BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Financial

New proposals to toughen bank trade rules

Posted on October 31, 2013

Global regulators are cracking down on banks that try to bend capital rules for their trading businesses by proposing new standards for the way lenders assess risk.

The Basel Committee on Banking Supervision yesterday published a consultation paper that analysts said could have significant repercussions for the way banks run their trading operations.

    It comes after regulators uncovered wide divergences between banks, with some using their complex internal models to minimise the amount of capital they have to set aside.

    The new system will require banks to calculate risks according to a standardised approach in addition to their own in-house methodology. The Committee said it may go further after assessing the effect of its proposals and introduce the standardised approach as a minimum requirement.

    Patrick Fell, director of financial services at PwC, said the new system would prompt investors to challenge banks when their in-house models showed a much lower risk figure than under the standardised approach.

    “Some banks may have a hard time in the public arena,” he said.

    Thomas Huertas, partner in Financial Services Risk at EY, said the proposals would also restrict the ability of banks to put illiquid assets in their trading books.

    “The proposal could have knock-on effects on the liquidity of some markets if the trading inventory of market-makers ends up being reduced,” he said. “It may increase some banks’ capital requirements but many of these banks already have capital that is substantially in excess of minimum requirements.”

    A pinch of Basel

    Jonathan Guthrie

    Wile E. Coyote never quite manages to catch Road Runner, his quarry in the old Warner Brothers cartoons. The pursuit of banks by the Basel Committee on Banking Supervision is similarly Sisyphean, writes Jonathan Guthrie. The banks have a habit of dodging measures the regulator creates to make them bolster their capital.

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    The new system would introduce more rigorous assessments of the models banks wish to use for their trading books. It would create a new method for banks to calculate the losses they could incur, dropping the so-called value at risk method in favour of an alternative called “expected shortfall”, which better captures their ability to withstand extreme market shocks.

    The boundary between banks’ trading books and their banking book will be made less “permeable” in order to limit firms’ ability to shunt assets between different books in order to reduce their capital requirements.

    Thursday’s paper was the second released by the Basel Committee as part of its “fundamental review” of trading book capital requirements. Regulators hope the detail will give investors a better idea of the capital implications for the industry.