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Capital, liquidity standards and macro prudential policy tools in financial supervision: addressing sovereign debt problems

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  • Ojo, Marianne

Abstract

During the recent Financial Crisis, as well as the 2010 and ongoing European Sovereign Debt Crisis, several governments had/have had to raise their debt levels in order to stabilize their economies. The principal problem attributed to sovereign debts, which is linked to their characteristics, is the possibility of defaults occurring in relation to these – since they are usually accompanied without collaterals. The possibilities of such defaults occurring are further increased where bailouts are granted in relation to these debts. Increased doubts in relation to the likelihood of larger sovereigns “rolling over maturing debt on their own”, as well as the consequential occurrence of “very high, economically penalizing, interest rates”, is considered to be the present reality. This paper aims to illustrate why distressed countries, once granted bail-outs, should be given full assurance (by grantors of the bail-outs) that continued assistance will be provided in the form of accompanying aids to assist in completing repayments relating to such bailouts (through the extension of repayment periods or reduced interest rates) – rather than aggravating their position (hence facilitating the risk of defaults). As well as a consideration of improvements which have been introduced through Basel III in respect of prudential supervisory tools (supervisory tools such as capital, liquidity requirements, and macro prudential policy tools), and an analysis of recent efforts which have been undertaken by the Basel Committee to address information gaps in derivative markets (a source of huge losses to many major banks), the paper also explores how the new Basel liquidity standards (that is, the Liquid Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), could be effectively implemented in mitigating sovereign debt crises. Ultimately, the paper will seek to demonstrate that additional leverage ratios which are to be introduced by the Basel Committee, will play a very crucial role if the new liquidity standards are to achieve their desired effects and stated objectives.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44616.

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Date of creation: 24 May 2011
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Handle: RePEc:pra:mprapa:44616

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Keywords: European Sovereign Debt Crisis; bail-outs; Basel III; Dodd Frank Act; Capital standards; Liquidity Standards; macro prudential policy tools; Over-the-Counter (OTC) derivatives; Credit-Default-Swaps (CDS); markets; disclosure; bank; regulation; leverage ratios;

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  1. Nicholas Economides & Roy C. Smith, 2011. "Trichet Bonds To Resolve the European Sovereign Debt Problem," Working Papers, NET Institute 11-01, NET Institute.
  2. Brandauer, Stefan, 2006. "Sovereign Debt and Economic Policies in Global Markets: A Political Economy Approach," Munich Dissertations in Economics, University of Munich, Department of Economics 5082, University of Munich, Department of Economics.
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