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Currencies

Euro suffers worst month against the pound since financial crisis

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Banks

RBS falls 2% after failing BoE stress test

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Currencies

China capital curbs reflect buyer’s remorse over market reforms

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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.