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Bank Supervision
 Fair
value accounting for financial instruments: some implications for bank
regulation
By Wayne R Landsman; Monetary and Economic Department
August 2006
BIS Working Papers No 209
I
identify issues that bank regulators need to consider if fair value accounting
is used for determining bank regulatory capital and when making regulatory
decisions. In financial reporting, US and international accounting standard
setters have issued several disclosure and measurement and recognition standards
for financial instruments and all indications are that both standard setters
will mandate recognition of all financial instruments at fair value. To help
identify important issues for bank regulators, I briefly review capital market
studies that examine the usefulness of fair value accounting to investors, and
discuss marking-to-market implementation issues of determining financial
instruments’ fair values. In doing so, I identify several key issues. First,
regulators need to consider how to let managers reveal private information in
their fair value estimates while minimising strategic manipulation of model
inputs to manage income and regulatory capital. Second, regulators need to
consider how best to minimise measurement error in fair values to maximise their
usefulness to investors and creditors when making investment decisions, and to
ensure bank managers have incentives to select investments that maximise
economic efficiency of the banking system. Third, cross-country institutional
differences are likely to play an important role in determining the
effectiveness of using mark-to-market accounting for financial reporting and
bank regulation.
Risk and liquidity in a system context
By Hyun Song Shin; Monetary and Economic Department
August 2006
BIS Working Papers No 212
This
paper explores the pricing of debt in a financial system where the assets that
borrowers hold to meet their obligations include claims against other borrowers.
Assessing financial claims in a system context captures features that are
missing in a partial equilibrium setting. It is possible for spreads to fall as
debts rise, as debt-fuelled increases in asset prices and stronger balance
sheets reinforce each other. Conversely, it is possible that de-leveraging leads
to increases in spreads, as is often observed during crises.
Risk in financial reporting: status,
challenges and suggested directions
By Claudio Borio and Kostas Tsatsaronis; Monetary and Economic
Department
August 2006
BIS Working Papers No 213
Advances in risk measurement technology have reshaped financial markets and the
functioning of the financial system. More recently, they have been reshaping the
prudential framework. Looking forward, they have the potential to reshape
financial reporting too. Recent initiatives to improve financial reporting
standards have brought to the fore significant differences in perspective
between accounting standard setters and prudential authorities. Building on
previous work, we argue that risk measurement and management technology can be
instrumental in bridging this gap and, by the same token, in improving financial
reporting. Risk measurement plays a crucial role in the measurement,
verification and validation of valuations. It is the basis for giving more
prominence to risk and measurement error information in public disclosures. And
it could act as more of a focal point in the design of accounting standards, as
greater consistency between sound risk management practices and accounting
standards can help to narrow the wedge between accounting and underlying
economic valuations.
 Basel
II – implementation of the New Capital Accord in Barbados
Remarks by Dr Marion Williams, Governor of the Central Bank of
Barbados, at a conference on Basel II, Bridgetown, 10 July 2006.
"...Over the last several months, banks have been receiving a number of
guidelines originating from the Central Bank of Barbados in preparation for the
migration to Basel II. We have been in constant contact with commercial banks on
their feedback on these proposed guidelines. However, it is very timely that we
should meet. There is a lot to talk about and a number of areas to be clarified.
I trust that by the end of our meeting over the next two days, we will be closer
to fine-tuning our road map for the implementation of Basel II. "
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Recommended Readings
 Bank
Competitiveness in Mexico
Marcos Avalos & Fausto Hernández Trillo
CEPAL
This study presents an analysis of bank
competitiveness in Mexico, from the perspective of contested market theory.
Starting with an overview of Mexico’s banking system, we argue that competition
among banks should be analyzed in a broader context, wherein the entire
financial system is included. It is important to consider whether banks are
contested by other financial and non-financial intermediaries. The study
concludes that in the market of certain financial products, especially credit
cards and the intervention of government securities, there is no competition.
Also, the commissions charged by banks in Mexico are high (just as in other
countries) and could lower the consumer’s surplus. This phenomenon does not
necessarily occur in other countries, due to the contesting of other agents
within the sector.
