Basel Committee endorses revisions to finalised market risk capital framework

News

Gen 18 2019

At its meeting in Basel on Monday 14 January 2019, the Basel Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), endorsed a set of revisions to the market risk framework and the Committee’s strategic priorities and work programme for 2019.

The revisions to the market riskframework endorsed by the GHOS today enhance its design and calibration by:

  • introducing a simplified standardised approach for banks with small or non-complex trading portfolios;
  • clarifying the scope of exposures that are subject to market risk capital requirements;
  • enhancing the risk sensitivity of the standardised approach by revising the treatment of foreign exchange risk, index instruments and options;
  • revising the standardised approach risk weights applicable to general interest rate risk, foreign exchange risk and selected credit spread risk exposures;
  • revamping the assessment process to determine whether a bank’s internal risk management models appropriately reflect the risks of individual trading desks (the so-called profit and loss attribution test); and
  • revising the requirements for identifying risk factors that are eligible for internal modelling and the capital requirement applicable to risk factors that are deemed non-modellable.

These revisions were informed by the Committee’s quantitative impact analyses. Once implemented, the revised framework is estimated to result in a weighted average increase of about 22% in total market risk capital requirements relative to the Basel 2.5 framework. By contrast, the framework issued in 2016 would have resulted in a weighted average increase of about 40%. The share of risk-weighted assets (RWAs) attributable to market risk remains low, at around 5% of total RWAs.

The revised market risk framework will take effect as of 1 January 2022, concurrent with the implementation of the Basel III reforms endorsed by the GHOS in December 2017. A description of the background, objectives and overall impact of the market risk framework is set out in an accompanying explanatory note.

The GHOS also endorsed the Committee’s strategic priorities and work programme for 2019. The Committee’s work programme for 2019 focuses on four key themes: (i) finalising ongoing policy reforms, and pursuing targeted new policy initiatives where needed; (ii) evaluating and monitoring the impact of post-crisis reforms and assessing emerging risks; (iii) promoting strong supervision; and (iv) ensuring full, timely and consistent implementation of the Committee’s post-crisis reforms.

“The final revisions to the market risk framework provide additional clarity to the Basel III post-crisis reforms, and allow banks and supervisors to implement the framework in a timely manner. Looking ahead, the Committee will increasingly focus on evaluating post-crisis reforms and addressing new and emerging vulnerabilities in the banking system” said Mario Draghi, GHOS Chairman and President of the European Central Bank.

 

Minimum capital requirements for market risk (PDF)

Explanatory note on the minimum capital requirements for market risk (PDF)

PRIIPs: true transparency at last?
a cura di Deloitte Italia

Articolo

Gen 18 2019
PRIIPs: true transparency at last? a cura di Deloitte Italia

The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation went live with MiFID II in January 2018, introducing requirements for firms to disclose specific information on certain investment products or services. The regulation’s main objective is to help investors assess the money value of these investments and make more informed decisions.

Some important issues have arisen since the implementation of KID and a process of regulatory review has been activated by the ESAs (European Regulatory Authorities).

This article aims to assess whether the PRIIPs regulation has created transparency and comparability across investment products, and the implications in the relationship with retail clients, on the basis of the observation of the market application of the new regulatory framework.

 

New Forms of Disclosure for PRIIPs

PRIIPs include a wide range of products such as investment funds, investment trusts, insurance-based investment products, structured investments (i.e bonds with derivatives components), and structured deposits.

Under the regulation, manufacturers/issuers are obliged to produce a Key Information Document (KID) for each product in scope.

The KID must be provided in the investors’ local language and be published on the company website prior to the product being offered to retail investors. Any distributor or financial intermediary, who sells or provides advice to a retail investor about PRIIPs, or receives a buy order on a PRIIP from a retail investor, must provide him/her with a KID.

KIDs are standardized three page documents built to answer the following four questions:

  • What is the product?
  • What are the risk?
  • What are the costs?
  • What do I get in return?

The document provides specific information such as the aggregated charges associated with the product as well as a breakdown of costs, riskiness, and the simulation outcome of different performance scenarios. All the information is summarized in the document and the net effect of the costs included is presented as an annual percentage reduction in yield.

