ECB: Monetary policy and household inequality

News

Lug 20 2018

The European Central Bank (ECB) published a working paper assessing the impact of monetary policy on households inequality across the Euro Area. Specifically, the study deals with the impact of the recently adopted  quantitative easing, on which recently came to public attention.

For example, commentators have pointed out that a prolonged reduction in policy interest rates can generate an income loss for savers holding interest-bearing assets, or that expansionary measures supporting financial asset prices are especially beneficial for the savers holding those assets. The paper reviews theoretical findings on the distributional effects of monetary policy on households’ income, wealth and consumption and it provides suggestive empirical evidence on their quantitative relevance with special emphasis on euro area countries.

The analysis first points out that monetary policy,  always produces distributional effects. Empirical evidence available for various countries suggests that a reduction in policy interest rates compresses the distribution of income. There is a modest evidence that the Asset Purchase Program (APP) led to a reduction of income inequality in the four largest euro area countries. However, the overall effects of monetary policy on income inequality are modest, compared to its observed secular trend.

The direct effect operates through the modification of policy rates. A reduction in policy rates will decrease interest payments for households with net outstanding debt, but it will also reduce interest income for households holding net financial assets. The indirect effect operates through the general equilibrium responses of prices and wages, hence of labour income and employment. After a reduction in policy rates, the direct increase in households’ expenditure and firms’ investment will lead to an increase in output and it will exert upward pressure on employment and wages. The additional increases in aggregate expenditure induced by higher employment and wages are the essence of the indirect effect.

To assess the relative importance of direct and indirect effects, the paper analyses how the distributional implications of monetary policy on income and wealth propagate to consumption. Such propagation is nontrivial when the marginal propensity to consume (MPC), out of transitory income shocks varies across households.

The study uses available estimates of MPCs to weigh the relative importance of direct and indirect effects on aggregate consumption in the euro area. To gauge the direct effects, it uses, on the one hand, detailed information on households’ asset and liabilities exposed to interest rate risk and, on the other hand, estimates of households’ saving elasticity to interest rate changes. To assess the indirect effect, it combines estimates of the aggregate impact of monetary policy on unemployment and wages with household-level job finding rates.

The results show that low short rates do hurt “savers”, i.e. households owning nonnegligible amounts of liquid assets, via a direct effect—that is, via the reduction in their income from those assets. Low short rates, however, also benefit savers, like all other households, via an indirect effect—that is, the reduction in their unemployment rate and the increase in their labour income. The indirect effect dominates from a quantitative perspective.

Monetary policy and household inequality (PDF)

EBA: Guidelines on fraud reporting under PSD2

News

Lug 20 2018

The European Banking Authority (EBA) published today its final Guidelines on fraud reporting under the revised Payment Services Directive (PSD2). These Guidelines, which the EBA developed in close cooperation with the European Central Bank (ECB) and which are addressed to payment service providers and competent authorities, are aimed at contributing to the objective of PSD2 of enhancing the security of retail payments in the EU.

These Guidelines require payment service providers across the 28 EU Member States to collect and report data on payment transactions and fraudulent payment transactions using a consistent methodology, definitions and data breakdowns.

Having assessed the responses received to the consultation paper (CP) it had published in August 2017, the EBA decided to make a number of changes to the Guidelines and related annexes. In particular, the final Guidelines now no longer require quarterly reporting of high-level data and a more detailed set of data on a yearly basis, but the reporting of a uniform set of data on a semi-annual basis instead.

The geographical scope of the data, too, has been reduced in size and complexity compared to the draft Guidelines that had been proposed in the CP, as the Guidelines do no longer require country-by-country data breakdowns and there is now a uniform geographical breakdown (instead of three different ones). In addition, fraudulent transactions where the payer is the fraudster are no longer within the scope of the Guidelines.

Furthermore, jointly with the ECB, the EBA has made particular efforts further to align the Guidelines with related reporting requirements, in particular with the ECB Regulation on payment statistics (ECB/2013/43).

