Risk And Regulation Monthly - November 2012

November saw the appointment of Mark Carney as the Governor of the Bank of England and, accompanying the G20 meeting in Mexico City, several reports by the Financial Stability Board (FSB), in particular on recovery and resolution; intensity and effectiveness of SIFI supervision; shadow banking; and a revised list of globally systemically important banks (G-SIBs).

As usual this note is produced for information only, on a best efforts basis, and does not constitute advice of any kind.

Capital (including stress testing)

The European Banking Authority (EBA) wrote twice to Commissioner Barnier regarding provisions in the Capital Requirements Regulation (CRR). In its first letter, on the definition of own funds, it raised concerns over recent amendments to the legislative text, specifically on the quality of common equity tier one capital; and the introduction of multiple dividends for some capital instruments. In its second letter the EBA noted the lack of a harmonised approach to calculating transitional floors for capital calculations, which it said should use the CRR standardised approach, and that it should be asked to draft standards for this purpose.

Wayne Byres, Secretary General of the Basel Committee on Banking Supervision (BCBS), spoke on Basel III, comparing regulatory reform to a healthy lifestyle. In his analogy, Byres likened regulators to personal trainers whose job it is to whip the banks "in ill health" back into shape. According to Byres, the full, timely and consistent implementation of Basel III was essential for a well-functioning financial system. Given the staggered deadlines under Basel III, the BCBS "has designed a fitness regime for banks that is modest at the outset and increases in intensity over time". The minimum capital requirements set out under Basel III were necessary, but not sufficient, and had to be accompanied by a raft of other measures. In addition Byres expressed the need for international regulatory agreements to be supported by strong national supervision.

Stefan Ingves, Chair of the BCBS, talked about the broad range of current and future regulatory initiatives being driven forward by the BCBS. Current areas of focus included large exposure rules; capital requirements for the trading book – reducing banking book/trading book arbitrage and enhancing transparency for securitisation; and reviewing the suitability of the standardised approaches to credit and operational risk for internationally active banks. Ingves also outlined the BCBS' intention to review the balance between complexity and comparability for capital, using the approach to debit valuation adjustments as an example. Given the huge complexity of developing a risk sensitive model approach, the BCBS had decided in favour of a more simplistic, but conservative, treatment. In addition, the BCBS had established a task force to develop guidelines on capital planning.

The FSA published a policy statement on "Large Exposure Regime – Groups of Connected Clients and Connected Counterparties". The proposals effectively relax the pre-existing rules and include the removal of the definition of connected counterparties in BIPRU 10.3.8R (the Prudential Sourcebook for Banks, Building Societies and Investment Firms) and the removal of decision trees and diagrams from the final guidance on exposures to structured finance vehicles.

The European Banking Federation (EBF) wrote to Commissioner Barnier to request postponing the fourth Capital Requirements Directive (CRD4) until 1 January 2014. The EBF expressed concerns that the international competitiveness of the EU was at jeopardy, particularly with regards to the "unlevel playing field" between the EU and the US, where the regulatory authorities had already announced a delay to Basel III implementation. The EBF also felt such delay was appropriate given the delay in finalising the CRD4 legislative text.

The Financial Services Authority (FSA) consulted on proposals to strengthen capital requirements for self-invested personal pension (SIPP) operators. Key proposals included the minimum capital a SIPP operator must hold (up from £5,000 to £20,000); total capital requirements (which should take into account the amount of assets under administration and any holdings of "non-standard assets"); and proceeds of capital held in a form that is realisable within one year(with capital explicitly required through the capital surcharge more easily realisable, within 30 days).

Liquidity

The FSA consulted on changes to BIPRU in response to concerns that the "costs of the FSA liquidity regime have been higher than thought when it was introduced", proposing that a simplified ILAS BIPRU firm should continue with a liquid assets buffer of not less than 50% of the simplified requirement and removing the increase to 70% scheduled for July 2013 and further rises thereafter. The FSA also proposed to amend BIPRU 12.7 to ensure that credit quality and currency requirements, which apply to high quality debt securities issued by governments, were also applied to securities issued by multilateral development banks.

Governance and...