For UCITS funds that meet the definition of PRIIP, a transitional period was planned until 31 December 2019, and has recently been voted for an extension by another two years [1].

 

Proposed changes for PRIIPs

Since its implementation, Manufacturers and Distributors have experienced several issues related to the following topics:

  • Performance scenarios methodology;
  • Calculation of “Transaction costs”;
  • Different representation of cost and charges between PRIIPs and MiFID II.

In October 2018, the ESAs sent the European Commission a letter to propose how to tackle the key issues which have arisen since the implementation of KID. In November, the ESAs issued a consultation paper on targeted amendments to the Delegated Regulation covering the rules for KID. The consultation paper addresses, in particular, amendments to the information regarding investment products’ performance scenarios.

While the abovementioned consultation was still open, representatives of the funds industry have increased their lobby strongly supporting a delay in the application of PRIIPs to UCITS funds to the 2022 horizon, finally voted by the ECON committee last December.  It is worth mentioning that nothing has changed in the current regulation therefore, as of January 1st  2022, a retail investor investing in a UCITS product will be given two different documents: the KIID for UCITS and the KID for PRIIPs. However, the Commission has been given one more year to finalize their Level 1 review (by 31 December 2019) with the expectation to address the question of the overlapping.

 

Performance Scenarios

PRIIPs requires the financial industry to inform retail clients on the possible evolution of their investment under different future scenarios, to assess the possible product losses or gains in different market conditions. The intention is to increase both client’s awareness on the products’ risks and the comparability with other similar financial instruments.

The regulation requires four performance scenarios in which the financial industry has to report the incomes or losses in absolute terms (assuming an investment of tenthousands euros) over different time periods, until the product’s maturity or the recommended holding period expires. Absolute gains and losses have to be illustrated adjusted for the costs the client would incur.

A favorable scenario, a moderate scenario, an unfavorable scenario, and a stressed scenario aim to depict clearly, through a forward looking approach, the evolution of investment losses and gains depending on the possible future market movements. While for some instruments the performance scenarios work well, this would not be the same for others. Some products are reporting incoherent performance scenarios (example below extracted from the KID of a certificate on “Eurostoxx 50” index.)

The forward-looking approach of the performance scenarios failed due to the dependence on the assumption that historic returns will continue in future. The simulation of the future performance scenarios is driven by the historic returns the product has had over its recommended holding period.  Looking at the equity markets over the last years characterized by a strong positive performance, the KID’s performance scenario methodology could bring positive results also under the unfavorable scenario. The investor could misinterpret such performance scenarios, considering these products less risky than others and able to grant a profit also during negative market conditions.

 

Consideration of “Transaction costs”

In the PRIIP KIDs, recurring costs, including the transaction costs, must be disclosed in percentage terms. The PRIIPs delegat act sets out how firms should calculate actual transaction costs: they must be determined using an “arrival price”, which requires firms to calculate the difference between the bid/ask midpoint price where a trade is first submitted, and the final execution price of the same trade. This means that the costs disclosed are often heavily influenced by market movements and, in some cases, have resulted in some firms disclosing negative figures for their transaction costs. These negative figures may lead investors to draw inaccurate conclusions about the desirability of certain funds and the true brokerage charges which they will ultimately bear.

 

Different representation of cost and charges between PRIIPs and MiFID II

With the introduction of PRIIPs, MiFID II has also introduced a requirement for firms to disclose an aggregate cost figure across all financial instruments in pre-sales activities. The MiFID perspective is different and covers all kinds of investors (not only retail as for PRIIPs) and the entire service value chain (e.g. cost of distribution, cost of service) where incentives paid or received by the distributor have to be reported. For the first time investors receive the overall cost of investing.

Differently from PRIIPs, no format template or guidelines have been foreseen by the regulation.  Thanks to PRIIPs and MIFID II investors should now have a much wider set of costs and charges figures across a much wider set of investments. Nevertheless, full comparability and transparency is still very far.

 

Conclusion and impacts for firms

It is evident that PRIIPs has still not reached its purpose, with significant issues emerging that are limiting the new Regulatory framework from expressing its potential.