Guidelines on fraud reporting under the Payment Services Directive 2 (PDF) 

FSB: reforms to interest rate benchmarks

News

Lug 15 2018

The Financial Stability Board (FSB) has today published a statement on reforms to interbank offered rates (IBORs) and the development of overnight risk-free, or nearly risk-free, rates (RFRs) and term rates.

The statement is intended to provide market participants and other stakeholders with the FSB’s views ahead of a forthcoming consultation by the International Swaps and Derivatives Association (ISDA) which contemplates fall backs for certain derivative contracts based on overnight RFRs.

Interest rate benchmarks play a key role in global financial markets. The FSB started its work on reforms to IBORs following enforcement action taken by FSB member authorities in response to the manipulation of these benchmarks. In 2014, the FSB set out recommendations to reform major interest rate benchmarks such as key IBORs and has been monitoring progress on implementation since then.

To ensure financial stability, benchmarks which are used extensively must be especially robust. The FSB welcomes the progress that has been made by public authorities and private sector working groups on the identification and development of overnight RFRs that are sufficiently robust for such extensive use.

These overnight RFRs are robust because they are anchored in active, liquid underlying markets. This contrasts with the scarcity of underlying transactions in the term interbank and wholesale unsecured funding markets from which some IBORs are constructed, a characteristic which could make them susceptible to manipulation. The FSB continues to encourage the development and adoption of these overnight RFRs where appropriate, for example in business where term properties are not needed, or where exposure to bank credit risk is not necessary or desirable. This will enhance financial stability.

In the markets which face the disappearance of IBORs, notably markets currently reliant on LIBOR, there needs to be a transition to new reference rates. In these markets, it will be important to have a full discussion and establish further clarity among affected end users on how this transition should take place. In some other markets, authorities and market participants continue to work on further reform or strengthening of IBORs, in tandem with their efforts to identify and facilitate the wider use of RFRs.

An overnight RFR may not, however, be the optimal rate in all the cases where term IBORs are currently used. The FSB recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets.

Interest rate benchmark reform – overnight risk-free rates and term rates (PDF)

ECB: Benefits and costs of liquidity regulation

News

Lug 15 2018

The European Central Bank (ECB) published a working paper aimed at addressing the new risks arising from changes in the regulation of liquidity related issues.

The prudential regulation of banks has changed dramatically since the global financial crisis. While the Basel III reforms of the quantity and quality of bank capital have been the most prominent, a number of other policy initiatives have also been pursued with the aim of making banks safer and avoiding future crises. The paper focuses on one of these initiatives – a new regime of bank liquidity regulation – and examine if and how it can be beneficial for financial stability, at what cost, and how it interacts with other financial policy tools such as capital requirements and the Lender of Last Resort.

An empirical assessment of the benefits of liquidity regulation and a quantification based on macro-financial models and euro area data of its long-run macroeconomic costs is proposed. This allowsto shed light also on the interactions with capital regulation and LOLR, and take these interactions into account in our evaluation of benefits and costs.

The usefulness of liquidity tools in the optimal financial policy mix is determined by three main factors: (1) the size of LOLR distortions, (2) the effectiveness of liquidity policy instruments in alleviating liquidity stress and (3) the cost of liquidity policy instruments themselves. Our empirical work takes as a point of departure that unlimited LOLR interventions are costly and focuses on providing guidance on the quantitative importance of the last two factors.

Among the benefits of liquidity regulation, the beneficial effect of the two main liquidity ratios (the Liquidity Coverage Ratio, (LCR) and the Net Stable Funding Ratio, (NSFR)) in reducing liquidity take-up by European banks is explored. During the 2008-2009 crisis period, European banks in our sample on average used a total of 460 billion euros of public liquidity. The estimates suggest that, had these banks fully complied with the LCR (NSFR) ratio, this would have reduced liquidity take-up by 32 (110) billion euros.

The proposed policy tools therefore had a statistically and economically significant negative impact on liquidity take-up during the most recent crisis. Nevertheless, the evidence also suggests that liquidity regulations (at least as currently specified) would not have prevented the need for large public liquidity assistance for European banks. This stands as a note of caution against expecting the end of LOLR interventions due to the application of the current liquidity policy tools.

