lead to excessive credit growth need
to be addressed
Financial stability is needed to ensure credit
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Don’t water down BIII: banks may need to issue more equity to
ensure regulatory tightening doesn’t slow credit growth
Use full scope for countercyclical capital buffer to limit fall in
credit in downturn
Strengthened pricing of credit risk ensures sustainable credit
Use scope in revised accounting rules to provision up front –
despite P/L impact – not when risk materializes (in a crisis)
Coordination among supervisors to limit regulatory arbitrage
Regulation must internalize credit effect