Category: Basel Committee

Banks contest new leverage limit rule.

According to, many of the United States’ largest banks aren’t happy with a recently proposed rule to increase the minimum capital a bank needs to hold against potential losses.

Banks are saying the new minimum– 5 percent for holding banks and 6 percent for their actual banking components– are arbitrary and harmful, claiming that the rule will worsen an already uneven playing field.

The increase from Basel III’s proposed 3 percent is considered a measure to further protect against vulnerabilities that were brought to light in the 2008 financial crises. Agencies are also considering raising the minimum amount of assets considered to have high liquidity for similar reasons. The nonprofit, Americans for Financial Reform, feels that taking these measures will be a big step towards financial stability.

Several banks have pointed out that these excessive leverage ratios will cause them to have to hold significantly more capital for their less risky assets, like cash, as well. In hopes of alleviating some of the sting, banking groups like the Securities Industry and Financial Markets Association and the American Bankers Association have requested that low risk assets like cash and treasuries be exempt from payment calculations.

Basel Committee May Rethink Regulatory Complexity

On Monday, the Basel Committee released a discussion paper dealing with the simplicity of the regulatory systems, leading some to take it as a sign that the committee may advocate simpler regulations in the future. In the paper, they discuss several current aspects of regulation such as risk sensitivity, complexity, and international equivalence.

Since the financial crisis of 2008, international regulatory bodies have become very active, trying to diagnose and address the issues that led to the crash. However, some have criticized these institutions for perhaps worsening issues, rather than diagnosing the potential issues in the economy.

The Basel Committee has recently made several recommendations for countries’ regulatory policies, including recent strategies on mitigating risk through controlling more capital in day to day business. The committee has focused primarily on risk-based systems of regulation, and these types of systems have inherent complexity, but certain members of the committee have acknowledged the issue. In fact, in 2012 the committee also started a sub committee called the Task Force on Simplicity and Comparability dedicated to assessing the impact of the policies.

The purpose of the paper, which was published yesterday on the Basel Committee website, was not to make recommendations, but elicit responses. It is currently open for comment until October 11th.

Basel Committee Reform Capital Rules of Derivatives Trading

On June 28th, The Basel Committee came out with two papers that recommend strengthening the regulatory oversight of counterparty credit swaps to decrease the alleged risk of derivative transactions.

The first paper improves upon the interim credit assessment suggestions that the Basel Committee made with the Current Exposure Method (CEM) and the Standardised Method. The new credit risk assessment of counterparties in derivative trading fine-tune upon the CEM and the Standardised Method by creating separate risk exposure plans for margined and unmargined trades.

The second paper focuses on the capital risk of banks when working with central counterparties (CCPs). As is, CCPs are utilized to create stability in the markets by clearing and settling trades through risk and obligation assessment as well as supervising the final swap. The new proposal from the Basel Committee includes a recommendation that all trades are sufficiently well capitalized, as well as suggestions to conserve positive incentives for banks to utilize central clearinghouses.

The Basel Committee was established in 1974 by a group of nations concerned about regulatory inconsistencies between countries. Many of the regulatory policies that it wanted to recommend since the financial crisis of 2008 were supposed to be finalized in 2o12, but have been delayed due to complications.

The two papers published are currently open for public comment until the end of September, 2013.


Basel III Rules Slated for March Deadline, EU Says

The European Union (EU) is pushing ahead with Basel III capital standards to avoid delays. Bloomberg reports that the EU’s financial services chief, Michel Barnier, stated in an interview that, “We need agreed rules as soon as possible so that banks know which way they are going.”

March 22 Deadline for Basel III

Lawmakers and EU negotiators will meet tomorrow to try and settle disputes over banker bonuses, financial reporting requirements and the amount of power retained by national regulators. A document outlining the EU’s planning warned that the EU should finish its laws on these new rules by March 22.

Bloomberg indicates that if deadlines aren’t met next month, the EU would run out of time to meet their January 2014 target date to implement the Basel III accord. Missing the March deadline could potentially force the EU to shorten the transition period, putting strain on lenders to adjust by the start of next year. Barnier spoke to this delay, saying, “The commission is very attached to having a working single regime.”