 Remarks
by Agustín Carstens
Deputy Managing Director International Monetary Fund
At the VIII Annual Assembly of Supervisors of Banks of the Americas (ASBA)
Oaxaca, Mexico, September 9, 2005
"...In a way we could say that since the late nineties, we have seen consistent
progress in this endeavor. The financial crises that took place during the last
decade in Mexico, East Asia, Russia, Brazil, Argentina, Turkey, Uruguay, and the
Dominican Republic triggered substantial efforts in different forums and
institutions oriented to prevent renewed crises or subsequent banking crises.
Work done by international bodies such as the Basle Committee, the Joint Forum
and the Financial Stability Forum represent a clear example. The discussion in
some instances has gone beyond the official and specialized circles, as is
attested by the fact that the Basle II Capital Accord and the new International
Financial Reporting Standards (IFRS) are discussed not only in forums like this
one, but also by the media and political audiences in many countries. In the
context of the Financial System Assessment Program (FSAP), the IMF and the World
Bank have been conducting assessments of financial systems across the world, to
identify their vulnerabilities and assist countries in developing plans to
address them. Since May 1999, 88 such assessments have been completed and 19 are
in process of completion, including assessments for 19 members of ASBA..."
Banks
and aggregate credit: what is new?
M S Mohanty, Gert Schnabel and Pablo Garcia-Luna
BIS Paper 28
A
major revival of bank lending in emerging market economies is under way.
Following years of weak or declining lending growth, bank credit to the private
sector, in real terms, was rising at a rate between 10 and 40% in a number of
countries by 2005. Such a recovery, reflecting in many countries a strong
expansion of credit to households, has arrested the decline in the share of
private sector bank credit in GDP, especially in Asia and Latin America, where
it had remained a special feature for some years (Graph 1). Indeed, several
factors have been favourable to bank lending in emerging economies over the past
few years: strong growth, excess liquidity in banking systems reflecting easier
global and domestic monetary conditions, and substantial bank restructuring.2
Such developments raise several questions: what has been the role of banks in
the overall financial system in the economy? Have the factors driving bank
lending growth changed recently and how sustainable might they prove in the
future?
Is financial stability policy now better
placed to prevent systemic banking crises?
Agustin Villar
BIS Paper 28
Widespread bank failures have severe implications for the economy. Wherever the
banking system collapses, output falls sharply and the economy takes a long time
to recover (Honohan (1996)). Moreover, bank failures build up political
pressures for the government to intervene and rescue banks; in some instances
political imperatives have replaced economic efficiency and led to the
nationalisation of the banking system (Brock (1992)). Furthermore, banking
crises have often occurred in conjunction with balance of payments crises (Kaminsky
and Reinhart (1995)). This is nowhere truer than in emerging market countries,
where banks remain at the centre of the financial system. For all these reasons,
it is of utmost importance to build up a sound and stable banking system.
Improving the banking system: the Chilean
experience
Cristina Betancour, José De Gregorio, Alejandro Jara
Central Bank of Chile
BIS Paper 28
This paper presents some evidence on the current state of the banking system in
Chile, with particular focus on the adjustments it must undergo to comply with
the Basel II Capital Accord. We present some basic facts about the Chilean
banking system and a brief international comparison. We consider separately
local banks, the country’s publicly owned bank and foreign banks, and present
the evolution of some basic indicators of performance. The evidence shows some
important efficiency gains over time. We also examine issues like the changing
procyclicality of banks’ lending and the changes in capital requirements which
will result from the adoption of Basel II. The Chilean banking system is well
prepared to implement Basel II, albeit in a gradual way.
