Rosa M. Lastra

Risk‐based capital requirements and their impact upon the banking industry: Basel II and CAD III

The Basel Committee has proposed a new capital framework to respond to the deficiencies of the 1988 Capital Accord (Basel I). The 1988 Accord has been criticised for its crude assessment of risk and for creating opportunities for regulatory arbitrage. In principle, the new approach, often referred to as Basel II, is not intended to raise or lower the overall level of regulatory capital currently held by banks, but to make it more risk sensitive. The spirit of the new Accord is to encourage the use of internal systems for measuring risks and allocating capital (the Accord extends the use of internal models from market risk to credit risk). A number of issues have been raised, however, with regard to its complexity, its cost, its impact on procyclicality, the possibility that it can lead to competitive distortions if some countries do not apply it (some big emerging economies) or apply it differently to small and big institutions (the USA) and others. Banks in Europe will also be obliged to comply with the new Capital Directive, often referred to as CAD III, which is the means by which the EU will implement the new Basel Capital Accord. CAD III will apply to all credit institutions and investment firms and not only to internationally active banks, as Basel does. This paper presents a critical approach to these developments and examines their impact upon the banking industry.

Lender of Last Resort, an International Perspective

The name “lender of last resort” owes its origins to Sir Francis Barings, who in 1797 referred to the Bank of England as the “dernier resort” from which all banks could obtain liquidity in times of crisis.1 The lender of last resort (“LOLR”) role of the central bank remains a major rationale for most central banks around the world, in both developed and developing countries.2 While other central bank functions have recently come under fire (e.g. banking supervision), the importance of having the LOLR under the umbrella of the central bank is seldom contested.3 It is the immediacy of the availability of central bank credit (the central bank being the ultimate supplier of high-powered money) that makes the LOLR particularly suitable to confront emergency situations.

The Role of the IMF as a Global Financial Authority

The financial crisis has taught us many lessons. One of them is that financial institutions are only global in good times, they retrench to national frontiers when things turn sour. However, this state of affairs has to change if financial institutions and markets can credibly claim to be global. This suggests that international solutions are needed for international problems. In this context, I contend that the International Monetary Fund, the institution at the centre of the international monetary and financial system, is best placed to adopt a role as a ‘global sheriff’ (echoing the words of George Soros in the 2010 Davos meeting) with regard to international financial stability.

Non-Performing Loans: Regulatory and Accounting Treatments of Assets

Asset quality is an essential part of sound banking. However, asset quality is difficult for banking regulators and investors to assess in the absence of a common, cross-border scheme to classify assets. Currently no standard is applied universally to classify loans, the most sizable asset on many banks’ balance sheets. As a corollary, no common definition of non-performing loans (NPLs) exists. This paper documents divergences in the definition of NPLs across countries, accounting regimes, firms and data sources. The paper’s originality is in attending to the legal, accounting, statistical, economic and strategic aspects of loan loss provisioning (LLP) and NPLs, topics that are multidisciplinary by nature but have not been dealt with in the literature in an integrated fashion before. Since the 2007 Great Financial Crisis (GFC), accounting bodies and prudential regulators are increasingly focused on early recognition of credit losses and enhanced disclosure. A common approach to NPL recognition might complement these initiatives.

Lender of last resort and banking union

1. Banking union in Europe Juan Castaneda, David G. Mayes and Geoffrey Wood 2. Banking union: the way forward Thomas F. Huertas 3. Plausible recovery and resolution plans for cross-border financial institutions Giannoula Karamichailidou and David G. Mayes 4. The Cyprus debacle: implications for the European banking union Kate Phylaktis 5. Euro area bank resolution and bail-in - intervention, triggers and writedowns Thomas Conlon and John Cotter Comment Alessandro Roselli 6. Lender of last resort and banking union Rosa M. Lastra 7. Resolution planning and structural reform within the banking union Jens-Hinrich Binder 8. Shadows and mirrors: the role of debt in the developing resolution strategies in the US, UK and European Union Michael Krimminger 9. Resolution of failing banks in the European banking union: finishing the job or going back to the drawing board? Johan A Lybeck 10. Monetary policy and long-term trends Charles A.E. Goodhart and Philipp ErfurthThe sovereign crisis that has characterised the eurozone since 2010 has highlighted the potentially vicious circle between banks and sovereigns, adding an extra dimension to the 2007/08 financial crisis. This is why the EU heads of state and government committed to a European banking union in June 2012; a vision that was further developed in the European Commission’s blueprint. The aim of the banking union is to ensure that the financial institutions of the – for now – 19 member states will be subject to a single supervision, a single resolution and a common deposit insurance system. This article explains the background to these initiatives and weighs the progress towards their completion.

