Group items tagged

three-pronged reform agenda

capital plan

capital holes

it would be somewhere between €100bn ($137bn) and €200bn.

the plan needs to change

forced to meet the planned 9 per cent core tier one capital ratio in such a short time

determined not to raise fresh money – either from shareholders, because equity prices are so disastrously low, or from the state, because of an understandable fear of being stigmatised as a bailed-out bank that is weaker than its rivals

they would shrink their balance sheets, reducing the risk-weighted assets (or lending commitments) that form the denominator of their capital ratios, rather than boosting the capital that forms the numerator.

shrinkage of available bank credit across Europe

protesting about the lack of funding.

politicians and small business

the banks are bluffing

There is a strong reason to call their bluff

second prong

that will not be enough

normalise banks’ access to liquid funds in the bond markets.

Dexia,

often not insufficient capital that kills a bank (Dexia’s ratios were top-notch) but a lack of liquidity

short-term funding and long-term lending commitments proved fatal.

International regulators

come up with a new measure

the net stable funding ratio

will limit profitability and the banks have protested. But it should happen.

there needs to be a quick fix, too

there has been no issuance of bank bonds

Only with a temporary guarantee from a European Union vehicle can bond markets be reopened.

policymakers need to tackle the root cause of the problems in the periphery – namely, their budgetary mismanagement.

Silvio Berlusconi

must be ousted by the Italian people

entirely within the gift of those preparing for the weekend summit.

first two reforms

brave political calls, laying policymakers open to accusations of handing money to bankers again

the lesser of two evils

accompanied by an enforceable regime of business lending commitments

normal rules of capitalism have already been suspended. We should stop pretending otherwise and make the necessary intervention quickly and decisively

the ratio does not formally take effect until 2015,

JPMorgan estimates that 28 European banks faced a total liquidity shortfall

number of members on the Basel Committee

the liquidity coverage ratio is the most “painful” piece of regulation to hit the sector, and will cost European banks nearly 12 per cent of their 2012 earnings on average

expected 5 per cent hit from tougher global requirements on bank capital, and a 3 per cent reduction from the Dodd-Frank financial reform measures in the US.

“Regulatory focus is rapidly shifting from capital at risk to liquidity risk in our view,”

Only seven of the 28 banks tested met the enhanced standards,

want to soften key technical definitions in the ratio

effect of reducing how much liquidity banks have to hold, and would allow them to count more corporate and covered bonds toward the total

The committee staff,

gathering data on the potential impact of the ratio, and a subgroup is working on the definitions ahead of a full committee meeting this month

US and continental European

regulators are expected to push for changes that would ease the impact on their banks,

support the status quo

Cross-jurisdictional liabilities.

take into account the liabilities of all offices of the relevant bank to entities outside the home market and include all liabilities to non-residents of its home jurisdiction.

international banks’ activities outside their home jurisdiction

Size.

bank’s distress or failure is more likely to damage the global economy or financial markets if its activities comprise a large share of global activity.

ts failure is therefore more likely to damage confidence in the global financial system

Interconnectedness

contagion in respect of other institutions depending on the network of contractual obligations in which it operates.

Intra-financial system assets.

Intra-financial system liabilities

Wholesale funding ratio.

Substitutability.

systemic impact of a bank’s distress or failure is expected to be negatively related to the substitutability of its services.

lack of realistic alternatives to a major business line

Assets under custody

disrupt the operation of financial market

Payments cleared and settled through payment systems

these institutions and customers may be unable to process payments immediately, affecting their liquidity.

Value of underwritten transactions in debt and equity markets

impede new securities issuance.

Complexity.

failure is likely to be greater, the more complex its business, structure, and operations are.

Notional value of OTC derivatives.

Level 3 assets.

Trading book value and “available for sale” value.

The BCBS provides some opportunity for individual supervisors of banks to make adjustments to a bank's G-SIB criteria determined by reference to the above criteria but states that it believes the bar for any such adjustment should be high, and it only expects such adjustments in exceptional cases.

continuing review of banks against the relevant indicators,

not proposing to develop a fixed list of G-SIBs. Banks could therefore migrate in and out of SIB status over time

G-SIBs, each bank will grouped into a category of systemic importance based on its score under the indicator based test specified above.

there will be 28 G-SIBs

Assessment Methodology

“indicator based measurement approach”

Each of these indicators is given a 20% weighting and, as specified below, most of the indicators are made up of two or more sub-indicators

Each indicator’s score is then aggregated.

Agency problem

Shareholder discipline.

Contingent capital holder discipline.

Market information.

Cost effectiveness.

Trigger failure.

Cost effectiveness.

Complexity.

Adverse signalling.

Negative shareholder incentives.

contingent capital should not be capable of meeting the additional loss absorbency requirement for G-SIBs

for consideration at the next G-20 meeting in November 2011, and it is expected they will be endorsed at such meeting.

28 banks will initially be specified as G-SIBs

The effect on such banks will, however, be significant

the common equity requirement for the largest global banks increasing from the current 2% of risk weighted assets to 9.5% (and potentially 10.5%)

G-SIBs will have some time to plan for the new loss absorbency requirement. The BCBS is proposing that the requirement will be phased in at the same time as the new capital conservation and countercyclical buffers between 1 January 2016, becoming fully effective at the start of 2019

the minimum “cut-off score” in relation to which banks will be regarded as G-SIBs will be set by 1 January 2014, and national jurisdictions will be expected to incorporate the new rules into legislation by 1 January 2015.

new Basel III framework at the end of 2010, the BCBS mandated all banks to hold significantly more capital than is currently the case as well as introducing new leverage and liquidity ratios

The Basel III rules apply to all banks. In addition, the FSB and the BCBS have been considering additional rules to apply to the largest global banks to deal with concerns that such banks are regarded as too big to fail

Basel Committee on Banking Supervision (“BCBS”) and the Financial Stability Board (“FSB”) published two papers relating to entities regarded as globally systemic important financial institutions (“G-SIFIs”)

Additional Loss Absorbency Requirement

Background

y.   Cons

: Pros