While Regulators have already activated the process to review the requirements, firms are free to take additional steps to help investors navigate the new set of information provided to them and reduce the possibility of inaccurate interpretation. Such steps could include:

  • reporting all information in one place consistently with the investment process (e.g. presenting all information together with the investment proposal)
  • explaining how various cost and charges figures and risk indicators are calculated and why differences can exist;
  • explaining why they are required to produce these information and warning the customer about its limitations.

 

Alessandro Mastrantuono | Director Deloitte Consulting

Emanuele Meo | Senior Manager Deloitte Consulting

Donato Masi | Manager Deloitte Consulting

 

Notes

[1] At the beginning of December 2018, the Committee on Economic and Monetary Affairs of the European Parliament (ECON committee voted to postpone the PRIIPs application to UCITS to 2022 (initially scheduled for 2020).

EBA: report on cost and performance of structured deposits

News

Gen 15 2019

The European Banking Authority (EBA) published today a report on the costs and performance of structured deposits in the European Union (EU). The report is a response to a request the EBA had received from the EU Commission as part of the implementation of it Capital Market Union Action Plan and concludes that the market for structured deposits in the EU appears to be limited in size and that data on costs and performance is not widely available. The report, therefore, also sets out the steps the EBA will take to enhance the data quality in the future.

As part of the implementation of the Capital Markets Union Action Plan, in October 2017, the European Commission sent a formal request to the three European Supervisory Authorities (EBA, ESMA and EIOPA) to issue, by the end of 2018, reports on the cost and past performance of the main categories of retail investment, insurance and pension products.

The request specified that the reports should be based on data reporting that is already required by Union or national law and should include a description of data gaps and other difficulties faced during the development of the report, including any potential recommendations for the future reporting cycles.

The only product category in the EBA’s consumer protection remit that is included in the request are structured deposits, which are deposits that are linked to an underlying asset but are repayable at par at maturity. The report includes a mapping of the specific regulatory requirements on pre-contractual disclosure and/or reporting applicable to structured deposits at European and national level and also identifies the data sources that would be required to fulfil the request. The report arrives at the view that the market for structured deposits in the EU is limited in size and that data on costs and performance is not widely available. It concludes by setting out steps that the EBA will take to obtain more accurate and standardised data in the future and, in so doing, enhance the reliability and overall quality of its response.

 

Report on cost and past performance of structured deposits (PDF)

Il termometro dei mercati finanziari (11 gennaio 2019)
a cura di Emilio Barucci e Daniele Marazzina

Termometro

Gen 12 2019
Il termometro dei mercati finanziari (11 gennaio 2019) a cura di Emilio Barucci e Daniele Marazzina

L’iniziativa di Finriskalert.it “Il termometro dei mercati finanziari” vuole presentare un indicatore settimanale sul grado di turbolenza/tensione dei mercati finanziari, con particolare attenzione all’Italia.

Significato degli indicatori

  • Rendimento borsa italiana: rendimento settimanale dell’indice della borsa italiana FTSEMIB;
  • Volatilità implicita borsa italiana: volatilità implicita calcolata considerando le opzioni at-the-money sul FTSEMIB a 3 mesi;
  • Future borsa italiana: valore del future sul FTSEMIB;
  • CDS principali banche 10Ysub: CDS medio delle obbligazioni subordinate a 10 anni delle principali banche italiane (Unicredit, Intesa San Paolo, MPS, Banco BPM);
  • Tasso di interesse ITA 2Y: tasso di interesse costruito sulla curva dei BTP con scadenza a due anni;
  • Spread ITA 10Y/2Y : differenza del tasso di interesse dei BTP a 10 anni e a 2 anni;
  • Rendimento borsa europea: rendimento settimanale dell’indice delle borse europee Eurostoxx;
  • Volatilità implicita borsa europea: volatilità implicita calcolata sulle opzioni at-the-money sull’indice Eurostoxx a scadenza 3 mesi;
  • Rendimento borsa ITA/Europa: differenza tra il rendimento settimanale della borsa italiana e quello delle borse europee, calcolato sugli indici FTSEMIB e Eurostoxx;
  • Spread ITA/GER: differenza tra i tassi di interesse italiani e tedeschi a 10 anni;
  • Spread EU/GER: differenza media tra i tassi di interesse dei principali paesi europei (Francia, Belgio, Spagna, Italia, Olanda) e quelli tedeschi a 10 anni;
  • Euro/dollaro: tasso di cambio euro/dollaro;
  • Spread US/GER 10Y: spread tra i tassi di interesse degli Stati Uniti e quelli tedeschi con scadenza 10 anni;
  • Prezzo Oro: quotazione dell’oro (in USD)
  • Spread 10Y/2Y Euro Swap Curve: differenza del tasso della curva EURO ZONE IRS 3M a 10Y e 2Y;
  • Euribor 6M: tasso euribor a 6 mesi.

