As the US moves to adopt Basel III, there are regulatory initiatives that are expected to be implemented, said Peter Went, VP, Banking Risk Management Programs, GARP, on February 14, 2013. The Basel Committee has several proposals that are issued for consultation and discussion, including ones that affect liquidity rules, the securitization framework, trading book review, and consistency of risk-weighted assets.
Went was the second speaker at a webinar organized by the Global Association of Risk Professionals (GARP) regarding regulatory reform of foreign banking operations (FBOs) in the United States and the implementation of the Basel III framework. (This continues the previous posting of his remarks on capital.)
The proposal on the liquidity coverage ratio seeks to expand the list of assets of sufficiently high quality. It is set to start at 60 percent of the total ratio in 2015, and ramp up by 10 percent coverage each year to the full 100 percent by 2019. During the question period, it was noted that Basel III in the US does not yet explicitly address liquidity requirements.
The Basel securitization framework examines the distinction between rated and unrated securitizations. “The proposals are intended to make capital requirements for securitizations more risk-sensitive,” said Went. Experts are looking at Alternatives A versus B (described on slides 56-58 of the presentation).
The Basel committee conducted a fundamental review of the trading book and produced a consultative document in May 2012, said Went. The methodology is moving from value-at-risk (VaR) to expected shortfall in order to capture tail risk better – hence the policy focus to link regulatory capital requirements to expected loss experiences. The boundary between the trading book and banking book means there are large differences in capital requirements for the same asset type – and the banks can opportunistically allocate exposures to minimize the capital requirements, hence reducing the use of capital.
After a whirlwind tour, by both Charles Horn (Part 1) and Peter Went (Part 2 and Part 3), of new developments in regulatory reform, one audience member was moved to ask whether the new rules weren’t “unnecessarily complex.” Went mused, “should we create simpler rules that may be much easier to implement and provide much more predictability and much easier compliance? Or should we go down the road where complex rules and gaming of the complex rules lead to an even more complex framework … which will be even more onerous to regulate?”
The goal of regulation is to create a level playing field, he said, although it might not ultimately work out that way; unintended consequences abound. ª
The webinar presentation slides can be found at: nt.on24.com/r.htm?e=572054&s=1&k=C19F270D67A297DF58184B8D2B2DD6BC”>http://event.on24.com/r.htm?e=572054&s=1&k=C19F270D67A297DF58184B8D2B2DD6BC>
The BIS publications related to the initiatives can be found at:
Liquidity – www.bis.org/publ/bcbs238.pdf
Securitization – www.bis.org/publ/bcbs236.pdf
Trading Book – www.bis.org/publ/bcbs219.pdf
Risk-weighted assets – www.bis.org/publ/bcbs240.pdf