The cost for banks of complying with the LCR and NSFR is also explored. These costs turn out to be non-trivial but small, especially when compared with the costs of capital requirements. The analysis therefore suggests that while the LCR and NSFR do not have financial stability benefits on a par with bank capital requirements, they are still useful due to their relatively low cost.

 

Benefits and costs of liquidity regulation (PDF)

EBA: Fintech and its impact on incumbents

News

Lug 15 2018
The European Banking Authority (EBA) published the first products of its FinTech Roadmap, namely (i) a thematic report on the impact of FinTech on incumbent credit institutions’ business models and (ii) a thematic report on the prudential risks and opportunities arising for institutions from FinTech. Both reports fall under the wider context of the newly established EBA FinTech Knowledge Hub and aim to raise awareness within the supervisory community and the industry on potential prudential risks and opportunities from current and potential FinTech applications and understand the main trends that could impact incumbents’ business models and pose potential challenges to their sustainability.

Report on the impact of FinTech on incumbent credit institutions’ business models 

Based on the EBA’s observations, incumbents are categorised into (i) proactive/front-runners, (ii) reactive and (iii) passive in terms of the level of adoption of innovative technologies and overall engagement with FinTech. Potential risks may arise both for incumbents not able to react adequately and timely, remaining passive observers, but also for aggressive front-runners that alter their business models without a clear strategic objective in mind, backed by appropriate governance, operational and technical changes.

The report sets out five factors that might significantly affect incumbents’ business models from a sustainability perspective: (i) digitalisation/innovation strategies pursued to keep up with the fast-changing environment, (ii) challenges arising from legacy ICT systems, (iii) operational capacity to implement the necessary changes, (iv) concerns over retaining and attracting staff and (v) increasing risk of competition from peers and other entities.

The report concurs that currently the predominant type of relationship between incumbents and FinTech is partnership with FinTech firms, which is considered a “win-win” situation.

Report on the prudential risks and opportunities arising for institutions from FinTech

The report assesses seven use cases, where new technologies are applied or considered to be applied to existing financial processes, procedures and services. The report aims to provide both competent authorities and institutions with useful guidance on such applications. It focuses on micro-prudential aspects, setting out potential prudential risks and opportunities that may arise from each use case:

  • Biometric authentication using fingerprint recognition;
  • Use of robo-advisors for investment advice;
  • Use of big data and machine learning for credit scoring;
  • Use of distributed ledger technology and smart contracts for trade finance;
  • Use of distributed ledger technology to streamline customer due diligence processes;
  • Mobile wallet with the use of near-field communication;
  • Outsourcing core banking/payment system to the public cloud;

No significant implementation of sophisticated technologies has been noted yet by institutions, possibly because of security concerns and filtering the hype around FinTech. From the prudential risks’ perspective, there is a growing shift towards operational risk, arising mainly from the accentuation of ICT risks as institutions move towards more technology-based solutions.

Dependencies on third-party providers, heightened legal and compliance risks and negative impact on conduct risk add to the overall increased operational risk. The potential efficiency gains and improved customer experience are currently the predominant potential opportunities while the changing customer behaviour is an important factor triggering institutions’ interest towards FinTech.

Report on prudential risks and opportunities arising for institutions from FinTech.pdf (PDF)

Report on the impact of Fintech on incumbent credit institutions’ business models.pdf (PDF)

IOSCO: commodities delivery and derivatives pricing

News

Lug 15 2018

The Board of the International Organization of Securities Commissions (IOSCO) is requesting feedback on proposed good or sound practices to assist relevant storage infrastructures and their oversight bodies to identify and address issues that could affect commodity derivatives’ pricing and in turn affect market integrity and efficiency.

In the report “Commodity Storage and Delivery Infrastructures: Good or Sound Practices, published for consultation today”, IOSCO proposes the adoption of the good or sound practices by all relevant storage infrastructures, their oversight bodies and financial regulators in IOSCO member jurisdictions, as appropriate to their role and activities.

IOSCO believes that the implementation of these practices will lead to a more transparent and robust environment for the physical storage and delivery of commodities, producing benefits for all commodity market participants.

