Posts tagged 'Basel II'

‘I take your hypothetical scenario of counterparty failure, and raise you a bank resolution regime…’

Imagine spending an entire career evaluating bad things that might happen to financial institutions. It’s no mere thought experiment done in passing, but rather a task that one slaves over in excruciating detail. For years upon years on a constantly moving chessboard of potential disaster.

So, who wants to be a regulator? Read more

The inevitability of shadowy banking (and how to regulate for it)

FT Alphaville decided earlier this week that we are sick of the term “shadow banking”. We’ve failed to come up with an alternative, however, and in the meantime Edward Kane, a professor at Boston College, has presented a paper entitled “The inevitability of shadowy banking” at the Atlanta Fed-hosted financial markets conference.

Kane’s paper says shadowy banking is basically safety-net arbitrage. He defines it thus: Read more

How to arb Basel II

In a previous post, we detailed trades that while making no sense economically, allow banks to game regulations around capital requirements and kick the recognition of losses further down the road.

This may have left you wondering how this is possible under the Basel II regulations, so we thought we’d walk you through the relevant sections, and outline the cases where this trade does, and doesn’t, work. Read more

More Angry Birds, less regulatory arbitrage, please

The notice was rather vague, but we’ve done some sleuthing and have a better picture of what’s been going on now.

The timing of the letter struck us. The deadline for the great European bank recapitalisation isn’t far off (June 2012), but the conditions specified by the European Banking Authority cut off some of the most obvious routes, given the difficulty in tapping the funding markets: deleveraging and model tweakageRead more

Regulatory arbitrage: Basel is watching you

Nearly a year ago, the Federal Reserve came out with a letter that in summary said something along the lines of:

Dear Banks, Read more

Regulating 2000s RBS… with 2010s rules

…we don’t like carrying more capital than we need to. You’ve heard me before on the subject of building up war chests and carrying; that’s not the way we would wish to operate at all.

At end-2006 and end-2007 respectively, RBS published tier 1 capital ratios of 7.5% and 7.3% of RWAs, and total capital ratios of 11.7% and 11.2%…

 Read more

Global enforcers set to oversee bank rules

Teams of global regulators will fan out across the world from next year to ensure that new tougher capital and liquidity standards are enforced correctly, the chairman of the Basel Committee on Banking Supervision said on Wednesday, the FT reports. “The financial crisis resulted in a bold response by the committee,” Stefan Ingves told an audience of North and South American banking supervisors in San Francisco. “However, these efforts will have been in vain if they are not globally implemented on a consistent and timely basis.” The US notably has not yet fully implemented the 2004 Basel II agreement. However, the country hope to have a draft for the implementation of Basel III by the end of the year, according to an earlier report by the FT.


Blood from an EBA stress test stone

For now, the European Banking Authority’s 2011 stress tests are a starting point to determine the potential bill for recapitalising euro banks for their sovereign exposure. Most analyst estimates of capital needs — those big juicy €100bn, €200bn numbers that you come across– also tend to work from the EBA numbers.

That’s got us thinking about the test results again. In the first instance, about accounting for sovereign write-downs. And then in the second instance, about the treatment of deferred tax assets. Read more

The cost of being a global Sifi

Global Sifi buffers is both the likely new name of FT Alphaville’s pub trivia team and a hotly followed piece of financial regulation.

The Financial Stability Board is not due to formally announce its capital recommendations until November, but we already have a good idea what to expect. (The Federal Reserve is also still to announce its proposals.) The very biggest banks are expected to be subject to a 250bps tier one capital surcharge, with the threat of an extra 50bps charge left over to disincentivise supersizing. Read more

Repairing risk-weightings … with ratings

It’s not a great time to recommend more reliance on ratings.

But that’s just what Barclays Capital are discussing in a 29-page note on Risk-Weighted Assets (RWAs), which have become a hot-button topic in recent weeks. The debate was first opened when US banks started complaining that their European competitors had much lower risk-weightings than they did. That difference, BarCap says, is nothing more than a giant RWA-shaped red herring. Read more

How to tinker with bank risk-weightings

Risk-weightings for bank assets are still relatively new things.

Codified in the Basel II rules first published in 2004, they were meant to shift financials away from set levels of required capital, tailoring them to the perceived amount of risky assets held by banks. Read more

Basel III blurs

Here’s a capital curio for investors in Credit Suisse’s Monday-announced CoCos issue.

It’s probably not a surprise that a transition from the Basel II to Basel III regulatory regimes might create some scope for capital confusion. But here’s a concrete example picked out by Cannacord Genuity banking analyst, Cormac Leech. Tier 1 common equity ratios under the supposedly-stricter Basel III could end up being bigger than the ratios under Basel II definitions for some banks during the transitional period. Read more

Capital ratios – for realsies

Who needs Basel III’s quantitative impact study? Standard & Poor’s on Wednesday published their own review into the capital positions of the world’s 75 biggest banks.

S&P’s risk-adjusted capital (RAC) positions are supposedly much closer to upcoming Basel III requirements than current regulatory capital needs under Basel II … Read more

Basel-ed again

Believe us, it’s taken all our willpower to not headline this post as Basel Faulty.

The London Banker has returned to blogging after a two-year hiatus. And boy, that 24-month break has done nothing to quell this former central banker’s ire. Read more

Risk-weighting the eurozone

Presenting one of the more ironic headaches for sovereign issuers and European banks out there at the moment. At any rate, we’d point to a great story from Joel Clark and Ellen Davis of Risk Magazine.

We’ve noted Europe’s increasingly two-tiered government bond market before. (Alongside two-tiered sovereign ratings, money markets, CDS movements — you name whatever market, the eurozone is already de facto breaking up within it.) Read more

‘Capital requirements increase systemic risk.’ Discuss.

Is this what went wrong with Basel II?

Is this what will go wrong with Basel III? Read more

SocGen’s skinned CLO

Synthetic CLOs — gone for good or simply slumbering the deep sleep of securitisation?

From Asset-Backed AlertRead more

UBS is not a “below average” bank

Swiss bank UBS has responded to Monday’s report from Standard & Poor’s, which you may recall  ranked 45 of the world’s leading banks according to their  risk-adjusted capital (RAC) ratios.

By S&P’s reckoning, UBS was near the bottom of the pile, with a RAC ratio of 2.2 per cent. In contrast, S&P gave HSBC a 9.3 per cent ratio, and Goldman 8.3 per cent. Moreover,  under S&P’s model, an 8 per cent RAC level “corresponds to full coverage of the level of stress embedded in our ratio.” Read more

Would you like a massage for your stressed VaR?

The BIS has released its analysis of proposed changes, adopted in July, to Basel II capital rules.

It’s basically an exercise in seeing just how much more capital banks will have to hold under the rejigged rules, which are due to come into effect in January. Read more

How the Basel II capital cliff begets resecuritisation

Basel II banking regulations are sooooo boring.

But Basel II’s effects on securitisation are fascinating, right? Read more

On killing the market for complex products

Proposed changes to Basel II banking regulations have not necessarily been getting the attention they deserve.

Hence, we read with interest a fantastic Deutsche Bank note on the impact of the adjustments, and specifically the potential fall-out from proposed increases to the risk weightings of resecuritisations. That’s something which involves (to put it crudely) how much capital banks will have to hold against synthetic or tranched securitisations — things like ABS-backed CDOs. Read more

Structured finance 101

An excellent – straightforward – paper giving a sound overview of the development of structured finance has been published by  Joshua D. Coval, Jakub Jurek, and Erik Stafford at Harvard Business School.

Failing the stress test; or, in the long run, we’re all dead

Earlier this week, Andrew Haldane, the Bank of England’s director for financial stability gave a speech to the Marcus-Evans Conference on stress testing.

While that doesn’t exactly sound particularly enticing, it was. And we’d recommend that you read this – the paper Haldane has authored based on his speech.  It’s entertaining and fascinating – and what it really very clearly shows is just what a blinkered world modern finance operates in. Read more