The July 2009 edition of the
Basel ii Compliance Professionals Association (BCPA)
newsletter
Breaking News:
Basel ii and the new
White House Financial Regulatory Overhaul Plan
We read in this plan:
"We must act now to restore confidence in the integrity
of our financial system."
Anyway, history repeats itself (a major Basel ii
assumption). Let's restore confidence one more time.
The Financial Regulatory Reform: A
New Foundation from the White House covers the required
changes in financial supervision and the Basel ii
framework:
RAISE INTERNATIONAL REGULATORY
STANDARDS AND IMPROVE INTERNATIONAL COOPERATION
A.
Strengthen the International Capital Framework
We recommend that the Basel Committee on Banking
Supervision (BCBS) continue
to modify and
improve Basel II by refining the risk weights
applicable to the trading book and securitized products,
introducing a supplemental leverage ratio, and improving
the definition of capital by the end of 2009.
We also urge the BCBS to complete an in-depth review of
the Basel II framework to mitigate its procyclical
effects.
B. Improve the Oversight of Global Financial Markets
We urge national authorities to promote the
standardization and improved oversight of credit
derivative and other OTC derivative markets, in
particular through the use of central counterparties,
along the lines of the G-20
commitment, and to advance these goals through
international coordination and cooperation.
C. Enhance Supervision of Internationally Active
Financial Firms
We recommend that the Financial Stability Board (FSB)
and national authorities implement G-20 commitments to
strengthen arrangements for international cooperation on
supervision of global financial firms through
establishment and continued operational development of
supervisory colleges.
D. Reform Crisis Prevention and Management Authorities
and Procedures
We recommend that the Basel Committee on Banking
Supervision expedite its work to improve cross-border
resolution of global financial firms and develop
recommendations by the end of 2009.
We further urge national authorities to improve
information-sharing arrangements and implement the FSB
principles for cross-border crisis management.
Strengthen Capital and Other
Prudential Standards Applicable to All Banks and BHCs
(Bank Holding Companies)
Treasury will lead a working group, with participation
by federal financial regulatory agencies and outside
experts, that will conduct a fundamental reassessment of
existing regulatory capital requirements for banks and
BHCs, including new Tier 1 FHCs.
The working group will issue a
report with its conclusions by December 31, 2009.
Capital requirements have long been the principal
regulatory tool to promote the safety and soundness of
banking firms and the stability of the banking system.
The capital rules in place at the inception of the
financial crisis, however, simply did not require
banking firms to hold enough capital in light of the
risks the firms faced.
Most banks that failed during this
crisis were considered well-capitalized just prior to
their failure.
The financial crisis highlighted a
number of problems with our existing regulatory capital
rules.
Our capital rules do not require institutions to hold
sufficient capital against implicit exposures to
off-balance sheet vehicles, as was made clear by the
actions many institutions took to support their
structured investment vehicles, asset-backed commercial
paper programs, and advised money market mutual funds.
The capital rules provide insufficient coverage for the
risks of trading assets and certain structured credit
products.
In addition, many of the capital instruments that
comprised the capital base of banks and BHCs did not
have the loss-absorption capacity expected of them.
The financial crisis has demonstrated the need for a
fundamental review of the regulatory capital framework
for banks and BHCs.
This review should be comprehensive and should cover all
elements of the framework, including composition of
capital, scope of risk coverage, relative risk weights,
and calibration.
In particular, the review should
include:
· Proposed changes to the capital rules to reduce
procyclicality, for example, by requiring all banks and
BHCs to hold enough high-quality capital during good
economic times to keep them above prudential minimum
capital requirements during stressed times;
· Analysis of the costs, benefits, and feasibility of
allowing banks and BHCs to satisfy a portion of their
regulatory capital requirements through the issuance of
contingent capital instruments (such as debt securities
that automatically convert into common equity in
stressed economic circumstances) or through the purchase
of tail insurance against macroeconomic risks;
· Proposed increases in regulatory capital requirements
on investments and exposures that pose high levels of
risk under stressed market conditions,
including in particular:
(i) trading positions;
(ii) equity investments;
(iii) credit exposures to low-credit-quality firms and
persons;
(iv) highly rated asset-backed securities (ABS) and
mortgage-backed securities (MBS);
(v) explicit and implicit exposures to sponsored
off-balance sheet vehicles; and
(vi) OTC derivatives that are not centrally cleared; and
· Recognition of the importance of a simpler, more
transparent measure of leverage for banks and BHCs to
supplement the risk-based capital measures.