The overarching objective of the good or sound practices is to create a framework that incentivises the market to adopt best practices and self-correction, rather than one that prohibits certain behaviours.

The report builds on IOSCO ́s 2016 report “The Impact of Storage and Delivery Infrastructure on Derivatives Market Pricing”, which identified certain commodities storage and delivery situations that have the potential to affect derivatives pricing if not properly addressed. These practices fall into five broad areas: oversight, transparency, conflicts of interest, fees and incentives, and operations.

 

The Impact of Storage and Delivery Infrastructure on Derivatives Market Pricing (PDF)

Commodity Storage and Delivery Infrastructures: Good or Sound Practices, published for consultation today

Robotic Process Automation – Challenges of Implementation in the Financial Services Industry
a cura di Deloitte Italia

Articolo

Lug 15 2018
Robotic Process Automation – Challenges of Implementation in the Financial Services Industry a cura di Deloitte Italia

Robotic Process Automation – Challenges of Implementation in the Financial Services Industry

In more established industries, finding new ways of increasing internal efficiency while maintaining a high level of customer satisfaction is persistently becoming more crucial not just to achieve success, but also to survive in an ever-competitive environment.

The Financial Service Industry (from now on, FSI) belongs to this category of slowly increasing markets and shows several characteristics that make it one of the best subjects for the application of Robotic Process Automation.

Robotic Process Automation (from now on, RPA), often referred to as “robotics” or “robots”, is defined as the automation of rule-based processes with software integrated at user interface level that can interact with the internal information technology landscape or external web application simulating a human. In other terms, RPA is a software solution that mimics a variety of rule-based, repeatable processes that do not require real-time creativity or judgment.

Classic processes that can benefit from RPA typically have repeatable and predictable interactions with IT applications, including those that may require toggling between multiple applications. These peculiar characteristics can be easily found in almost all of the totality of FSI middle and back-office processes.

In essence, a robot can perform activities like opening emails and attachments, logging into web/enterprise applications, moving files and folders, filling in forms, reading/writing from databases, scraping data from the web, connecting to system API, extracting structured data from documents and following “if/then” decision rules. On the other hand, a robot is not designed to: read hand-written documents, understand the meaning of documents, self-adapt to variations of the underlying applications, produce physical outputs, perform complex tasks requiring human interaction, cognitive systems or artificial intelligence.

Benefits

The main results of a successful RPA implementation are identifiable in significantly faster (payback at less than 12 months[1]) and higher ROI, achievable with a limited investment compared to a traditional IT project and tangible efficiency improvements (about 20% of FTE capacity coverable by robots on average[1]).

Nonetheless, organizations adopting RPA solutions typically experience benefits beyond mere cost reduction and speed of implementation:

  • Decreased cycle times: usually robots are faster than humans in work execution and can run 24/7;
  • Flexible cost structure: robots can be scheduled and reassigned depending on the current needs of the organizations (e.g. by dynamically allocating more robots to more cumbersome or urgent processes);
  • Improved accuracy: as long as any exception is properly mapped, robots cannot fail in the standard execution (e.g. they do not make typos);
  • Improved organizational structure: RPA can free staff from the more repetitive and alienating tasks and enables a more valuable personnel allocation;
  • Detailed data capture: robotic solutions are designed to provide users and controllers with a wide set of reports and logs, useful for supporting further process improvements, auditing and bolstering regulatory compliances.

Challenges

These are just some of the examples of the benefits that a robotic solution can yield to a financial service provider, which well explains why nowadays RPA has become a key topic of the business jargon of this industry.

Yet there are several challenges that may emerge when implementing a RPA solution, whose nature can span from mere technical and infrastructural issues to strategic and behavioural matters.

First, RPA is so effective in the short time that it incurs in the risk of being considered as a simple “patch” solution, only able to quickly solve a temporary issue, with the result that Proof of Concepts and Technologies take precedence over a cohesive, end-to-end strategy that considers also people change management implications. Moreover, organizations often take a de-centralized approach to RPA, testing the capability across multiple functions with uncoordinated initiatives. This short sighted approach eventually leads to an ineffective scaling of RPA throughout the organization.

