Libor, capital requirements and regulatory priorities

The week on Risk.net, March 4 - 10, 2016

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LIBOR replacements could be forced onto OTC market

AMA replacement "will harm op risk management"

BLIND SPOTS around algo trading and market crises, BoE's Fisher warns

 

COMMENTARY: Missing the goal

Regulators around the world have pinned their hopes of preventing another catastrophic financial crisis on sweeping capital reforms: for banks, it means a big cut in risk sensitivity of the rules; for insurers, it means the opposite. Both approaches were being questioned this week.

In the field of op risk, bank regulators finally unveiled long-flagged proposals to bar the advanced measurement approach (AMA) that allows approved banks to use their own models to calculate capital requirements. The models have proved incapable of coping with post-crisis conduct risk losses. But whole careers have been built on the AMA, and its mooted replacement – the standardised measurement approach (SMA) – was immediately panned by the industry.

"If they just wanted something simple so they can compare the banks, maybe they have achieved it... But if they wanted to protect the system I'm not sure there is really any added value," said Santander's head of non-financial risk methodologies.

Plans to ditch the AMA were first revealed by Risk.net in October 2015.

Research published on Risk.net this week also casts doubt on the effectiveness of the Basel III leverage ratio. Invented as a backstop to prevent the collapse of major banks, it is currently set at far too low a level to make a real difference to the chance of a collapse, according to ex post analysis of 30 European banks. Even doubling it from 3% to 6% would leave the banking system far more risky than regulators intended.

And in the UK, the Prudential Regulation Authority has warned that brand-new Solvency II risk-based capital rules threaten to make the insurance industry more pro-cyclical and less stable – echoing concerns over pro-cyclicality already expressed by insurers and regulators late last year.

 

STAT OF THE WEEK

US G-Sibs had $73 billion worth of structured notes outstanding in total on September 30, 2015. Of this amount, $37 billion is set to remain outstanding as of January 2019 when the first phase of the TLAC requirement is scheduled to enter into force – all $37 billion would be ineligible for bail-in under the Fed's proposal.


QUOTE OF THE WEEK

"My nightmare is that we wake up one morning and we find out that somebody has just switched off the very core of the financial system. This is something I was worrying about when I was in office and it remains apt a few years later" – Paul Tucker, chair of the Systemic Risk Council and former deputy governor of the Bank of England.


ALSO THIS WEEK

EC urged to target initial margin for CCP recovery
Irish central banker says haircuts should be seen as temporary loans to CCPs in a crisis

South African banks may pool quants to tackle FRTB
Senior trader fears banks don't have quant resources to meet FRTB deadline

Banks save €3.5bn in swaptions compression drive
Capitalab removes €1.3 trillion notional, cutting capital requirements

Liquidity obsession 'irrational', says UK rail pension head
Chief executive of railways pension group says cost controls more important

Life firms irked by patchy matching adjustment approvals
UK regulator could have been more clear about success of bolder submissions, say advisers

SGX hopes to shake up LNG market with new index
Asian LNG traders voice cautious optimism about ‘Singapore Sling' spot-market index and derivatives contracts

CME set to launch swaptions clearing in Q2
Banks say the incoming uncleared margin rules are the driver behind the move, which may also even up the CME-LCH basis

SEC in wait-and-see mode on CDS clearing mandate
Industry sources that have met with the agency claim it has "no plan" for mandate

LME Clear ‘welcomes scrutiny' of CCP risk management
Oversight from clearing members is good for central counterparties, says LME Clear CEO

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