I colori sono assegnati in un’ottica VaR: se il valore riportato è superiore (inferiore) al quantile al 15%, il colore utilizzato è l’arancione. Se il valore riportato è superiore (inferiore) al quantile al 5% il colore utilizzato è il rosso. La banda (verso l’alto o verso il basso) viene selezionata, a seconda dell’indicatore, nella direzione dell’instabilità del mercato. I quantili vengono ricostruiti prendendo la serie storica di un anno di osservazioni: ad esempio, un valore in una casella rossa significa che appartiene al 5% dei valori meno positivi riscontrati nell’ultimo anno. Per le prime tre voci della sezione “Politica Monetaria”, le bande per definire il colore sono simmetriche (valori in positivo e in negativo). I dati riportati provengono dal database Thomson Reuters. Infine, la tendenza mostra la dinamica in atto e viene rappresentata dalle frecce: ↑,↓, ↔  indicano rispettivamente miglioramento, peggioramento, stabilità.

Disclaimer: Le informazioni contenute in questa pagina sono esclusivamente a scopo informativo e per uso personale. Le informazioni possono essere modificate da finriskalert.it in qualsiasi momento e senza preavviso. Finriskalert.it non può fornire alcuna garanzia in merito all’affidabilità, completezza, esattezza ed attualità dei dati riportati e, pertanto, non assume alcuna responsabilità per qualsiasi danno legato all’uso, proprio o improprio delle informazioni contenute in questa pagina. I contenuti presenti in questa pagina non devono in alcun modo essere intesi come consigli finanziari, economici, giuridici, fiscali o di altra natura e nessuna decisione d’investimento o qualsiasi altra decisione deve essere presa unicamente sulla base di questi dati.

Pillole dal Rapporto di Stabilità Finanziaria di Banca d’Italia
di Emilio Barucci

Articolo

Gen 11 2019
Pillole dal Rapporto di Stabilità Finanziaria di Banca d’Italia di Emilio Barucci

Il Rapporto di Stabilità Finanziaria pubblicato da Banca d’Italia (BDI) a fine 2018 contiene alcuni dati interessanti:

Credito bancario. Secondo le previsioni, il credito bancario rimarrà debole nel biennio 2019-2020, il rapporto credito/PIL continuerà ad essere al di sotto del suo valore di lungo periodo.

Aumento dello spread sui titoli di Stato italiani. L’aumento dei tassi ha causato un aumento della spesa di interessi per lo Stato italiano pari a 1,5 miliardi da aprile a novembre, costerebbe 5 miliardi nel 2019 e 9 miliardi nel 2020. Secondo simulazioni basate su quanto accaduto nel 2010-2011, un aumento di 100 punti basi dello spread dei titoli di Stato decennali porterebbe a:

  • un aumento di 40 punti base sui REPO delle banche e di 100 sulle loro obbligazioni. L’effetto sul CET1 per le banche significative sarebbe pari a 40 punti base e a 90 per le banche meno significative. Le banche italiane hanno il 5.7% dell’attivo valutato al fair value investito in titoli di Stato italiani (quelle meno significative sono più esposte).
  • una riduzione dei fondi propri del 28% delle compagnie assicurative che detengono il 34% dell’attivo investito in titoli di Stato italiani.
  • Un aumento di 70 punti base per i tassi di interesse dei prestiti alle imprese e di 30 punti base per i mutui alle famiglie. Si verificherebbe anche una riduzione significativa del tasso di crescita dei prestiti alle imprese.

Mercato immobiliare. Il numero delle compravendite è in recupero ma i prezzi hanno continuato a diminuire nel 2018, nel 2019 potrebbe esserci una debole inversione di tendenza. Nel 2018 l’indicatore di vulnerabilità bancaria per i mutui per l’acquisto di immobili e i crediti alle imprese di costruzioni (flusso di nuovi crediti deteriorati) ha raggiunto il valore più basso dal 2002. Il LTV dei mutui è in aumento ma su valori prossimi a quelli riscontrati nel 2007-2008 ed è in linea con quello delle maggiori economie europee.

