New IMF paper sets out principles for virtual currency regulation

IMF-WashintonThe IMF released today a staff discussion note examining the regulatory and policy challenges of virtual currencies. The paper also sets outs principles for the design of domestic and international regulatory frameworks for virtual currencies.

“The report provides an overview of virtual currencies, how they work and how they fit into monetary systems, both domestically and internationally. It discusses the potential implications of the technological advances underlying virtual currencies, such as the distributed ledger system, before examining the regulatory and policy challenges posed by VCs, in the areas of consumer protection, financial integrity (money laundering and terrorism financing), taxation, financial stability, exchange and capital controls and monetary policy. The paper also sets out principles for the design of regulatory frameworks for VCs at both the domestic and international levels.”

Read the press release here and the full note here.

Basel 3’s capital requirements for market risk

Basel_-_Bank_für_internationalen_Zahlungsausgleich1The Basel Committee on Banking Supervision has issued the revised minimum capital requirements for market risk, a major component of the Basel 3 capital standards.

“The key features of the revised framework include:

– A revised boundary between the trading book and banking book;

– A revised internal models approach for market risk;

– A revised standardised approach for market risk;

– A shift from value-at-risk to an expected shortfall measure of risk under stress; and

– Incorporation of the risk of market illiquidity.”

Read the full text at

Central Bank of Brazil Economics and Finance Award

br-banco-central-bc-copomIn celebration of its 50th anniversary, the Central Bank of Brazil has launched the Central Bank Economics and Finance Award. In its first edition the award welcomes papers on monetary policy. The top three papers will receive a cash prize of 20,000 reais ($5,000), 10,000 reais ($2,500), and 5,000 reais ($1,250). The submissions are open from March 15 to April 15, 2016, and the results will be released on August 1, 2016.

More information is available at


Soft Law in Central Bank Accountability Frameworks

Camila Duran, a law professor at Universidade de São Paulo (Brazil), writes in the European Journal of Legal Studies about the importance of soft law in central bank accountability frameworks, comparing the Fed, the ECB and the Central Bank of Brazil.

EJLS[1](1)“Central banks are not traditionally thought of as being socially accountable. In fact, the main innovation of central banks in the 20th century was to make them largely independent from political influence. Thus, the prevailing (economic) analyses of central bank accountability have examined the formal relationships of accountability to political bodies such as the legislature and the executive. However, this article argues that trends in monetary policy-making beginning in the 1990s inadvertently led to the potential for greater social accountability of central banks. Driven by a shifting economic consensus, central banks moved from an approach of secretive currency management to transparent communication with the market. This transformation was prompted by new beliefs aboutthe efficiency of monetary policy. This article argues that the current ‘hard law’ framework for central bank accountability does not reveal all of the social mechanisms in place. In fact, ‘soft law’ instruments are causing more and faster institutional changes in the legal framework for the central bank accountability. The role of law is changing accordingly: central banks have their actions controlled in an ex postmodel of supervision rather than an ex anteform. This study explores the institutional development of accountability mechanisms in two central banks in advanced economies (the US Federal Reserve and the European Central Bank) and in a monetary authority in an emerging economic power(the Brazilian Central Bank). All the three central banks had the same institutional development, despite the significant differences in terms of political, social and economic contexts in which they operate.”

Read the full article at

Reforming or Deforming the Fed?

Maintaining a fixed dollar price for gold, imposing a Taylor rule for monetary policy, barring private bankers from being directors of the Fed’s regional reserve banks, releasing full transcripts six months after the Fed’s meetings – Barry Eichengreen comments on US presidential candidates’ proposals for reforming the Fed.

“The fact that three of the nine directors of the Fed’s regional reserve banks are private bankers is an anachronism that creates the appearance, and potentially the reality, of a conflict of interest. [Bernie] Sanders’ suggestion that the US president, rather than their own directors, nominate the regional reserve banks’ presidents is also worthy of consideration.

It is important to recall that the peculiar arrangements prevailing today were designed to overcome the financial sector’s opposition to the establishment of a central bank when the Federal Reserve Act was passed in 1913. This, clearly, is no longer the problem; on the contrary, the financial sector today is one of the Fed’s last staunch defenders.”

Read the full article here.

Basel 3’s new market risk framework and leverage ratio requirements endorsed


The Basel Committee’s governing body has endorsed Basel 3’s new market risk framework and leverage ratio requirements.

“Notable improvements in the new risk framework, which takes effect in 2019, include:

– A revised boundary between the banking and trading books that will reduce scope for arbitrage;

– A revised internal models approach with more coherent and comprehensive risk capture;

– An enhanced model approval process and more prudent recognition of hedging and portfolio diversification; and

– A revised standardised approach that serves as a credible fall-back and floor to the model-based approach, and facilitates more consistent and comparable reporting of market risk across banks and jurisdictions.


The [Group of Central Bank Governors and Heads of Supervision (GHOS)] also discussed the final design and calibration of the leverage ratio. Members agreed that the leverage ratio should be based on a Tier 1 definition of capital and should comprise a minimum level of 3%, and they discussed additional requirements for global systemically important banks.”

Read the full press release here.

China’s cabinet to have greater financial supervision role

Poor coordination among China’s banking, securities and insurance supervisors has prompted the authorities to consider unifying financial sector supervision under a single watchdog, while the central banks is trying to increase its role in macroprudential supervision, Reuters reports.

“After last summer’s stock market crash was blamed in part on poor coordination between financial regulators, sources said China was considering merging its banking, insurance and securities watchdogs into a single ‘super-commission’.

This month’s renewed stock market turmoil has made it more urgent to unify China’s regulatory system to restore confidence in markets and ward off financial risks.”

Read the full story at

Novo Banco: picking losers

Investors should price in the risk that EU authorities may exclude from bail-in bondholders of the same class, the Financial Times’ Lex column argues.

“Banks in urgent need of capital have no easy options. State bailouts sow moral hazard and raising equity or selling assets is hard, particularly at a moment of public weakness such as the aftermath of a failed stress test. The fashion now is for bondholders to step up and absorb losses, almost as if they owned equity. Fairness and prudence require that losses be dispersed evenly across all bondholders — so the hit is painful to all, but lethal to none.”

Read the full story here.


One rule to bind them all

With Solvency 2, the EU has a new prudential rulebook for insurance companies, The Economist reports.

20160102_fnp502“LIKE banks, insurers need a cushion of capital to ensure that they can meet customers’ claims in the event of unexpectedly big payouts or poor investment performance. As at banks, these cushions have at times proved woefully thin. In theory, all that changes on January 1st—in the European Union, at least—when a new set of regulations known as Solvency 2 comes into force. After more than ten years of negotiation, all European insurers will have to follow uniform rules on capital that are designed to make the firms more robust and allow investors and customers to assess their strength much more easily.”

Read the full story here.


Investors cry foul over bank bail-ins

New EU bail-in rules spread fear among large depositors and senior bondholders, the FT reports.

40107a74-07b0-4bde-8886-8ed32c4e623c“In both the Greek and Italian cases, banks were rushed into recapitalising before the new EU regime came into force on January 1, which could have meant losses for large depositors. When depositors have been bailed in before — such as in Cyprus three years ago — it has caused public fury and economic instability.

However, it is the Portuguese situation that has most upset investors. The central bank chose five senior bond issues out of a total of 52 to move from Novo Banco to the “bad bank” it set up to hold its toxic assets after a bailout in mid-2014.”

Read the full story here: