By making firms safer, it is possible that the required risk premia in bank capital and funding instruments will be lower, and hence the effect on the overall cost of funding is uncertain. In addition CRDIV also makes changes to rules on corporate governance, including remuneration, and introduces standardised EU regulatory reporting. These reporting requirements will specify the information firms must report to supervisors in areas such as own funds, large exposures and financial information. CRDIV will take until 2019 to be fully implemented. In addition to CRDIV, there are a number of other reviews and developments affecting the banking capital framework. The PRA has been undertaking a review of its approach and application of Pillar 2A requirements to ensure consistency of application across firms. That will be complete in 2016H1. The BCBS is also continuing its work including reviews of the capital held against the trading book, sovereign risk, and securitisation, and more generally reviewing the use of models and Pillar III disclosures. Leverage The capital requirements for a bank are generally calculated by first weighting together the assets of a firm, reflecting the underlying risks of each type of asset. Hence the key metric is the capital held relative to “risk weighted assets” or RWAs. Whilst the general approach of being risk sensitive is widely accepted, it does raise issues around consistency.
As always, the thoughts I offer today are my own, and should not be interpreted as representing the position of the FOMC or the Federal Reserve System. First, what we may see in terms of market strains and macroeconomic adjustment during this normalization process will not be new. Changes in Fed policy, and especially the tightening of monetary policy, have often created challenges for countries abroad, especially in EMEs. Second, these countries, as a group, are better equipped today to handle those challenges than at perhaps any time in the past. This reflects the fundamental improvements and stronger policy frameworks that many EMEs have put in place over the past 15 years. Third, given the dollar’s role as the global reserve currency, the Federal Reserve has a special responsibility to manage U.S. monetary policy in a way that helps promote global financial stability. Like other central banks, our monetary policy mandate has a domestic focus. But, our actions often have global implications that feed back into the U.S. economy and financial markets, and we need to always keep this in mind. For most of us, the market volatility that we saw during the so-called “taper tantrum” in the spring and summer of 2013 still remains fresh in our minds. EME financial markets were hit hardest, with declines in equity prices, a widening in sovereign debt spreads and a sharp increase in foreign exchange rate volatility.