The Mexican financial
system: reforms and evolution 1995-2005
José J. Sidaoui
Deputy Director, Banco de Mexico
BIS Paper 28
The banking crisis of 1995 The Mexican banking crisis of 1995 contained many of
the same characteristics as other banking crises: a massive expansion of credit
in a short period of time, poor bank management, supervisory and regulatory
loopholes, and a shock (both domestic and external). The perverse incentives
created by a quasi-fixed exchange rate regime contributed to the onset of the
crisis. However, the weakness of the financial system and loopholes within the
regulatory and supervisory frameworks exacerbated its aftermath. The experience
has provided important policy lessons. We divide the different factors that
triggered the crisis and were responsible for its severity into the following
categories: the macroeconomic environment, the incentives’ structure faced by
economic agents, and the legal and regulatory framework.
The recent behaviour of financial market
volatility
Monetary and Economic Department
August 2006
BIS Papers No 29
A
striking feature of financial market behaviour in recent years has been the low
level of price volatility over a wide range of financial assets and markets. The
issue has attracted the attention of central bankers and financial regulators
due to the potential implications for financial stability. This paper makes an
effort to shed light on this phenomenon, drawing on literature surveys, reviews
of previous analyses by non-academic commentators and institutions, and some new
empirical evidence.
 Corporate
Governance in Emerging Market Banks
Especial Report
Fitch Ratings
This report follows earlier reports by Fitch on CG and draws on a paper
published by the OECD on CG in emerging markets2. The report is in two main
sections. Part I gives a broad overview of the three tiers of governance and
Part II looks at how CG is evolving region by region in various emerging market
countries.
Towards Basel III - Emerging
Andrew Powell, IDB
Given recent petitions by large US banks to have greater flexibility in
implementing Basel II, this new agreement to regulate banks’ minimum capital has
received considerable press attention of late.2 Basel II raises these
implementation issues as arguably it is primarily focused on the largest 100 or
so international banks incorporated in G10+ countries. However, 100+ countries
may well implement the Accord for their top 10+ banks. Implementation issues are
then even more fraught for other countries and the “fit” could be substantially
improved. Indeed, countries will adapt the Accord to implement it and this
implies the essence of a standard may be lost. I propose the development of a
standard adaptation, Basel III – Emerging, for emerging countries.
Why Don't Banks Fail Anymore?
IS IT THE STRONG ECONOMY? BETTER REGULATION? LUCK?
By Daniel Gross
The Federal Deposit Insurance Corp. is the Joe DiMaggio of federal regulators:
It's got a tremendous streak going. Yesterday marked the 639th day without a
bank failure, the longest run in the institution's history. (The prior record,
609 days, ended in 1946, the year the best film about a busted bank, It's a
Wonderful Life, premiered.) And 2005 was the first calendar year since the
FDIC's inception, in 1934, in which no banks failed. Meanwhile, in February,
President Bush signed legislation that, for the first time since 1980, would
raise the cap on insured deposits. Are these signs that the vast banking
industry has reached a new plateau of permanent prosperity and competency? Or is
it the calm before the storm? The FDIC was one of those awful,
 The
role of the Matricula Consular in helping “unbanked” Mexican immigrants enter
the U.S. banking system
Sheila Bair; FDIC/USA
Last fall, the Inter-American Development Bank asked the University of
Massachusetts to undertake a research project on ways to improve Latin American
immigrants’ access to the U.S. banking system. The request was precipitated by
the IDB’s strong interest in finding ways to lower the cost of sending
remittances to Latin America. Research previously sponsored by the IDB showed
that while banks and credit unions can offer a significantly cheaper alternative
to traditional wire transfer, most Latin American immigrants continue to use
wire transfer services, not depository institutions, to send money home. This
research also identified a number of factors that discouraged Latino immigrants
from opening accounts, the most frequently cited being documentation
requirements, but also, fears about minimum balance requirements, high fees, and
a general distrust of banks.
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ASBA Events
BCP Self-Assessment Workshop
ASBA – IMF Program
Mexico, August 21-23
Objective: Provide to the participants the main elements to
conduct a self-assessment of the Basel Core Principles for Effective Bank
Supervision that is comprehensive, credible and action-oriented. The workshop
will be based on the current BCP, but will also cover the main differences
between the current BCP and the new (proposed) BCP, expected to be in effect in
October 2006.
Fundamentals of Interest Rate Risk
Management
Mexico City, August 28 - September 1st, 2006
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