Basel III Measures

The Basel Committee on Banking Supervision unites banking regulators from 27 nations including the U.S., U.K., and China to coordinate their rule-making. The Basel III measures, which must be written into national laws, could triple the core capital lenders must hold, and set industry standards for how lenders should manage risks. Negotiations on the Basel rule have come to a standstill regarding how much additional capital should be required for systemically important financial institutions and banker bonuses.

Lawmakers are encouraging the EU to include in the capital rules a requirement for country-by-country reports on profits, losses and taxes, according to documents obtained by Bloomberg. Many nations are hesitant to expand the scope of the capital rules, and are waiting until a separate accounting legislation to debate the topic.

The Basel Debate: Regulators Allow Increased Risk to Maintain Growth

The Basel Committee announced on Sunday that it plans to defang a rule that requires banks to maintain easy-to-sell assets. They committee also extended the compliance date to 2015, at which time banks will only be required to meet 60% of the required liquidity.

The liquidity coverage ratio (LCR) has been the persistent target of the banking lobby for months. The watered down requirements, which allow banks to count a wider array of riskier assets toward a required liquidity buffer, demonstrate a major victory for the banking lobby.

“The rule in its original shape,” reports the WSJ, “would have forced banks to hold enough liquid assets to cover all their expected outflows over a 30-day period in 2015. That deadline is now put back to Jan. 1, 2019, and banks will only have to show a ratio of 60% in 2015. Importantly, banks will now be able to use certain equities, corporate debt and residential-mortgage-backed securities to cover up to 15% of their LCR.”

Although the new rule will phase in over a four year period, Basel Committee members are celebrating the announcement as a high-water mark for the prevailing regulatory regime:

“For the first time in regulatory history, we have a truly global minimum standard for bank liquidity,” said Basel oversight committee chairman Mervyn King.

Basel Decision and the Economy

Although some, like the WSJ, are hailing the decision as a boon to a slow-moving economy, others, like Brooke Masters of the Financial Times, note the considerable ironies of the Basel Committee decision:

“The draft rule, for example, said banks could hold only sovereign debt, top-quality corporate bonds and cash in their liquidity buffers because those were the only truly safe assets. The eurozone crisis undermined part of that argument. Persistent warnings from bankers and traders that there simply weren’t enough ‘safe’ assets to go around did the rest.”

In other words, a hypothetical liquidity crisis is being used to excuse banks from complying with the originally sought after LCR requirement. Riskier assets are now being allowed because otherwise sufficient liquidity may not exist.

“Persistent warnings from bankers and traders that there simply weren’t enough ‘safe’ assets to go around did the rest,” said the Financial Times.

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New Margin Rules for Swaps in 2013

CFTC Chairman Gary Gensler said on Monday that new rules mandating the margin needed to back uncleared swap trades will be announced early next year. The announcement comes only a day after a U.S. District Court struck down the CFTC’s rule on position limits.

“I would anticipate that the CFTC, in consultation with Europe, would take up the final margin rules toward the beginning of next year with the benefit of this international work,” Gensler said. Gensler’s remarks hint at a willingness to avoid the extraterritoriality disputes that have undergirded recent regulatory moves.

The margin rules are a mandate of Dodd-Frank financial reform and a consensus result of two G-20 summits.

Debate over swaps margins intensified in recent months with the publication of a new study on swaps by IOSCO and comments from the Basel Committee. Gensler’s statement suggests that the CFTC has taken the comment period to heart.

“We are doing so through the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) whose consultative paper on margin closed just last week,” Gensler said.


Move Away from LIBOR Would Hurt Banks

Despite industry groups’ efforts to prevent a move away from LIBOR as a benchmark rate for derivatives transactions, global regulators appear increasingly likely to do just that, people with knowledge of the matter say.

With many banks already having switched to overnight-indexed-swap rates for valuing collateral-backed trades since the 2008 financial crisis, unsecured deals are expected to follow the same route. Because rates on these transactions are significantly higher, however, banks that are forced to make the change face potentially significant losses.

“That adjustment is likely to be a debit and the numbers can be large, even in the hundreds of millions for the major global banks,” said Yura Mahindroo, director at PricewaterhouseCoopers in Melbourne. “But it’s still evolving. We haven’t seen that much take up.”

The Basel III reforms, set to take effect on January 1st, 2013, set capital requirements for uncollateralized transactions. The burden on banks will also increase as mandatory clearing requirements kick in for many types of OTC derivatives over the coming months.

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Photo credit: Anthony Quintano