Pension provision, lifetime financial sustainability, care and dignity in old age: legal and economic issues: Multidisciplinary Reflections

The legal, policy and economic issues associated with pension provision, lifetime financial sustainability, and care and dignity in old age and their implications for home life are fundamental challenges for the future of our society. Pension provision is in crisis and this chapter highlights the crucial policy choices and regulatory challenges. It considers the importance of the ‘nuclear family’ and the ‘extended family’ in the provision of care, from child care to old-age care. The home, supported by the wider society, is the natural environment in which such provision is best anchored. An adequate legal and regulatory framework for pensions needs to balance a number of competing interests, bearing in mind the implications in terms of intergenerational debt of the financing of care and income in old age, and the broader social-justice considerations in the design of pension schemes that safeguard dignity in old age in a market economy.

Pension Provision, Care and Dignity in Old Age: Legal and Economic Issues

The legal, policy and economic issues associated with pension provision, care and dignity in old age are fundamental challenges for the future of our society. Pension provision is in crisis and this paper highlights the policy choices and regulatory challenges that this entails. The analysis also highlights the importance of the ‘nuclear family’ and the ‘extended family’ in the provision of care, from child care to old age care and the consideration that the home is the natural environment in which such provision ought to take place. In this context, an adequate legal and regulatory framework for pensions needs to balance a number of competing interests, given the implications in terms of intergenerational debt of the financing of care and income in old age and the broader social justice considerations that are at stake in the design of schemes that provide adequate care and income in old age in a market economy. The starting point should be the dignity of human beings, which today finds general acceptance via the United Nations Universal Declaration of Human Rights. In this context, we highlight inter alia major issues of generational fairness arising in the UK, linked partly but not solely to pension issues. Possible political consequences are a “battle of generations” in the future.

The rule of law in monetary affairs : world trade forum

1. Introduction and overview Thomas Cottier, Rosa M. Lastra, Lucia Satragno and Christian Tietje Part I. Legal Foundations and Evolution of the International Monetary System: 2. The role of law in monetary affairs: taking stock Christian Tietje 3. The international monetary and financial architecture - some institutional aspects Mario Giovanoli 4. The role of central banks in monetary affairs: a comparative perspective Rosa M. Lastra 5. Monetary union and the law: some comments Jean-Victor Louis Part II. Specific Policy Issues in Monetary Affairs: 6. Global governance of international competitiveness spillovers Bernard Hoekman 7. Global benchmark interest rates: conflicting objectives and increasing hybridization Claus D. Zimmermann 8. Credit rating agencies: regulation and financial stability Iain Macneil 9. Monitoring and surveillance at the international monetary system: what can be learnt from the trade field? Nadia Rendak 10. The impact of sovereign debt on EU monetary affairs Annamaria Viterbo 11. Taxation in times of austerity: a question of political economy Isabel Feichtner Part III. The Interaction between WTO Law and Monetary Affairs: 12. Towards an equitable integration of monetary and financial matters, trade and sustainable development Robert Howse 13. Trade imbalances and multilateral trade cooperation Juan Marchetti, Michele Ruta and Robert Teh 14. The WTO dispute settlement mechanism in matters involving exchanges rates and trade Gabrielle Z. Marceau and John J. Maughan 15. Monetary affairs in the WTO Trade Policy Review Mathias Kende Part IV. The Quest for Law in Monetary Policy: 16. The potential of law and legal methodology in monetary affairs Thomas Cottier and Lucia Satragno 17. Framework of analysis: towards multilayered governance in monetary affairs Ernst-Ulrich Petersmann 18. Transparency and monetary affairs Christine Kaufmann and Rolf H. Weber 19. Human rights and austerity programmes Markus Krajewski 20. International economic law and macro-prudential regulation Kern Alexander 21. Relationship between monetary policy and exchange rate policy Francois Gianviti 22. Monetary policy measures in investment law: the uneasy relationship between monetary stability and investment protection Federico Lupo Pasini.