This market for short-term credit evolved in the United States in a manner in which transactions between lenders and borrowers covered only part of each day – from late afternoon to early morning. During the middle of the day, the two large clearing banks supplied huge amounts of intraday credit to the major securities dealers. Borrowers’ assumed this credit would always be available to them, and did not appreciate the rollover risk to which they could be exposed if a clearing bank decided not to lend to them during the day. Similarly, triparty lenders underestimated their exposure to borrowers, believing that the clearing banks would always return their funds each morning. When triparty borrowers encountered funding pressures, these assumptions were starkly called into question. The private sector Triparty Repo Infrastructure Task Force, created in 2009, has made progress toward the objective of creating a more stable triparty market, but deeper change is needed to achieve real systemic risk reduction in this market. I will return to this subject later. As part of our financial stability effort, we also need to build in short-circuit mechanisms that help to dampen shocks and increase resilience. This is reflected in work underway in implementing the Basel III agreements relating to the capital conservation buffer and also on capital planning in our supervisory process. This includes requirements for financial intermediaries to cease paying dividends when economic circumstances deteriorate.
Results of the comprehensive asset-assessment exercise As you probably all know, the European bank assessment exercise, covering 130 banks, most of which will be directly overseen by the SSM, essentially comprised two components. First, an asset quality review (the AQR), which basically involved an analysis of the rigour with which bank balance sheets reflect the value of different assets. The review evaluated, as appropriate, accounting classifications, collateral values, fair value calculation methods and the recognition of borrowers’ impaired creditworthiness. Second, a stress test, evaluating how solvency would fare in two macroeconomic scenarios: a baseline scenario, considered likely, and another highly adverse scenario. BIS central bankers’ speeches  1  In addition to increasing the transparency of banks’ financial position and to providing information to help ensure the effective functioning of the SSM as a supervisory authority from the outset, the analysis aimed to detect potential capital shortfalls that needed to be rapidly redressed. To do this, quantitative benchmarks were set for capital adequacy ratios – measured by the ratio of common equity tier 1 (CET1) capital to risk-weighted assets – for each part of the exercise (8% in the AQR and in the baseline scenario of the stress test, and 5.5% for the adverse scenario). The exercise was designed to high standards. This was manifest in the breadth of the field work done for the review of bank balance sheets, in the severity of the adverse macroeconomic scenario envisaged and in the wide range of risk (credit, market, sovereign, etc.) factors considered.