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Bank
Supervision
 Principles for Sound Liquidity Risk Management and Supervision
Bank of International Settlements. June 2008.
The market turmoil that began in mid-2007 re-emphasized the importance of liquidity to the functioning of financial markets and the banking sector. In advance of the turmoil, asset markets were buoyant and funding was readily available at low cost. The reversal in market conditions illustrated how quickly liquidity can evaporate and that illiquidity can last for an extended period of time. In order to account for financial market developments as well as lessons learned from the turmoil, the Basel Committee has conducted a fundamental review of its 2000 Sound Practices for Managing Liquidity in Banking Organizations. Guidance has been significantly expanded in a number of key areas.
 Bank Competition and Financial Stability: Friends or Foes?
Thorsten Beck. The World Bank. Development Research Group. Finance and Private Sector Team. June 2008
Theory makes ambiguous predictions about the relationship between market structure and competitiveness of the banking system and banking sector stability. Empirical studies focusing on individual countries provide similarly ambiguous results, while cross-country studies point mostly to a positive relationship between competition and stability in the banking system. Where liberalization and unfettered competition have resulted in fragility, this has been mostly the consequence of regulatory and supervisory failures. The advantages of competition for an efficient and inclusive financial system are strong, and regulatory and supervisory policies should focus on an incentive compatible environment for banking rather than try to fine-tune market structure or the degree of competition.
Bank Regulations Are Changing: For Better or Worse?
James R. Barth, Gerard Caprio, Jr., Ross Levine. The World Bank. Development Research Group. Finance and Private Sector Team. June 2008
This paper presents new and official survey information on bank regulations in 142 countries and makes comparisons with two earlier surveys. The data do not
suggest that countries have primarily reformed their bank regulations for the better over the last decade. Following Basel guidelines many countries strengthened capital regulations and official supervisory agencies, but existing evidence suggests that these reforms will not improve bank stability or efficiency. While some countries have empowered private monitoring of banks, consistent with the third pillar of Basel II, there are many exceptions and reversals along this dimension.
Securitization: Was the tail wagging the dog?
Keynote speech by Mr Malcolm D Knight, General Manager of the BIS, on the occasion of the 33rd Annual Conference of the International Organization of Securities Commissions (IOSCO), Autorité des Marchés Financiers (AMF), Paris, 29 May 2008.
The securitization process has been at the heart of the ongoing financial market turmoil that began almost a year ago as the "US subprime mortgage crisis". A key issue is whether securitization is the proverbial dog that has been wagged by its own tail. One question for today is whether the realization of "tail risks" wagged the "dog" of the securitization process to the point where it is no longer seen as a useful element of the financial system. Or, on the contrary, did the basic weaknesses lie in the way securitization was implemented? And can the securitization process be strengthened and its shortcomings redressed so that it can continue to play a key role in the operation of the financial system?
 Nout Wellink: The significant role of microfinance and supervisory issues
Speech by Dr Nout Wellink, President of the Netherlands Bank and Chairman of the Basel Committee on Banking Supervision, at the ING Microfinance Seminar “A billion to gain – the next phase”, Amsterdam. June 16, 2008.
Microfinance is becoming ever more relevant, and there can therefore be no doubt that we need to keep it on our agendas. Today, I want to touch upon two issues. I will start with the significant and increasing role of microfinance to combat poverty in the world. This role cannot be called “micro” anymore. Then, I will discuss some supervisory issues that follow from the microfinance concept.
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Recommended
Readings
Ratings in structured finance: What went wrong and what can be done to address shortcomings?
Report submitted by a Study Group established by the Committee on the Global Financial System. Bank for International Settlements.
The role of credit ratings in structured finance is a topic of long-standing interest to the Committee on the Global Financial System (CGFS). Against the backdrop of the turmoil in the markets for structured credit products, the CGFS in September 2007 discussed the use of credit ratings in structured finance. Following this discussion and a request by the Financial Stability Forum (FSF), the 2005 report (The role of ratings in structured finance: issues and implications) was actualized. This new report draws on the lessons that have been learnt during the credit turmoil on vulnerabilities of ratings of structured finance products, and provides a number of recommendations to address weaknesses that were identified. The report incorporates a summary of the feedback received during the consultation process.
Bank Involvement with SMEs: Beyond Relationship Lending
Augusto de la Torre, María Soledad Martínez Pería, Sergio L. Schmukler. The World Bank. Development Economics Research Group & Latin America and the Caribbean Region. June 2008.
The “conventional wisdom” in academic and policy circles argues that, while large and foreign banks are generally not interested in serving SMEs, small and niche banks have an advantage in doing so because they can overcome SME opaqueness through relationship lending. This paper shows that there is a gap between this view and what banks actually do. Banks perceive SMEs as a core and strategic business and seem well positioned to expand their links with SMEs. The recent intensification of bank involvement with SMEs in various emerging markets documented in this paper is neither led by small or niche banks nor highly dependent on relationship lending. Rather, all types of banks are catering to SMEs.
 Randall S Kroszner: Prospects for recovery and repair of mortgage markets
Speech by Mr. Randall S Kroszner, Member of the Board of Governors of the US Federal Reserve System, at the Conference of State Bank Supervisors Annual Conference, Amelia Island Plantation, Florida, 22 May 2008.
Today I will offer my perspective on the prospects for recovery and repair of the mortgage markets, which I believe will be a gradual process that requires both market and regulatory discipline. Although any assessment at this stage about the recovery and repair of mortgage markets is preliminary, I will outline some steps, many of which are already in train, which can foster the rehabilitation process. As part of this discussion, I will highlight what the Federal Reserve is doing to facilitate improvements in the mortgage markets, some of which involve important collaborations with the Conference of State Bank Supervisors (CSBS).
Who Are the Unbanked?
Simeon Djankov, Pedro Miranda, Enrique Seira, Siddharth Sharma. The World Bank. Private Sector Development Department. Enterprise Analysis Unit. June 2008
This paper uses nationally representative survey data from Mexico to compare households with savings accounts in formal financial institutions with their neighbors who are not account holders. The survey, which was conducted in 2005, contains information on nearly 5,000 households. The findings show that although neighboring banked and unbanked households have similar demographic and occupational profiles, the former are more educated and have markedly greater wealth.
Frederic S Mishkin: How should we respond to asset price bubbles?
Speech by Mr Frederic S Mishkin, Member of the Board of Governors of the US Federal Reserve System, at the Wharton Financial Institutions Center and Oliver Wyman Institute's Annual Financial Risk Roundtable, Philadelphia, Pennsylvania, 15 May 2008.
In my remarks today, I would like to return to the issue of how we should respond to possible asset price bubbles. I will first focus on the conceptual framework I use to evaluate these issues, based on a core set of scientific principles for monetary policy. My framing of the issues highlights the following three questions:
• Are some asset price bubbles more problematic than others?
• How should monetary policy respond to asset price bubbles? and
• What other types of policy responses are appropriate?
My discussion of these conceptual issues is followed by a summary of several historical examples that illustrate the importance of focusing on the principles I have outlined.
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