Capital, Liquidity Standards and Macro Prudential Policy Tools in Financial Supervision: Addressing Sovereign Debt Problems
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During the recent Financial Crisis, as well as the 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.
Keywords
HG Finance