On the other hand, a successful pilot implementation may create a misconception of what RPA is actually capable of, overestimating its possible applications also on processes that do not comply with the automation basic requirements. More commonly, organizations perform an RPA transformation without considering broader value propositions comprehensive of complementary technologies, which drastically reduce the possibilities of an effective implementation.

In some cases, employees may turn to be apprehensive about the potential impacts of service automation on their jobs, and executives cannot neglect this aspect. Indeed, where one side sees an opportunity for better allocation of resources to more valuable activities, the other side perceives a threat to their role in the organization. In the worst case, staff members might panic and even sabotage new initiatives.

Finally, even though RPA is designed to mimic human behaviour, a minimum of process reengineering is required in order to effectively automate the activities. This fact adds to the basket all the possible issues that may occur whenever a change is brought to a consolidated procedure, and the complexity is further increased if we consider that the change involves both the business and the IT functions.

The largest threat that all these elements bring together is the concrete possibility of a stand-alone RPA implementation, as showed in a research conducted by Deloitte in 2017[1] over 400 firms spread across the world. Indeed, while 53% of the interviewed sample had started an RPA initiative, only 3% was able to scale such activities and reach a steady productivity state.

Solutions

Therefore, despite the easiness of implementation of an RPA solution compared to a traditional IT change, a concretely effective process automation is far from being a simple task.

Indeed, the correct adoption of RPA in the organization requires executives and users to take into account several aspects, not just IT-related, such as:

  • A strong commitment from management to help deliver the service automation vision. This can be achieved by steering internal communications to inform staff about the service automation strategy and timing and its effects on employees;
  • An early involvement of IT professionals to avoid risks to the organization, such as exposing sensitive data, and to plan a comprehensive automation roadmap, which is crucial to ensure a proper development of RPA aligned with traditional systems evolution;
  • A direct engagement of employees in the design and implementation of the RPA solution, which can also be very effective in reducing resistance and can lead to further positive impacts including higher job satisfaction.

The result of these considerations is the creation of a centralized Center of Excellence inclusive of the organizational layers involved in the initial implementation. The CoE will represent the unit that, by applying a sound governance framework, will be in charge of the evolution of robotics in the organization.

Under a strategic perspective, to successfully start and maintain an RPA initiative, an organization should:

  • Adopt a different mind-set that considers a new category of digital workforce, inclusive of users and robots as well. This novel perception requires first to start with a bold ambition for the digital workforce, which is then translated in a continuous transformation programme. In turn, this needs continuous and apt investments: RPA should not be considered as an one-off cost, but its effective implementation and improvement has to be sustained over time;
  • Be aware that RPA actually represents only the first step of the automation spectrum. Indeed, RPA can get more effective if it is connected with other supporting/enabling technologies, such as BPM, OCR and Machine Learning. The development of further, “smarter” technologies with RPA tools enables the real paradigm shift towards the Intelligent Enterprise;
  • Manage RPA issues that can emerge in aligning the new solution with the current IT architecture, by having a strong checklist in place regarding infrastructure and compliance requirements. This point is crucial in order to ensure that the correct infrastructure is in place and compliance requirements have been met early on in the project. The proper architectural alignment comes first with the targeted selection of the RPA vendor that best meets the business needs.

Maximizing the impact of RPA requires a committed shift in mind-set and an approach switch from experimentation oriented to transformation oriented.

Conclusion

The recent developments of the Financial Services Industry are shifting the focus on efficiency. Thanks to its ability to deliver quick and concrete results with a limited investment, RPA appears to be the right solution for such emerging needs.

Yet, despite the several benefits provided, RPA comes also with some potential issues that may halt its development. Elements like poor planning, employees’ resistance and change aversion may indeed represent a critical obstacle to a proper scaling of RPA in the organization, which would lay-off many of the potential benefits.

Therefore, for an organization resolving to this kind of implementation it is essential to adopt a strategic approach inclusive of both the organizational and technical aspects that considers RPA as the starting element towards the realization of the digital enterprise run by the digital workforce.