As a general rule, banks and BHCs should be subject to a
risk-based capital rule that covers all lines of
business, assesses capital adequacy relative to
appropriate measures of the relative risk of various
types of exposures, is transparent and comparable across
firms, and is credible and enforceable.
We also support the Basel Committee's efforts to improve
the Basel II Capital Accord, as discussed in Section V.
V. RAISE INTERNATIONAL REGULATORY
STANDARDS AND IMPROVE INTERNATIONAL COOPERATION
As we have witnessed during this crisis, financial
stress can spread easily and quickly across national
boundaries.
Yet, regulation is still set largely in a national
context.
Without consistent supervision and regulation, financial
institutions will tend to move their activities to
jurisdictions with looser standards, creating a race to
the bottom and intensifying systemic risk for the entire
global financial system.
The United States is playing a strong leadership role in
efforts to coordinate international financial policy
through the G-20, the Financial Stability Board, and the
Basel Committee on Banking Supervision.
We will use our leadership position in the international
community to promote initiatives compatible with the
domestic regulatory reforms described in this report.
We will focus on reaching international consensus on
core issues:
Regulatory capital standards;
Oversight of global financial markets; supervision of
internationally active financial firms;
Crisis prevention and management.
At the April 2009 London Summit,
the G-20 Leaders issued an eight-part declaration
outlining a comprehensive plan for financial regulatory
reform.
The domestic regulatory reform initiatives outlined in
this report are consistent with the international
commitments the United States has undertaken as part of
the G-20 process, and we propose stronger regulatory
standards in a number of areas.
In 1988, the Basel Committee on Banking Supervision
developed the Basel Accord to provide a framework to
strengthen banking system safety and soundness through
internationally consistent bank regulatory capital
requirements.
As
weaknesses in the original Basel Accord became
increasingly apparent, the BCBS developed a new accord,
known as Basel II. The United States has not fully
implemented Basel II, but the international financial
crisis has already demonstrated weaknesses in the Basel
II framework.
We support the BCBS's efforts to address these
weaknesses.
In particular, we support the BCBS's efforts to improve
the regulatory capital framework for trading book and
securitization exposures by 2010.
Second, we urge the BCBS to strengthen the definition of
regulatory capital to improve the quality, quantity, and
international consistency of capital.
We urge the BCBS to issue guidelines to harmonize the
definition of capital by the end of 2009, and develop
recommendations on minimum capital levels in 2010.
[The moral of the story: Basel ii becomes more important
and more difficult to implement]
Breaking
News
"Basel III? No
way"
Jose Maria Roldan, chairman of the Basel Committee's
standards implementation group, at the British Bankers'
Association conference
"The framework was not perfect" he continued.
"It will evolve and look different in future."
"We are certainly not going in the direction of Basel
III. "
"I would say Basel III is now even less of an option."
"Our priority is that we strengthen Basel II and make
sure it's truly implemented"
" Excessive reliance on a bank's own risk models used
under the framework may not be appropriate, but nor is
relying too much on very simple approaches"
According to Roldan, the most important changes being
developed by the Basel Committee are:
1. Increase of minimum capital
requirements to better reflect trading book activities
2. Enhanced supervision
3. Enhanced risk management
4. Enhanced disclosure of securitisations and
off-balance-sheet instruments
5. Improvements to valuation and stress-testing
practices
[The moral of
the story: Be prepared for Basel 2.9...
... (but not Basel 3)]
Dear members,
- Visit the
website of our association:
www.basel-ii-association.com
- Write in your CV, resume,
websites etc. that you are members of the Basel ii
Compliance Professionals Association.
-
Take advantage of the distance learning and online
certification program of our Association - at a cost
that is unheard of -
www.basel-ii-association.com/Distance_Learning_Online_Certification.htm
Best
Regards,
George Lekatis
President of
the Basel ii Compliance Professionals Association
(BCPA)
General Manager, Compliance LLC
1200 G
Street NW Suite 800, Washington DC 20005, USA
Tel:
(202) 449-9750
Email:
lekatis@basel-ii-association.com
Web:
www.basel-ii-association.com
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