Re Thinking Regulation and Monetary Policies?: Until Asset Valuations and Risk Taking Levels Are Conrolled…
4 Pages Posted: 9 Jul 2019
Date Written: July 5, 2019
Reforms on capital standards, namely the introduction of important liquidity standards such as the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), along with leverage ratios… standard, supplementary and enhanced supplementary leverage ratios comprise some of the macro prudential policies that have been adopted in response to flaws which were inherent in the Basel risk based capital framework.
These very vital developments aimed at addressing the inability of adequately assessing levels of liquidity – owing to complex channels through which these were transferred – particularly during periods where the financial cycles were approaching “bust” levels/ recessionary periods; as well as difficulties in accurately estimating asset prices (overvalued assets particularly); as well as difficulties attributed to those financial institutions deemed to have met capital requirements (under Basel II) – which however, struggled to meet liquidity requirements or rather, did not have enough liquid assets to meet their liabilities as these fell due, triggered the need to introduce conservative buffers, counter cyclical buffers as part of those measures to address the pro cyclical nature attributed to Basel II.
With the rise of crypto currency platforms, data analytics – as well risk induced based activities, will there ever be a way of regulating - such that incentives to engage in risk prone activities are not encouraged?
This chapter highlights recent efforts being taken by regulators to accord greater attention to financial institutions which are more prone to risk taking incentives and which are also considered to be systemically relevant in terms of their nature, size and complexity.
Keywords: monetary policies, macro prudential policies, inflation, financial stability, conservative buffers, counter cyclical buffers, leverage ratios, liquidity standards, risk based capital adequacy framework, Basel capital framework, Dodd-Frank Act
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