Banks Brace for Basel III11.08.2012
The new capital adequacy accord, known as Basel III, for banks holds major implications for the world’s leading banking institutions, and the indications are that many aren’t prepared.
“Banks are still getting ready to comply with Basel II,” said Thierry Truche, head of product management at Misys Global Risk, a technology provider. “Should Basel III come about as it is interpreted today, banks will have to look very hard at the way they measure liquidity today and calculate and report on their liquidity ratios.”
“Many banks still lack adequate mechanisms to even compute their liquidity, but there is also a danger to invest only in short-term regulatory technology. Banks are still struggling with centralizing all their risk data and improving their internal transparency.”
According to the most recent Basel III monitoring exercise by the Basel Committee on Banking Supervision, a group of central bank governors from the world’s leading economic nations who agreed upon the Basel III rules, the results of which were released in September, the average common equity tier one capital ratio of group one banks—those that have tier one capital in excess of €3 billion and are internationally active—on December 31, 2011, was 7.7%, as compared with the Basel III minimum requirement of 4.5%.
In order for all group one banks to reach the 4.5% minimum, an increase of €11.9 billion common equity tier one capital ratio would be required.
“With the proposed decline of the tier one capital ratio for group one banks under Basel III rules, efficient usage of liquidity will be the new paradigm, especially with the risk of the double duty usage of the liquidity buffer,” said Truche.
Separately, the International Swaps and Derivatives Association (Isda) and the Association for Financial Markets in Europe (Afme), both trade bodies, are lobbying the European Commission to ease up on capital requirements for bank exposures to central counterparties.
In a November 7 letter to the European Commission, the organizations noted differences between the Commission’s capital requirements regulation, which is now in draft form, and the Basel Committee’s interim rules for capitalizing exposures to CCPs that are intended to come into effect from January.
The Basel Committee’s interim rules, known as BCBS 227, issued in July 2012 as part of Basel III, builds on a set of principles for financial market infrastructures that have been adopted by international securities and prudential regulators.
The principles are designed to enhance the robustness of the essential infrastructure— including CCPs—supporting global financial markets.
Isda and Afme, in their letter, noted that unless differences between the Commission’s capital requirements regulation and BCBS 227 were resolved, capital requirements for European Union-based institutions would be increased, putting them at a competitive disadvantage to non-EU institutions.
Collaboration and communication among industry stakeholders will be critical to achieving the aims of lowering systemic risk and increasing transparency.
For example, the International Securities Association for Institutional Trade Communication (ISITC), an organization that attempts to improve the operational effectiveness of the financial industry, is working to drive the adoption of standards and define how and when they should be used.
“The work of groups like the Standards Coordination Group [which represents the end-to-end players in the processing chain for the securities industry] ensures that the financial services industry is adequately prepared for change, both good and bad, so that we can withstand volatility, improve efficiency, reduce costs and benefit market participants and the industry as a whole,” said Jan Ellis Snitzer, chair of ISITC and vice-president at investment manager Loomis, Sayles & Co.
Cboe acquired EuroCCP on 1 July 2020.
ETFs in Europe had net outflows of $5.06bn in September.
€STR futures provide an efficient way to hedge European money market rates
Year-end has become a regular point of dislocation for the Eurozone repo and money markets.
The EU’s financial markets regulator and supervisor has published its 2023 Annual Work Programme.