-
Final guidelines for dealing with failing institutions from the international Basel Committee include direct capital injections something the Dodd-Frank Act tried to end in the U.S. as a last-ditch option.
July 16 -
WASHINGTON Certain indicators of financial risk appear to be getting worse, including term premiums for Treasury bonds and dealer inventories of fixed-income assets, according to the Office of Financial Research.
June 26 -
The Greek debt crisis and China's stock-market crash may put downward pressure on interest rates and delay the Fed's interest rate hike, and they are adding uncertainty at a time when lenders thought recovery would be taking hold.
July 7 -
The Basel Committee's revisions to banks' risk disclosure requirements should help investors glean more meaningful information, thereby allowing them to impose market discipline on less creditworthy institutions.
January 29
For proof that events in emerging markets can influence capital markets in the rest of the world, one need only look at the developments of the last few weeks.
Global markets
It is probably too early to predict the long-term effect of the events in Brazil and China on the broader global economy and the Federal Reserve's plans to raise interest rates. However, it is not too early to scrutinize the extent to which many U.S. banks are exposed to emerging markets. Yet it is difficult to get an accurate picture of banks' exposures to emerging markets because of their opacity.
In order to improve banks' risk management, they should be required to release detailed information on the level of credit, market, operational, and liquidity risks they have by country, industry, and largest counterparties. Only with transparency can the market make rational investment decisions.
Banks are influenced by both primary and secondary effects of volatility in emerging markets. Primary effects are caused by banks' direct exposure to currencies, bonds, and stocks of emerging market governments and corporations. Banks may also be exposed to loans, repurchasing agreements, and derivatives with emerging market public- or private-sector entities.
Banks may also be vulnerable to secondary effects when their counterparty, such as an international corporation, is exposed directly to emerging markets. The Chinese economic downturn, for example, is having a particularly adverse impact on commodity
Federal Financial Institutions Examination Council
Recent financial disclosures show that
From a bond, equity and derivatives markets perspective, the U.S. banks most sensitive to recent Brazilian and Chinese events are the
Then there is the matter of banks' exposure to the foreign exchange market. Bank holding companies in the U.S. generated revenues of $18.7 billion by trading interest rate, foreign exchange, equity, credit and commodity products in the first quarter of 2015, according to the latest available
Volatility can be a bank's best friend. In the coming months, we will find out which banks benefited from the effects of the Brazilian downgrade and the Chinese yuan devaluation and which banks took losses. Unfortunately, due to the opacity of banks' risk metrics along with their complexity, we cannot tell how liquid their emerging market positions are, how they are hedged, in what legal entities they are booked and how they are collateralized. This information would be invaluable in helping investors, analysts, and journalists scrutinize banks' credit, market and liquidity risks. As such, regulators should require that banks disclose this information to the public.
Also of concern is large banks' poor risk
The Basel Committee on Banking Supervision has recommended that bank supervisors make ad hoc requests of the most internationally active banks to see if they can measure specific exposures by country, industry or counterparty. I have significant doubts that large U.S. banks would be able to show that they can measure completely, accurately, and in a timely manner what their exact exposures are to Latin American and Asian currencies, securities, derivatives, and counterparties impacted by emerging market volatility. Indeed, surveys by the
Some of my bank contacts have told me that they hope they will improve their risk data aggregation and risk measurements. But I do not think that American taxpayers should be satisfied with "hope" as a strategy to make banks safer.
Mayra Rodríguez Valladares is managing principal at
financial regulatory consulting and training firm in New York. On Twitter, she is