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ENSURING BANKING STABILITY

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EMU and enlargement are enhancing this process further ... Dominance of large banks and cartel banking in Europe: too big too fail ... – PowerPoint PPT presentation

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Title: ENSURING BANKING STABILITY


1
ENSURING BANKING STABILITY
  • Prof. Harald Benink
  • RSM Erasmus University
  • November 16, 2007

2
EUROPE AS TREND SETTER
  • Internal market program
  • Europe as an increasingly integrated,
    liberalized financial market
  • Model for the evolving banking regulatory
    structure in developed countries
  • EMU and enlargement are enhancing this process
    further

3
EVOLUTION OF BANK CAPITAL/ASSET RATIOS (1847-2001)
4
EVOLUTION OF NON-FINANCIAL CAPITAL /ASSET RATIOS
(1978-2002)
5
REDUCTION IN BANK CAPITAL/ASSET RATIOS
  • Increasing diversification of banks in the late
    1800s and early 1900s
  • No real banking crises in Europe in the 1930s
  • Dominance of large banks and cartel banking in
    Europe too big too fail (explicit and implicit
    guarantees)

6
THREATS TO BANK SOLVENCYIN EUROPE
  • Greater competition among EU banks
  • Competition from non-banks enabled by ICT
    technology
  • Losses by no-longer-protected undiversified banks
    (existing and new ones)

7
PROPOSAL FOR ENSURING BANKING STABILITY
  • Limitation of deposit insurance to deposits
  • Protect the deposit insurance fund and taxpayers
    from losses by requiring over-collateralization
    or relatively high level of capital
  • Structured early intervention and resolution

8
LIMITATION OF DEPOSIT INSURANCE TO DEPOSITS
  • Account must be repaid at par and offer explicit
    interest payments that do not exceed a relatively
    small amount above the comparable Treasury rate
  • Make it administratively easier to distinguish
    deposits from other (uninsured) investment
    accounts

9
COLLATERALIZED DEPOSITS
  • Over-collateralize deposits with obligations for
    which default and interest-rate risk can be
    calculated daily
  • Very small probability that immediately
    obtainable market value of the collateral is less
    than the amount of insured deposits

10
RELATIVELY HIGH CAPITAL
  • Relatively high regulatory capital requirement
  • Equity capital and debt capital
  • Debt can count as capital if it is explicitly
    and credibly uninsured and may not be redeemed
    except from funds that are obtained from new
    issues that replace the debt capital

11
RELATIVELY HIGH CAPITAL (continued)
  • Capital requirement should be substantial, for
    instance, 15
  • Daily or reliable market values for most banking
    assets are not available
  • Most bank assets are not very liquid
  • Most banks have substantial amounts of debt which
    could serve as debt capital

12
STRUCTURED EARLY INTERVENTION AND RESOLUTION
  • Establishment of capital/asset zones
  • Highest zone (above 15) limited overall
    supervision
  • Falling below 15 greater supervision and
    requirement to submit business plan
  • Falling below 10 direct monitoring and
    supervision
  • Falling below 5 take over the bank
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