Trésorier/Treasurer magazine - N°98 - July/Aug/Sep 2017 - 35

The renminbi keeps internationalizing, reaching almost two
percent of global payments. It was the first most actively
traded currency among emerging countries. According to the
IMF2 , its share in the World's total allocated international
reserves (1%) starts to approach that of the AUD and is more
than six times higher than the CHF. But it is not yet matching
the real global economic significance of China, whose output
represents around 18% of the total.
A recent interview of Peter Praet, member of the Executive
Board of the ECB, mentions him acknowledging a synchronized recovery of the world economy. But he notes that the
euro area recovery is not yet sustainable without the support
of the monetary policy, and confidence indicators, the soft
data, are still higher than the hard figures. Private consump-

Following the case of Switzerland is interesting since they
depend massively on their trading partners. Thomas Jordan,
chairman of the Governing Board of the Swiss National Bank
confirms the outline of the global environment mentioned by
Peter Praet. Core inflation, that excludes oil and food prices,
has not increased. US is already in full employment territory;
Europe follows behind. The Swiss franc appreciation seems
to have been digested and the Swiss GDP is expected to grow
at a 1.5% rate in 2017. But production capacity utilization,
as in Europe, shows some leeway still. The SNB had to still
continue its intervention on the foreign currency markets,
purchasing currencies for CHF 67 billion in 2016 (totaling
almost CHF 800 billion). The rest of their assets is gold and
a small fraction of Swiss assets. Currency reserves allows
them to react to smooth out the valuation of the Swiss franc
but in the meantime, they need to make sure their reserves
keep their value. First, they cannot hedge FX risk against the
Swiss franc since this would push it upwards again. Second,
by contrast with the monetary policy, the investment policy
shouldn't impact prices and thus the SNB cares a lot about
absorption capacity, liquidity thus, security and return.

1 -EBA studies show great disparities in the interpretation and implementation of risk weighted assets measures among the major banks in Europe.
2 -IMF, Currency Composition of Foreign Exchange Reserves Including Holdings in Renminbi, March 31st, 2017

/ AUG / SEP 2017

- JULY

On June 1st, the chairman of the Financial Stability Institute of
the BIS, Fernando Restoy, summarized the recent trends in
banking regulation. In particular, the standardized approach
for credit risk is being modernized to be more granular, more
representative of the real risk exposure. At the same time,
for those who apply the alternative internal ratings-based
(IRB) approach, the parameters are tightened by setting
floors to them as well as floors on the results to avoid wide
gaps between the two approaches. This is part of a big reality
check: complexity, also in regulation, deters transparency,
expectable behavior and confidence. But, by barring the route
with precautionary floors, the cost-benefit relationship of
implementing an IRB approach starts to be prohibitive. Some
banks are furious, given the sums, efforts and time invested
into more quantitative methods. The desire of comprehensiveness, comparability1 , easier validation, healthy competition, and reduction of procyclicality are advocating back for
more simpler, readable, rule-based regulations.

tion is driving again demand. Inflation has recently been
volatile, but it continues on the path outlined in the forecasts
of the ECB. They believe that the output gap will be closed
by 2019 which will be followed by a price pressure. Therefore
there is no fear of a "low inflation trap" but monetary efforts
must still be sustained in the meantime. Economic development is still fed by very favourable financial conditions. Banks
are not very happy about negative interest rates but it is not
the only reason why their profits are under pressure. The ECB
was awaiting more consolidation in the sector. But the good
news is that this doesn't prevent banks from providing their
clients with cheap long-term financing conditions; SMEs are
less worried about access to credit and that can help unleashing growth. Of course, we are in a strange environment
says Peter Praet, but without this the recession would have
been much deeper. He reminds that the mission of the ECB is
price stability and that does not entail influencing redistribution processes over governments' action.

N°98

This edition of the Risk Observatory will be clearly faithful to
its title, providing a large picture of the hot subjects in the
financial industry (be)for(e) the summer, since our readers will
share some time probably on the beach, or next to a pool with
plenty of time to reflect.

What's new to read about
during the summer...
or to expect after?

HUGUES PIROTTE
Solvay BS, ULB
FinMetrics

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Trésorier/Treasurer magazine - N°98 - July/Aug/Sep 2017

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