Skip to main content

ICMA Centre Research looks at whether banks could survive a new Great Depression

A newly issued ICMA Centre discussion paper looks into the recent financial crisis and into whether banks could survive a new Great Depression. Simone Varotto, Teaching Fellow at the ICMA Centre, investigates whether banks complying with current and proposed bank capital regulation would set aside enough capital reserves to survive a Great Depression scenario, the severe worldwide economic downturn that occured in the 1930s.

Varotto first analyses banks' loan portfolios and finds that regulatory capital in most cases offers enough protection against extreme crisis events. The only exceptions are portfolios with average maturity beyond 10 years. Then, he investigates bank's trading portfolios and finds that current minimum capital requirements will have to increase dramatically and, depending on the maturity and rating characteristics of the portfolio, by more than 5 times the current levels to cover for credit risk and market risk in stressed conditions. He also finds that the increase is mostly due to market risk capital charges which can be more than 20 times larger than the newly introduced "incremental risk charge" for credit risk. The paper's conclusions call for further research to understand the potentially large impact of the new regulation on bank's investment decisions and lending practices."

Article in full

Published 18 March 2010

You might also like

British Steel and Brexit

24 May 2019
As a global industry, steel prices and exports have been falling as demand decreases. Whilst the media reports on British Steel have focused on job losses, Brexit-related issues have played a greater role on its sudden demise.
Business News

Institutional investors, business and the public good from transactions to relations by Colin Melvin

13 January 2015
Colin joined Hermes Fund Managers in 2002 and became CEO of Hermes Equity Ownership Services in 2005. Colin provides advice and assistance to pension funds and other institutional investors in the areas of responsible asset management, corporate governance, voting and engagement. He is currently an Associate of the Centre for Corporate Governance Research of the University of Birmingham and a non-executive director of Aedas Europe, an architectural firm. Colin is currently an active member of various industry steering groups and committees including those of the United Nations Principles for Responsible Investment Initiative (for which he was the first Chair), Tomorrow’s Company Inquiry into Corporate Ownership, the Work Foundation Panel of Inquiry into Work and Enterprise, the Global Institutional Governance Network, the Institutional Investors Group on Climate Change and the International Corporate Governance Network. Previously, Colin was Corporate Governance Manager and Secretary to the Ethics Committee at Standard Life Investments and Head of Corporate Governance and responsible investment at Baillie Gifford.

Indebted students won't benefit from interest rate changes to their loans

11 September 2017
Why interest rate changes to student loans don’t make financial sense for the bulk of indebted students.