22 Sep 2010
Thinking beyond Basel III Adrian Blundell-Wignall, Paul Atkinson
In previous studies, the OECD has identified the main hallmarks of the crisis as too-big-to-fail institutions that took on too much risk; insolvency resulting from contagion and counterparty risk; the lack of regulatory and supervisory integration; and the lack of efficient resolution regimes. This article looks at how the Basel III proposals address these issues, helping to reduce the chance of another crisis like the current one. The Basel III capital proposals have some very useful elements, notably a leverage ratio, a capital buffer and the proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses. However, this report also identifies some major concerns. For example, Basel III does not properly address the most fundamental regulatory problem that the "promises" that make up any financial system are not treated equally. This issue has many implications for the reform process, including reform of the structure of the supervision and regulation process and whether the shadow banking system should be incorporated into the regulatory framework – and, if so, how. Finally, modifications in the overall riskweighted asset framework are suggested that would deal with concentration issues.
22 Sep 2010
The Design of Government Guarantees for Bank Bonds Aviram Levy, Sebastian Schich
In 2010 authorities have taken the first steps to end some of the public support measures put in place in response to the financial crisis, starting with government guarantees for bond issues. Financial institutions have made extensive use of this tool, which has been effective in avoiding a further tightening of funding conditions, but this type of public support has, nonetheless, raised some concerns. First, the cost of issuing guaranteed bonds has mainly reflected the characteristics of the sovereign guarantor rather than those of the issuer, thus favouring "weak" borrowers with a "strong" sovereign backing. This situation has the potential to distort competition and create incentives for excessive risk taking. Such effects could have been reduced by the choice of a different fee determination mechanism. Second, the continued availability in 2010 of guarantee schemes, despite a declining overall usage, may be alleviating the pressure on some weak financial institutions to address their weaknesses: the average creditworthiness of banks issuing after mid-2009, when market conditions became more favourable, has sharply declined. JEL Classification: G01, G12, G21, G28. Keywords: financial crisis, policy response to the crisis, government guaranteed bonds, competitive distortions
22 Sep 2010
Risks Ahead for the Financial Industry in a Changing Interest Rate Environment Gert Wehinger
The current interest rate environment has been conducive to financial institutions assuming exposure to interest rate risks. As interest rates are expected to rise globally, albeit slowly, and current steep yield curves may soon flatten, such risks may materialise in the near future. At the same time, weaknesses in the banking sector still exist, especially for some segments of the European banking sector. While the effects of changes in interest rates and their structure on financial institutions differ, recent changes in asset and funding structures of banks make them generally more vulnerable to a changing interest rate environment. Currency risk exposure has also grown, and regional concentration may pose specific risks. An unravelling of carry trades will have a negative effect on some institutions. Proper risk management can help during an adjustment process, and regulatory reforms underway will better support risk management functions in financial institutions that are, in any case, already adjusting to the new environment. JEL Classification: G01, G12, G15, G21, G32 Keywords: financial crisis, interest rate risks, sovereign risks, bond markets, banks
22 Sep 2010
Assessing Default Investment Strategies in Defined Contribution Pension Plans Pablo Antolin, Stéphanie Payet, Juan Yermo
This paper assesses the relative performance of different investment strategies for different structures of the payout phase. In particular, it looks at whether the specific glide-path of life-cycle investment strategies and the introduction of dynamic features in the design of default investment strategies affect significantly retirement income outcomes. The analysis concludes that there is no "one-size-fits-all" default investment option. Life-cycle and dynamic investment strategies deliver comparable replacement rates adjusted by risk. However, life-cycle strategies that maintain a constant exposure to equities during most of the accumulation period, switching swiftly to bonds in the last decade before retirement, seem to produce better results and are easier to explain. Dynamic management strategies can provide somewhat higher replacement rates for a given level of risk than the more deterministic strategies, at least in the case of pay-outs in the form of variable withdrawals. The length of the contribution period also affects the ranking of the different investment strategies with life-cycle strategies having a stronger positive impact the shorter is the contribution period.
22 Sep 2010
Consumer Protection and Financial Innovation Stephen Lumpkin
The issue of financial innovation and consumer protection is mostly about access and suitability. Access refers to a situation in which affordable, mainstream financial products are available to all segments of the population across the range of income levels and demographic characteristics. Suitability addresses the appropriateness of the products for particular consumer groups. Innovative products will tend generally to be either positive for access to finance or neutral. But products that actually result in increased access to finance may nonetheless still raise suitability issues. Innovative products can be particularly difficult for retail consumers to understand and better financial education is needed to help address financial illiteracy. In addition, service providers should have appropriate internal controls to minimise the chances that consumers take on inappropriate exposures. Even the best disclosures, alone, may not be adequate, so to avoid situations in which retail investors become involved with unsuitable products, institutions should be "encouraged" to develop sufficient measures for client protection as part of their product development activities. Stricter penalties should be used when needed to address mis-selling, fraud or firm misconduct. JEL Classification: G01, G28, G38. Keywords: Financial innovation, consumer protection, financial regulation
22 Sep 2010
Debt Markets Hans J. Blommestein, Vincenzo Guzzo, Allison Holland, Yibin Mu
Discussions at the 11th OECD-WBG-IMF Global Bond Market Forum focused on four key areas: i) the impact of crisis-related measures and the potential implications of exit; ii) the measurement of sovereign risk; iii) the determinants of investor demand; and iv) debt managers’ response to the crisis. Overall, participants felt that the steps taken to stabilise financial conditions had generally been effective and that conditions in financial markets were normalising. However, discussions highlighted a number of ongoing risks including: i) while credible consolidation plans were needed, fiscal and monetary policy would be tightened too soon; ii) managing investor uncertainty would prove critical in managing risk in the near-term; and (iii) regulatory changes might lead to a deterioration in conditions in primary and secondary markets and otherwise aggravate the challenges facing debt managers. JEL Classification: G15, G18, G20, G24, G32, G38, H62, H68 Keywords: Outlook on public deficits and government debt, crisis and debt management policies, government debt market, measurement of sovereign risk, investor demand, exit strategy
22 Sep 2010
A Suggested New Approach to the Measurement and Reporting of Gross Short- Term Borrowing Operations by Governments Hans J. Blommestein, Ove Sten Jensen, Thomas Olofsson
As part of its Borrowing Outlook, the OECD estimates gross short– term government borrowing requirements. The article concludes that all methods for measuring short-term borrowing needs studied here – except one – provide either significantly underestimated or substantially overestimated measures. The article therefore suggests adopting the following measure: Gross Short-Term Marketable Borrowing Requirements is equal to Net Short-Term Borrowing Requirements plus the outstanding amount of the stock of short-term instruments. This new measure (referred to as Method 2 in the study) yields, in principle, meaningful estimates, comparable across different countries. JEL Classification: G15, G18, H63, H68. Keywords: measuring gross short-term borrowing requirements, debt
22 Sep 2010
Statistical Yearbook on African Central Government Debt Hans J. Blommestein, Thor Saari
The borrowing needs of African governments are increasingly met by issuing marketable debt instruments. Leading practices from OECD governments exert an important influence on debt management and the functioning of markets for sovereign debt instruments. This first issue of the Statistical Yearbook on African Central Government Debt provides comprehensive and consistent information on African central government debt instruments. It includes individual country data but also comparative statistics to facilitate pan-African (cross-country) analysis. JEL Classification: G2, G28, H63 Keywords: African borrowing needs and debt instruments, public debt management, Statistical Yearbook on African Central Government Debt
