FSR Financial Stability Review April 2017 The impact of financial reforms 21 CONTENTS INTRODUCTORY ARTICLE Towards financial stability: 7 A common good that needs to be consolidated and reinforced François VILLEROY de GALHAU, Banque de France OVERVIEW AND ISSUES AT STAKE Ten years on: fixing the fault lines of the global financial crisis 13 Mark CARNEY, Financial Stability Board and Bank of England HAVE FINANCIAL INSTITUTIONS BEEN MADE MORE RESILIENT? Safer than ever before? An assessment of the impact of regulation 23 on banks’ resilience eight years on Danièle NOUY, Single Supervisory Mechanism Measuring the impact of Basel III 33 Douglas J. ELLIOTT and Emre BALTA, Oliver Wyman The impact of financial regulation: a G-SIB perspective 45 Axel WEBER, UBS Group AG Bank health post-crisis 55 Kyriakos CHOUSAKOS, Yale University, and Gary GORTON, Yale University and NBER HAVE REGULATORS SUCCESSFULLY ADDRESSED THE “TOO-BIG-TO-FAIL” PROBLEM? Implementing an efficient resolution framework in the Banking Union: 71 lessons from the crisis and challenges ahead Elke KÖNIG, Single Resolution Board Building a strong financial sector 77 Valdis DOMBROVSKIS, European Commission National and supranational banking regulators: between delayed intervention 87 and time inconsistency Bruno Maria PARIGI, University of Padova and CESifo Banque de France Financial Stability Review No. 21 - April 2017 - The impact of financial reforms 3 CONTENTS ARE DERIVATIVE MARKETS SAFER? Central clearing: reaping the benefits, controlling the risks 97 Benoît CŒURÉ, European Central Bank and Committee on Payments and Market Infrastructures (BIS) A systemic risk assessment of OTC derivatives reforms and skin-in-the-game for CCPs 111 Sheri MARKOSE, University of Essex, Simone GIANSANTE, Bath Management School, and Ali RAIS SHAGHAGHI, Cambridge Centre for Risk Studies Central clearing and risk transformation 127 Rama CONT, Imperial College and CNRS TOWARDS SOUND MARKET-BASED FINANCE? Have post-crisis financial reforms crimped market liquidity? 141 Avinash PERSAUD, Intelligence Capital Limited and Gresham College A stability perspective of market-based finance: designing new prudential tools? 149 Steven MAIJOOR and Clément BOIDARD, European Securities and Markets Authority Macroprudential measures and capital controls: towards a framework for policy evaluation 157 Claudia BUCH, Deutsche Bundesbank PUBLISHED ARTICLES 167 4 Banque de France Financial Stability Review No. 21 - April 2017 - The impact of financial reforms Introductory article François Towards financial stability: a common good VILLEROY de GALHAU Governor that needs to be consolidated and reinforced Banque de France n the immediate aftermath of the crisis, The financial crisis had a huge impact on the at the London Summit in April 2009, real economy: many countries have still not the G20 heads of state and government got seen a return to pre-crisis levels of output and Itogether to launch a concerted global action are suffering from high levels of unemployment, plan. Their joint aim was to address the flaws in while the cost of bank bailouts to public finances the existing regulatory framework, which had continues to weigh on growth. The cumulative proved incapable of preventing imbalances from loss of output since the crisis, compared to its building up in the financial system and from pre-crisis trend, is of the order of 25% of one spilling over to the real economy. Eight years year’s world GDP.1 To prevent a repeat of the later, with most of the elements in this plan now turmoil, considerable efforts have been made at being finalised, concerns are being raised as to the international level since 2008. The members of potential negative effects of the new regulations, the G20 have significantly reinforced the regulatory with some even questioning the need for robust framework, starting with prudential standards for global regulations to safeguard financial stability. banks under Basel III, and then gradually extending their scope of intervention to other areas and In order to contribute to the debate and provide sectors: the centralised clearing of over-the-counter some factual enlightenment, the Banque de France derivatives, the resolution of systemically has chosen, for its 2017 Financial Stability Review, important banks, the regulation of the shadow to bring together the views of public authorities, banking system and of credit rating agencies, academics and industry representatives. With the and the development of macroprudential policy. benefit of a few years’ hindsight, and based on the results of various assessment exercises, the These unprecedented regulatory reforms, contributions point to both an achievement and a coordinated globally, constitute an essential challenge. The achievement