Ricchezza delle famiglie. Nei primi tre trimestri del 2018 è calata del 3.5%. Il grado di indebitamento è tra i più bassi dell’area euro e concentrato sulle famiglie in grado di sostenere l’onere. Dal 2008 ad oggi la composizione della ricchezza è variata significativamente: depositi +3% (da 29% a 32%), obbligazioni -14% (da 21% a 7%), le obbligazioni bancarie in particolare sono passate da 9.4% a 1.8%, quote fondi comuni +6% (da 6% a 12%), fondi pensione +1.3% (da 1.1% a 2.4%), assicurazioni +6.3% (da 11% a 17.3%, quasi del tutto ramo vita). Aumento del credito al consumo, le famiglie italiane sono in ritardo nei pagamenti più che in altri paesi europei, il 65% dei prestiti è in carico a famiglie con un reddito superiore al valore mediano. La quota dei prestiti alle famiglie deteriorati è pari al 7.7% (tre punti in meno del 2015). I nuclei familiari vulnerabili a fine 2019 dovrebbero essere pari all’1.9% con un debito pari all’11.3% del totale, se l’euribor salisse di 100 punti base il debito vulnerabile salirebbe al 12.3%.

Imprese. La redditività è pari al 7% (un valore prossimo a quello pre-crisi), solo le imprese di costruzioni sono sotto il dato del 2007. Le imprese hanno un buon livello di autofinanziamento (le attività liquide sono il 20% del PIL, il livello più alto da venti anni). La leva finanziaria è pari a 40%, è di due punti percentuale superiore alla media area euro ma è scesa di dieci punti dal picco del 2011. Il tasso di deterioramento dei prestiti bancari, pari al 2.8%, è prossimo ai livelli pre-crisi. La quota di imprese vulnerabili dovrebbe ridursi nel 2019 al 30%, valore inferiore di 15% rispetto al picco del 2012.

Banche. Il flusso di nuovi crediti deteriorati si colloca all’1.7% al minimo dal 2006. Nel primo semestre del 2018 la consistenza dei crediti deteriorati lordi è diminuita del 13% (ed è pari a 225 miliardi). A fine giugno, il rapporto tra crediti deteriorati e totale dei finanziamenti (al netto delle rettifiche di valore) era pari al 5%. Tra maggio e settembre le banche hanno acquistato titoli di Stato per 39 miliardi. I titoli pubblici italiani pesano per il 9.5% sul totale attivo delle banche. Il funding gap delle banche (rispetto alla raccolta al dettaglio) è pari al 2%, sui livelli minimi da venti anni. La raccolta obbligazionaria è diminuita soprattutto per il calo di quella presso le famiglie ed è inferiore a quella dei principali paesi europei. Tra aprile e ottobre, il rendimento delle obbligazioni bancarie senior è raddoppiato, quello delle obbligazioni non garantite è triplicato. A giugno 2018 il CET1 ratio delle banche era pari a 13.2%, 60 punti più basso di fine 2017, nel secondo semestre l’impatto della diminuzione dei corsi dei titoli di Stato è stato pari 30 punti base, per quelle significative, e 75 per quelle meno significative. Le principali banche italiane sono meno patrimonializzate di quelle europee nella misura di 180 punti base secondo la misura del CET1 ratio mentre hanno un livello di leva finanziaria più favorevole (5.7% contro 5.3%). Rispetto al primo semestre del 2017 il margine di intermediazione è aumentato dell’1.5% (+3.1% le commissioni, +2.9% margine di interesse).

EBA releases its annual assessment of the consistency of internal model outcomes

News

Gen 11 2019

The European Banking Authority (EBA) published two reports on the consistency of risk weighted assets (RWAs) across all EU institutions authorised to use internal approaches for the calculation of capital requirements. The reports cover credit risk for high and low default portfolios (LDPs and HDPs), as well as market risk. The results confirm previous findings, with the majority of risk-weights (RWs) variability explained by fundamentals. These benchmarking exercises, conducted by the EBA on an annual basis are a fundamental supervisory and convergence tool to address unwarranted inconsistencies and restoring trust in internal models.

