35. See Annex on Proc cyclicality, Accompanying Document to
the Proposal for a Directive of the European Parliament and
ot the Council amending Capital Requirements Directive
on trading book, securitisation issues and remuneration poli-
cies. <http: Z Zee. eιιropa. eu Zinternaljn ark er ∕ba nk /docs Zregcap it al /
com2OO9 ZimpactJissesmentjm.pdf> at page 46 of 47
36. As identified in the Accompanying Document to the Proposal
for a Directive of the European Parliament and of the Council
amending Capital Requirements Directive on trading book,
securitisation issues and remuneration policies. See page 46 of
47
37. See “Is Basel II Pro Cyclical? A Selected Review of the
Literature” Financial Stability Review December 2009 at page
150
38. Report of the Financial Stability Forum on “Addressing Pro
cyclicality in the Financial System: Measuring and Funding
Liquidity Risk” at pages 20 and 22
39. ibid at pages 21 and 22
40. See P Agenor and L Pereira da Silva , „Cyclical Effects of Bank
Capital Requirements with Imperfect Credit Marketsu World
Bank PoHcy Research Paper 5067 at page 36.They illustrate
through their model that capital buffers, by lowering deposit
rates, are actually expansionary and that hence,“if capital buffers
are increased during an expansion, with the initial objective of
being countercyclical, they may actually turn out to be procycli-
cal."This, in their opinion, is an important conclusion, given the
prevailing view that “countercycHcal regulatory requirements
may be a way to reduce the build up of systemic risks:if the
signaling effects of capital buffers are important, “leaning against
the wind” may not reduce the amplitude of the financial-
business cycle.” For more information on this, also see M Ojo,
„The Impact of Capital and Disclosure Requirements on Risks
and Risk Taking Incentives*4 (2010)
41. Report of the Financial Stability Forum on “Addressing Pro
cyclicality in the Financial System: Measuring and Funding
Liquidity Risk" http: / Zune wfinatιdals tabili tyboard ,org Zpublicat ions/
r_0904a.pdf at page 24
42. According to the Bundesbank, „the economics of information,
which is widely applicable to the financial markets, therefore
eases the rigorous assumptions about information require-
ments and market perfection?* See Deutsche Bundesbank
, ,,Seairities Market Regulation: International Approaches'*
Deutsche Bundesbank Monthly Report January 2006 at
page 36
43. Since specific knowledge which banks possess about their bor-
rowers is considered to be a factor which determines the illi-
quidity of bank loans; see “The Concept of Systemic Risk” ECB
Financial Stability Review December 2009 at page ↑37<http://
u>unι>. ecb. in t!pub ZfirzshaiedZpdfZivbfinandaIstabiIityrevieuQ00912en.
pdfi05d3164914c6a 14bbl3522 2b5c3894fa>
44. ibid; According to the Review, the reduction in the common
pool of liquidity also has the potential to trigger the failure of
banks and could consequently lead to a devaluation of illiquid
bank assets and further aggravation of problems within the
banking sector.
45. Report of the Financial Stability Forum on “Addressing Pro
CyclieaHty in th? Financial System: Measuring and Funding
Liquidity Risk" http://Wunufinandalstabilityboard.oιg∕publications Z
r_0904a.pdf at page 24
46. ibid
47. TheTurner Review :Key Elements of the Turner Review (page
2 of 4) <http://www.dlapiper.com>
48. Exacerbated strains on bank capital is the term used to denote
procycHcality ; s?e ibid International Accounting Standards are
also considered to have Iiad a pro-cycHcal impact. It is stated that
“in particular moving to marking to market accounting, rather
than the more traditional marking to maturity, exacerbated
VolatiHty in the accounts ot banks—with valuation becoming
practically impossible for some securities as the market in them
disappeared.”; ibid
49. R Repullo, J Saurina, and Carlos Trucharte,“How to Mitigate
the Procyclical Effects of Capital Adequacy Rules" <http: //
Uninnewointelliger,се. coni/article. 581 +M5jf0e4ba595.0.html>
50. See the Accompanying Document to the Proposal for a Directive
of the European Parliament and of the Council amending
Capital Requirements Directive on trading book, securitisation
issues and remuneration poHcies http://ec.europa.eu/intemal_mar
ket∕bank∕docs ZregcapitalZcom2009Zimpactjissesment_en.pdf Page
46 of 47
51. “Report of the Financial StabiHty Forum on Addressing Pro
CydicaHty in the Financial System” http://wwwfinaneialstabili
tyboard.org/pubHcations/r_0904a.pdt'
52. Accompanying Document to the Proposal for a Directive of
the European Parliament and of the Council amending Capital
Requirements Directive on trading book, securitisation issues
and remuneration policies htfp!Z∕ee.euwpa.eιι∕internalj>ιarket∕
bank/does Zregeapkal ∕com2009/inipact_assesnient_en.pdf page 46
of 47
53. Scc “Report of the Financial Stability Forum on Addressing Pro
CyclicaHty in the Financial System” at pages 2 and 3 http: ZZunini'.
financialstabilityboιrd. org/publications/r_0904a .pdf
54. See Bank for International Settlements, Consultative Document,
Strengthening the Resilience of the Banking Sector** at page
48
55. SecBankforInternational Settlements „Proposed Enhancements
to the Basel II Framework: Revisions to PiHar 3“ (Market
DiscipHne)** Consultative Document , Basel Committee on
Banking Supervision paragraph 73 at page 23
56. See, Enliancemerts to the Basel II Framework** Basel Committee
on Banking Supervision pubHcations July 2009 at page 29
http:/∕u'un∣'.bis.OtgZpubI∕bcbs 157.pdf and <http:Z∕u>uni'.bis.org/
pub! ∕bcbs 15 7. pdf: no frames=1>
57. Ibid at page 10
58. ibid
59. See B Arrunada, “The Provision of Non Audit Services by
Auditors: Let the Market Evolve and Decide” 1999 International
Revievi' of Law and Economics at page 13. According to
Arranada, regulators should not only focus on policies which
would improve transparency of information—hence enhancing
Volume 30 ∙ Number 9 ∙ September 2011
Banking & Financial Services Policy Report ∙ 43