Currencies

Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Property

Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Currencies

Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Categorized | Banks

Fed targets bank evasion of capital rules


Posted on December 20, 2013

The Federal Reserve clamped down on bank moves to evade tougher capital rules on Friday, warning that transactions intended to reduce risk would be closely scrutinised during annual stress tests on bank balance sheets.

Banks around the world are being forced to meet higher capital levels under the new Basel III regime, which is due to be implemented by 2019. To help their ratio of equity to assets, banks have examined ways to reduce their stated assets without an outright sale.

    Some of these regulatory capital trades, which typically involve insurance offered by a third-party, are legitimate while others are evasion, the Fed indicated.

    If the risks are shifted to a “thinly capitalised counterparty or affiliated entity of the firm, any residual risk is effectively captured in the firm’s internal capital adequacy assessment”, the agency said in its guidance note to large banks.

    “Examiners will closely consider such transactions, and potential residual risks, when evaluating an institution’s capital adequacy,” the Fed said.

    Banks are expected to maintain sufficient capital to account for such risks, regulators said. Companies are typically reluctant to divulge details of the trades, though some have come to light.

    Blackstone last year insured Citigroup against initial losses on a pool of shipping loans. Though the assets stayed on Citi’s balance sheet, the insurance was designed to boost capital ratios.

    In some cases, the Fed could decide not to recognise a transaction as a mitigating factor for risk-based capital, meaning a bank would have to find substitutes to meet those standards.

    The Fed said bank staff should bring these kinds of transactions to the attention of senior management.

    The Fed did not cite specific cases it was concerned about but mentioned instances in which a bank transfers a portfolio risk to an entity which is unable to absorb losses equal to the risk-based capital requirement for the risk transferred.

    The Fed said the entity could be a thinly capitalised special purpose vehicle, such as a subsidiary that serves as a counterparty.

    In March, the Basel Committee on Banking Supervision also addressed the issue to crack down on regulatory arbitrage. The committee, which sets global bank safety rules, said it would levy hefty charges on banks that use pricey credit default swaps to cut their capital requirements.

    The committee was targeting banks that were buying credit protection on risky loans but deferring or spreading out the premiums for several years. The committee said it would require banks, under certain circumstances, to calculate the present value of what was paid for the credit protection in a specific way.

    “The proposed changes are intended to ensure that the costs, and not just the benefits, of purchased credit protection are appropriately recognised in regulatory capital,” the committee said.