The Bank of England on regulatory arbitrage, CCPs for OTC derivatives and more

A slew of recent publications from the Bank of England, some as part of their Q3 Quarterly Bulletin and some separate, should be considered both for reading the tea leaves of regulatory intent and for practical insights they offer the market. We summarize these papers, reports and articles for easy reading.

“Over-the-counter (OTC) derivatives, central clearing and financial stability”, by Arshadur Rahman. The new contribution of this piece is a highlight on the BofE’s concerns about cross-border regulatory supervision. The paper notes “As home to global CCPs, the UK authorities have taken the initiative to establish regulatory ‘colleges’ consisting of a wide range of other international authorities. These colleges provide a vehicle for the sharing of information about those CCPs and the approach that the Bank is taking to their supervision, and for those authorities to input into the Bank’s approach. In addition, within the EU, EMIR established regulatory colleges of relevant EU authorities for each EU CCP. Co-operation between authorities will also be important in the context of the preparation of resolution plans for CCPs.”

“How has cash usage evolved in recent decades? What might drive demand in the future?”, by Tom Fish and Roy Whymark. The highlights: demand for banknotes (yes, cash) has been growing since the mid-90s, even though its only about 3% of total UK assets. The demise of cash looks overrated and overhyped. The authors look at cash competitors and find that none of them mean that cash will be any less important than it is now. This gets to be pretty interesting when considering cash competitors like bitcoin. We recommend the video at the bottom of the above link. Stick it out until the end for a funny line about investing in the future of cash.

Meanwhile, the Bank’s Andrew Haldane, in a speech this past Friday, raised the idea of moving entirely to electronic currency and doing away with cash in the context of interest rates and inflation management: “One interesting solution, then, would be to maintain the principle of a government-backed currency, but have it issued in an electronic rather than paper form. This would preserve the social convention of a state-issued unit of account and medium of exchange, albeit with currency now held in digital rather than physical wallets. But it would allow negative interest rates to be levied on currency easily and speedily, so relaxing the ZLB constraint.”

“The implementation of ring-fencing: the PRA’s approach to ring-fencing transfer schemes – CP33/15”. This is a consultation paper from the Prudential Regulatory Authority. It lays out the mechanics and operations of how ring-fencing transfer schemes should be submitted and who can write them. This isn’t the sexiest consultation paper the BofE has ever put out, but how these details work are important to people involved with them.

“Regulatory arbitrage in action: evidence from banking flows and macroprudential policy,” by Dennis Reinhardt and Rhiannon Sowerbutts. This staff working paper leans towards the academic side of things, but the upshot is that regulatory arbitrage is alive and well. The authors “find evidence that borrowing by the domestic non-bank sector from foreign banks increases after home authorities take a macroprudential capital action. We find no increase in borrowing from foreign banks after an action which tightens lending standards (such as limits on loan-to-value ratios for house purchase). Evidence on reserve requirements is mixed.” When regulators apply capital regulation in one country, the authors find evidence that foreign banks have a competitive advantage. This is no new news but its very interesting to see the results documented so clearly.

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