Will you try to satisfy your microprudential or your macroprudential supervisors today?
What? You want to satisfy both?
It is not that easy. The moment we satisfy the microprudential supervisors, the macroprudential ones worry about the ... stability of the system!
I was travelling from Australia, where I led a class to ANZ bank, to Kuala Lumpur, where I would lead a class organized by the Institute of Bankers in Malaysia (IBBM), when I read the excellent paper we have at Number 1 our list this week.
"The mandatory move to clearing standardised over-the-counter (OTC) derivatives trades via CCPs will HELP to reduce counterparty risk between financial institutions, PROMOTE transparency in hitherto opaque OTC derivatives markets and FACILITATE a more orderly resolution of failing financial institutions.
HOWEVER, the more prominent role of CCPs will also introduce NEW systemic risks.
Mandatory clearing will turn CCPs into systemic nodes in the financial system, with unknown, but possibly far-reaching, consequences.
For example, systemic risks may be exacerbated by the procyclicality of CCPs' practices, as they tend to tighten collateral requirements during an economic downturn.
This, in turn, may fuel the creation of adverse feedback loops in financial markets and possibly trigger asset fire sales."
Ok, I will try to understand it.
We try to have stability in the financial markets ... ... to introduce countercyclical measures to satisfy the Basel iii rules and the microprudential supervisors ... ... to reduce counterparty risk ... ... SO we have a mandatory move to clearing standardised over-the-counter (OTC) derivatives trades via CCPs ... ... that solves some microprudential problems ... ... but alerts the macroprudential supervisors ... ... as it has "unknown, but possibly far-reaching, consequences" ... ... exacerbated by the PROcyclicality of CCPs' practices (oh no) ... ... that possibly trigger asset fire sales ... ... and financial stability problems.
George Lekatis is the General Manager of Compliance LLC, a leading provider of risk and compliance training and executive coaching in 36 countries.
George has more than 17,000 hours experience as a professional speaker and seminar leader. He has worked for more than 18 years as a management consultant and educator and has demonstrated exceptional presentation and communication skills.
George is the president of the Basel ii Compliance Professionals Association (BCPA, www.basel-ii-association.com), the largest association of Basel ii professionals in the world, and the Basel iii Compliance Professionals Association (BiiiCPA, www.basel-iii-association.com), the largest association of Basel iii professionals in the world.
George is also president of the Sarbanes Oxley Compliance Professionals Association (SOXCPA, www.sarbanes-oxley-association.com), the largest Association of Sarbanes Oxley professionals in the world
George is an expert witness, qualified to investigate and testify about risk and compliance management standards, policies, procedures, best practices, due care and due diligence.read more
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