Along with the Bank of England and the Federal Reserve, the SNB is represented as an observer in the IBA oversight committee. Matters discussed by the oversight committee include methodology, definition and data basis for the Libor rates; as such it plays an important role in supporting and evaluating the reforms that have been adopted. BIS central bankers’ speeches  3  Charts  4  BIS central bankers’ speeches  BIS central bankers’ speeches  5
The combination of complexity and manipulation has led to a loss of faith by investors in model outputs, and in particular risk weights, over the past few years. Surveys of investors suggest a fairly deep-seated scepticism about risk weights, with only a small fraction believing them trustworthy (Chart 9). From a low base, investor faith in these risk weights has continued to fall fast (Chart 10). These concerns appear to be reflected in the pricing of bank risk. Bank investors appear to have moved towards using simpler metrics, such as leverage ratios, when assessing capital adequacy. There is a positive correlation between banks’ leverage ratios and their market price-to-book ratios (Hoenig (2013)). No such correlation exists for banks’ regulatory capital ratios. Investors seem to have begun pricing the solvency risk they best understand. The lack of transparency about, and investor trust in, risk weights has important implications. For regulators, a lack of transparency can damage the power of market discipline in constraining risk-taking – so-called Pillar III of Basel. Or, put differently, the complexity of Pillar I of the Basel Tower (regulatory rules) risks emasculating Pillar III (market discipline). Pillar I has become Popeye’s forearm, Pillar III his bicep.3 For investors, uncertainty about banks’ true capital adequacy is priced. Where there is uncertainty, they will factor a premium into banks’ cost of capital. That may be one of the reasons many of the world’s largest banks have continued to trade at a discount to their equity book value.