is that the regulatory achievement and a shared foundation that must be reforms put in place since the crisis have made the preserved in all G20 jurisdictions. On the whole, global financial system substantially more resilient, the standards agreed at global level have been with no noticeable adverse impact on growth. implemented in a timely and consistent manner The challenge now is to finalise the regulatory by all G20 members, as evidenced by the findings framework and guarantee its long-term sustainability. of the Financial Stability Board’s (FSB) annual country peer reviews. The impact of the reforms on the resilience of the financial system has been very 1| What we have achieved: largely positive. Banks in particular are in a much the action plan agreed by the G20 stronger position, both in terms of their ability 1 See IMF World Economic has largely met its objective to withstand liquidity shocks and their solvency: Outlook, April 2015; Ollivaud (P.) without weighing to any noticeable and Turner (D.), the core equity (CET1) ratio of the largest banks The effect of the global financial extent on economic growth operating at international level has been raised crisis on OECD potential output, from 7.1% in mid-2011 to 11.9% in mid-2016.2 OECD Working Papers, No. 1166, 2014. The 2008 crisis exposed the urgent need to reinforce 2 BCBS, Basel III Monitoring financial stability, and prompted a swift and Various studies have been carried out to measure Report, February 2017. resolute response on the part of public authorities. the impact of the reforms on the financing of Data for Group 1 banks. Banque de France Financial Stability Review No. 21 - April 2017 - The impact of financial reforms 7 Towards financial stability: a common good that needs to be consolidated and reinforced François Villeroy de Galhau the economy and on growth. The most extensive 2| The challenge for tomorrow: were those conducted by the Basel Committee’s to consolidate and complete Macroeconomic Assessment Group (MAG)3 this achievement while ensuring in 2010, before the introduction of the Basel III the long-term sustainability reform, and which used 97 models and simulation of the new regulatory framework tools to examine the effects of the regulatory transition. These were complemented by the work The priority today, nearly ten years after the of the Long-term Economic Impact group (LEI),4 crisis, is to finalise the work in progress in order which measured the long-run effects of the reforms to stabilise the regulatory framework for both the on economic growth. The MAG concluded, from a bank and non-bank sectors. broad range of estimates, that the median increase in the cost of credit in response to a 1 percentage point With regard to the banking sector first,the rise in the target capital ratio would be roughly main concern now is to complete the Basel III 15 basis points. But in actual fact, this impact framework, and not to put together some never materialised. Indeed, the favourable effects hypothetical Basel IV reform. As reiterated by of the interest rate cuts under the accommodative the G20 heads of state at the Hangzhou Summit monetary policy stance have far outweighed the in September 2016, Basel III should be finalised feared negative consequences of stricter regulatory without significantly increasing overall capital requirements. Since then, other studies have been requirements. The main elements of the package conducted by the financial industry itself, by have already been approved at international level academics, central banks and international and and have largely entered into force in most G20 European organisations. The debate is clearly a jurisdictions, notably the standardisation complex one, and results may vary depending on and significant reinforcement of capital, the the particular methodology used. Nevertheless, introduction of a leverage ratio, new liquidity what largely emerges from these analyses is that ratios and macroprudential capital buffers, and the the new bank prudential regulations have been reform of bank trading books. The remaining work implemented with no noticeable impact on underway relates essentially to the measurement global economic growth and without creating any of risk in bank balance sheets. In this respect, major conflicts between the objectives of financial the Basel Committee has made significant efforts stability on the one hand and the financing of the over the past few years to simplify and improve economy on the other. I stand firm in my belief: the comparability of risk-weighted assets across no one can seriously claim, either in France or in institutions and jurisdictions, in order to reduce Europe, or indeed in any advanced economy, that unjustified variations in results.