11.11.2011

Regulators Zero In on Liquidity

11.11.2011
Terry Flanagan

New rules seek to squeeze out systemic risk.

Rules aimed at reducing systemic risk in the banking sector are meeting with pushback from some of the world’s largest banks, which contend that the rules will thwart growth and global diversification.

At issue are the Basel Committee on Banking Supervision (BCBS) has issued rules on the assessment methodology for global systemic importance, the magnitude of additional loss absorbency that global systemically-important financial institutions should have, and the arrangements by which they will be phased in.

The assessment methodology is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of readily available substitutes or financial institution infrastructure, global (cross-jurisdictional) activity and complexity.

International banks are chafing at some of the proposed changes. Citi, for example, has said that the cross-jurisdictional activity factor discourages international activity and the sound practice of matching local assets with local liabilities.

The proposed methodology aggregates cross-jurisdictional assets and cross-jurisdictional liabilities as indicators of cross-jurisdictional activities. One consequence of this approach, Citi noted, is that a bank that funds all of its local currency assets, in each host country, through nonlocal currency liabilities, will have one-half the score of a bank that funds all of its local currency assets with local currency liabilities and capital.

“The methodology double-counts the footprint for a locally match-funded international business versus a cross-border funded business,” said Brian Leach, chief risk officer at Citigroup, in a comment letter.

Regulators have three instruments at their disposal to prevent large-scale bank failures from occurring, David Renz, director, risk advisory at SunGard Ambit, told Markets Media.

“Firstly, they can ask for more capital and liquidity, to disincentivize excessive institution size and cushion the blow of a large-scale failure,” Renz said. “Secondly, by creating a level playing field between jurisdictions, regulatory arbitrage – one of the potential root causes of such large-scale failures – may be kept at bay. Finally, a clear definition of roles between home and host regulators as well as requiring contingency plans for unwinding utility-type-operations help to reduce the operational hazards and the spread of contagion associated with such failures.”

SunGard’s Ambit risk and performance management solutions include modules for asset/liability and market risk management, liquidity risk management, and regulatory compliance.

The additional loss absorbency requirements will range from 1% to 2.5% Common Equity Tier 1 (CET1) depending on a bank’s systemic importance, with an “empty bucket” of 3.5% CET1 as a means to discourage banks from becoming even more systemically important.

If the empty bucket becomes populated in the future, a new empty bucket will be added with a higher additional loss absorbency level applied.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, and are to become fully effective in 2019.

Related articles

  1. Solution enables financial firms to better determine ESG credentials for clients and their supply chains.

  2. Trading Europe From ‘Across the Pond’

    Status grants clearing members clarity on the regulatory treatment of their exposures to OCC.

  3. Daily Email Feature

    TRACE Turns 20

    Stephanie Dumont and Ola Persson of FINRA reflect on advances in fixed income transparency.

  4. Asset manager anticipates an SEC decision on converting its fund to a spot bitcoin ETF by early July.

  5. The EU Parliament’s report substantially extends the coverage of the label.