Credit Risk exercise
The credit risk report examines the different drivers leading to the observed dispersion across banks’ models. Most of the results are broadly in line with previous exercises, with 50% of the difference in variability explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. The remaining could be attributed to differences in collateralisation and other institution-specific factors, such as risk strategy and management practices, idiosyncratic portfolio features, modelling assumptions, client structure, as well as supervisory practices. This confirms previous findings that RWA variability can be explained, to a large extent, by looking at some measurable features of institutions’ exposures.

For LDPs, the risk weight assessments of institutions on a set of common counterparties have been compared. When substituting the risk weight with that of the median institution, the resulting deviations would generally be below 10%. Furthermore, the variability in estimates has been stable in comparison with the 2017 benchmarking exercise.

For HDPs, the estimated values of probabilities of default (PD) and loss given defaults (LGD) have been compared with observed values, i.e. default rates and loss rates. The report presents evidence that the majority of institutions have conservative estimates, in particular when compared with the observed values for the latest year. In comparison with the 2016 exercise, both default and loss rates have decreased more than PD and LGD estimates in recent years, which is likely to reflect a general improvement in economic conditions.

The competent authorities performed an assessment of the internal models, which have been identified as outliers in this benchmarking exercise. In comparison with previous exercises, their monitoring activities are increasingly noticing issues identified by the EBA benchmarking exercise. The same conclusion holds for institutions’ internal validations. This is reassuring and indicates that the increased regulatory and supervisory attention paid to internal models is contributing to the consistency of the RWA of internal models.

Market Risk exercise
Compared to the previous exercise, the 2018 analysis shows a reduction in the dispersion in the initial market valuation (IMV) and risk measures. This improvement was expected and is mainly due to the simplification in the market risk benchmark portfolios. Some variability in the results persists, which mainly stems from different interpretations and heterogeneous market practices adopted by the firms. Some of these issues have been addressed, and the quality of the data has improved.

From a risk factor perspective, interest rate portfolios exhibit a lower level of dispersion than the other asset classes, which is most likely due to the use of more consistent practices and assumptions that are more homogeneous across the banks when modelling interest rate risk. This finding confirms the conclusions drawn in last year’s analysis.

In line with the previous exercises, a significant dispersion for all the risk measures is observed. More complex measures such as incremental risk charge (IRC) and all price risk (APR) show a higher level of dispersion.

This report has provided input for competent authorities on areas that may require their further investigation, such as IMV variability for some credit spread products. Supervisors should pay attention to the materiality of risk factors not in VaR and, in particular, not encompassed in the IRC models.

EBA Report results from the 2018 Market Risk Benchmarking Report (PDF)

EBA Report results from the 2018 Credit Risk Benchmarking Report (PDF)

ESMA: Performance and costs of retail investment products in the EU

News

Gen 11 2019

The European Securities and Markets Authority (ESMA) today publishes its first Annual Statistical Report (Report) on the cost and performance of retail investment products. The Report covers Undertakings for Collective Investment in Transferable Securities (UCITS), Alternative Investment Funds sold to retail investors (retail AIFs) and Structured Retail Products (SRPs).

The analysis complements ESMA’s risk assessment, supervisory convergence and investor protection work, and contributes to the European Commission’s project on cost and performance of investment products under the Capital Markets Union Action Plan.
The report documents the significant impact of costs on the final returns that retail investors make on their investments:

  • the charges for UCITS funds, taken all together, reduce their gross returns by one quarter on average;
  • the cost impact varies widely, especially depending on the choice of product, asset class, fund type; and
  • management fees and other on-going costs constitute over 80% of investors costs, whilst entry and exit fees have a less significant impact.

Market transparency is particularly limited for retail AIFs and SRPs for which practically no up-to-date data on costs and performance are available.

The data shows that for UCITS the total costs of a fund presents a significant drain on fund performance, impacting retail investors to a much higher extent than institutional investors. On average, retail clients pay twice as much as institutional clients. The impact varies across asset classes, with costs on average accounting for 25% of gross returns in the period from 2015 to 2017. On-going costs such as management fees constitute over 80% of the total cost paid by customers, whilst entry and exit fees have a less significant impact.

