BROKER-DEALERS fear SEC leverage ratio plans
OPERATIONAL RISK out of control at US public-sector pension funds
CCPS are an "enormous risk" to the financial system, the Minnesota Fed hears
COMMENTARY: Centrally planned
Too clever, and possibly Communist: it sounds like an attack on US presidential hopeful Bernie Sanders. In fact, it is criticism of the idea that common equity should be supplemented with a layer of loss-absorbing debt – a mix known as total loss-absorbing capacity (TLAC).
In TLAC theory, a fatter layer of equity makes banks less likely to fail, and the ability to write down – or bail-in – outstanding bonds means spillover losses can be mopped up without taxpayer support.
In practice, bail-in is untested and Adam Posen, a former member of the Bank of England's rate-setting committee, worries it will not work.
"I really don't buy TLAC. I do not buy the idea of conditional capital. We had this wonderful idea ... well, it's all too clever by half," he told a symposium at the Federal Reserve Bank of Minnesota this week.
Posen is not alone. In a Risk.net interview, Thomas Hoenig, vice-chair of the Federal Deposit Insurance Corporation, argued TLAC should not exist – instead, equity should "do its job" – and he attacked one possible outcome of the regime, which is a requirement for some banks to borrow more.
"That's not a market at work – that is a central planner telling everyone how they should operate and I think that's bad," said Hoenig.
Regulation was being second-guessed elsewhere as well, as banks concluded the trading desk structures they drew up for compliance with the Volcker Rule would not be fit for the purpose of calculating regulatory capital.
And mooted new capital requirements for non-bank broker-dealers could cause a kind of financial whiplash in the US Treasury market. Banks have already been hit by new leverage ratio requirements, which gave non-bank broker-dealers an advantage - leading, as Risk.net reported last year, to the insurgents dominating Treasury volumes on at least one major platform. But now the tables could be turned again, with the threat of new leverage limits on non-banks potentially restricting their activities. This might give banks the chance to re-enter the market on better terms or it might further strain liquidity in an already fragile market.
A bank maintaining at least 50,000 reported open positions in interest rate swaps each month would save more than $1 million a year under CME's fee schedule for trade reporting, which includes an annual cap of $250,000 per asset class, analysis conducted by Risk.net reveals.
QUOTE OF THE WEEK
"No single rule served to concentrate risk more than risk-based capital requirements" – Thomas Hoenig, FDIC vice-chair
ALSO THIS WEEK
Buy side targets leverage cap in SEC derivatives plans
AQR says its managed futures fund could suffer larger drawdowns under new rule
Capital sums set to drive FRTB desk decisions
Using Volcker desk structure may hurt model approval chances, banks say
When it comes to correlation, cleaning is a chore that pays
Recent trends in research may help firms obtain reliable correlations from limited data
Basel Committee to amend leverage ratio calculation
CEM to be ditched, but regulators still considering treatment of client margin
ABN Amro cuts rates swaps from €24bn covered bond programme
High cost of downgrade triggers forces Dutch bank to consider alternative hedge
Questions remain after final EU uncleared margin rules
Industry gives a positive welcome, but the treatment of non-netting jurisdictions is still uncertain
The week on Risk.net, December 2–8, 2017Receive this by email