 

Alessandra Ceriani – Partner Deloitte Consulting

Alberto D’Elicio – Manager Deloitte Consulting

Giuseppe Scotti – Analyst Deloitte Consulting

 

Notes

[1] Deloitte, The robots are ready. Are you? Untapped advantage in your digital workforce, 2017

Il termometro dei mercati finanziari (13 luglio 2018)
a cura di Emilio Barucci e Daniele Marazzina

Termometro

Lug 14 2018
Il termometro dei mercati finanziari (13 luglio 2018) a cura di Emilio Barucci e Daniele Marazzina

Continua l’iniziativa di Finriskalert.it “Il termometro dei mercati finanziari”. Questa rubrica 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.

FSB: Cyber Lexicon Consultative Document

News

Lug 07 2018

The Financial Stability Board (FSB) launched a draft version of a Cyber Lexicon that is intended to support the work of the FSB and others to address financial sector cyber resilience. This consultation seeks input on a draft Cyber Lexicon which comprises a set of 50 core terms related to cyber security and cyber resilience in the financial sector.

The Cyber Lexicon is intended to support the work of the FSB, standard-setting bodies, authorities and private sector participants, e.g. financial institutions and international standards organisations. A lexicon could be useful to support work in the following areas:

  • Cross-sector common understanding of relevant cyber security and cyber resilience terminology;
  • Work to assess and monitor financial stability risks of cyber risk scenarios;
  • Information sharing as appropriate; and
  • Work by the FSB and/or standard-setting bodies to provide guidance related to cyber security and cyber resilience, including identifying effective practices.

The FSB developed the lexicon in response to a request from G20 Finance Ministers and Central Bank Governors at their October 2017 meeting.

The FSB delivered a stocktake report to that meeting on existing publicly available regulations and supervisory practices with respect to cyber security in the financial sector.

Ministers and Governors asked that the FSB continue its work to protect financial stability against the malicious use of Information and Communication Technologies, noting that this work could be supported by a common lexicon of terms that are important in the work.

Cyber Lexicon – Consultative Document (PDF)

BIS: Financial stability implications of a prolonged period of low interest rates

News

Lug 07 2018

The Committee on the Global Financial System (CGFS) mandated a Working Group co-chaired by Ulrich Bindseil (European Central Bank) and Steven B Kamin (Federal Reserve Board of Governors) to identify and provide evidence for the channels through which a “low-for-long” scenario might affect financial stability, focusing on the impact of low rates on banks and on insurance companies and private pension funds (ICPFs).

Interest rates have been low in the aftermath of the Global Financial Crisis, raising concerns about financial stability. In particular, the profitability and strength of financial firms may suffer in an environment of prolonged low interest rates. Additional vulnerabilities may arise if financial firms respond to “low-for-long” interest rates by increasing risk-taking. The study resulted in a report which presents the Group’s conclusions about whether prolonged low rates induce fragility in the financial system because of repercussions on banks and ICPFs.

The first message is that while banks should generally be able to cope with solvency challenges in a low-for-long scenario, ICPFs would do less well. Banks can undertake a number of adjustments to shield profitability from low rates, whereas ICPFs are characterised by negative duration gaps that make them vulnerable to falling interest rates.

The second message is that even though the Working Group identified only a relatively limited amount of additional risk-taking by banks and ICPFs in response to low rates, a low-for-long scenario could still engender material risks to financial stability.

For example, even in the absence of greater risk-taking, a future snapback in interest rates could be challenging for financial institutions. Banks without sufficient capital buffers could face solvency issues, driven by both valuation and credit losses. ICPFs, instead, could face liquidity problems, driven either by additional collateral demands linked to losses on derivative positions or by spikes in early liquidations.

The adjustment of financial firms to a low interest rate environment warrants further investigation, especially when low rates are associated with a generalised overvaluation of risky assets. I hope that this reports provides both a sound rationale for ongoing monitoring efforts and a useful starting point for future analysis.

Financial stability implications of a prolonged period of low interest rates (PDF)