In terms of overall returns, passive equity funds consistently outperform active equity funds. This is further demonstrated by the fact that costs for actively managed equity funds are found to be significantly higher than for passively managed funds and ETFs.

Moreover, the report finds significant variation in costs and gross performance across Member States. Finally, the report highlights the lack of available and usable cost and performance data, especially for retail AIFs and SRPs, which is a significant issue from an investor protection perspective.

The report provides National Competent Authorities with useful information to support the implementation of the Capital Markets Union, and aims to facilitate increased participation by retail investors in capital markets by providing consistent EU-wide information on cost and performance of investment products. It also demonstrates the relevance of disclosure of costs to investors, as required by the MiFID II, UCITS and PRIIPs rules and the need for asset managers and investment firms to act in the best interest of investors, as laid down in requirements of MiFID II, the UCITS and AIFM Directives.

ESMA: Performance and costs of retail investment products in the EU (PDF)

ECB: the forward guidance puzzle and its implications for optimal monetary policy

News

Gen 11 2019

The European Central Bank (ECB) issued a working paper that discusses the implications for optimal monetary policy when rates are at (or close) to their effective lower bounds.

In these cases, central banks often turn to communication about the future path of policy rates—known as forward guidance—as an alternative means to stimulate economic activity. According to the standard sticky-price model often used in academia and central banks to analyze monetary policy, for- ward guidance is a powerful substitute for a change in the current policy rate and should be used by central banks to improve welfare when the current policy rate is constrained by the lower bound. In particular, in the standard model, the central bank finds it optimal to announce that it will keep the policy rate at the lower bound for longer than would be warranted by future output and inflation stabilization considerations alone.

An intriguing feature of this standard model is that the economic effects of forward guidance can be implausibly large. This feature—often referred to as the forward guidance puzzle—has generated concern among researchers that the standard model is of limited use for the analysis of forward guidance policies and, as a result, has also generated an interest in modifying the standard model to mitigate the implausibly large effects of forward guidance. A number of recent papers have shown that various economically sensible departures from the standard framework go a long way in attenuating the forward guidance puzzle, but they have done so under the assumption that the interest rate policy is characterized by a simple feedback rule.

The paper examines the implications of attenuating the forward guidance puzzle for the optimal design of forward guidance policy. We do so by introducing private-sector discounting—discounting of the expected future income in the Euler equation and discounting of the expected future marginal costs of production in the Phillips curve—into an otherwise standard sticky-price model and characterizing how the degree of discounting affects optimal commitment policy.

When private-sector agents discount future economic conditions more in making their decisions today, an announced cut in future interest rates becomes less effective in stimulating current economic activity. While the implication of such discounting for optimal policy depends on its degree, we find that, under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the effective lower bound for longer than in the standard model without private-sector discounting.

Attenuating the forward guidance puzzle: implications for optimal monetary policy (PDF)

BIS: a survey on central banks digital currencies

News

Gen 11 2019

The Bank for International Settlement (BIS) issued a research paper addressing the hypothetical benefits and risks of central bank digital currencies (CBDC), which are being widely discussed in recent times. The paper adds to these discussions by taking stock of how progress and plans in this area are developing, based on a global survey of central banks.

Responses show that central banks are proceeding with caution and most are only at a conceptual stage with their work. However, a handful have moved to considering practical issues and a couple of central banks with idiosyncratic circumstances might issue a digital currency in the short or medium term.

The 2018 report by the Committee on Payments and Market Infrastructures (CPMI) and the Markets Committee (MC) defines CBDCs as new variants of central bank money different from physical cash or central bank reserve/settlement accounts. Based on four key properties, the CPMI-MC report provides a taxonomy of money (“The money flower”) which delineates between two broad types of CBDC: general purpose and wholesale – with the former type coming in two varieties (Graph 1).

Source: BIS

The four key properties of money are: issuer (central bank or not); form (digital or physical); accessibility (widely or restricted); and technology. In terms of technology, the report distinguishes between money that is token- or account-based. In payment economics, a key difference between tokens and accounts is in their verification: a person receiving a token will verify that the token is genuine, whereas an intermediary verifies the identity of an account holder.

However, the definition of tokens varies considerable across scientific fields, and other reports distinguish between value- or account-based forms of CBDC. In sum, this paper discusses the three variants of CBDC highlighted by the grey- shaded areas within the “money flower” above.

The first is a “general purpose”, “account-based” variant, ie an account at the central bank for the general public. This would be widely available and primarily targeted at retail transactions (but also available for broader use).

The second form is a “general purpose”, “token-based” variant, ie a type of “digital cash” issued by the central bank for the general public. This second variant would have similar availability and functions to the first, but would be distributed and transferred differently.

The last form is a “wholesale”, “token- or value-based” variant, ie a restricted-access digital token for wholesale settlements (eg interbank payments, or securities settlement).

Proceeding with caution – a survey on central bank digital currency (PDF)

Il termometro dei mercati finanziari (4 gennaio 2019)
a cura di Emilio Barucci e Daniele Marazzina

Termometro

Gen 05 2019
Il termometro dei mercati finanziari (4 gennaio 2019) a cura di Emilio Barucci e Daniele Marazzina

L’iniziativa di Finriskalert.it “Il termometro dei mercati finanziari” vuole presentare un indicatore settimanale sul grado di turbolenza/tensione dei mercati finanziari, con particolare attenzione all’Italia.

Significato degli indicatori

  • Rendimento borsa italiana: rendimento settimanale dell’indice della borsa italiana FTSEMIB;
  • Volatilità implicita borsa italiana: volatilità implicita calcolata considerando le opzioni at-the-money sul FTSEMIB a 3 mesi;
  • Future borsa italiana: valore del future sul FTSEMIB;
  • CDS principali banche 10Ysub: CDS medio delle obbligazioni subordinate a 10 anni delle principali banche italiane (Unicredit, Intesa San Paolo, MPS, Banco BPM);
  • Tasso di interesse ITA 2Y: tasso di interesse costruito sulla curva dei BTP con scadenza a due anni;
  • Spread ITA 10Y/2Y : differenza del tasso di interesse dei BTP a 10 anni e a 2 anni;
  • Rendimento borsa europea: rendimento settimanale dell’indice delle borse europee Eurostoxx;
  • Volatilità implicita borsa europea: volatilità implicita calcolata sulle opzioni at-the-money sull’indice Eurostoxx a scadenza 3 mesi;
  • Rendimento borsa ITA/Europa: differenza tra il rendimento settimanale della borsa italiana e quello delle borse europee, calcolato sugli indici FTSEMIB e Eurostoxx;
  • Spread ITA/GER: differenza tra i tassi di interesse italiani e tedeschi a 10 anni;
  • Spread EU/GER: differenza media tra i tassi di interesse dei principali paesi europei (Francia, Belgio, Spagna, Italia, Olanda) e quelli tedeschi a 10 anni;
  • Euro/dollaro: tasso di cambio euro/dollaro;
  • Spread US/GER 10Y: spread tra i tassi di interesse degli Stati Uniti e quelli tedeschi con scadenza 10 anni;
  • Prezzo Oro: quotazione dell’oro (in USD)
  • Spread 10Y/2Y Euro Swap Curve: differenza del tasso della curva EURO ZONE IRS 3M a 10Y e 2Y;
  • Euribor 6M: tasso euribor a 6 mesi.

I colori sono assegnati in un’ottica VaR: se il valore riportato è superiore (inferiore) al quantile al 15%, il colore utilizzato è l’arancione. Se il valore riportato è superiore (inferiore) al quantile al 5% il colore utilizzato è il rosso. La banda (verso l’alto o verso il basso) viene selezionata, a seconda dell’indicatore, nella direzione dell’instabilità del mercato. I quantili vengono ricostruiti prendendo la serie storica di un anno di osservazioni: ad esempio, un valore in una casella rossa significa che appartiene al 5% dei valori meno positivi riscontrati nell’ultimo anno. Per le prime tre voci della sezione “Politica Monetaria”, le bande per definire il colore sono simmetriche (valori in positivo e in negativo). I dati riportati provengono dal database Thomson Reuters. Infine, la tendenza mostra la dinamica in atto e viene rappresentata dalle frecce: ↑,↓, ↔  indicano rispettivamente miglioramento, peggioramento, stabilità.

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