All major global banks now meet Basel III requirements

    The world's 224 major international banks now meet the risk-based capital requirements under the tougher Basel III banking regulations and have further narrowed the shortfall in capital required to meet targets for 2019, according to the Basel Committee on Banking Supervision (BCBS).
    The Basel Committee, which sets global standards for banking supervision, said the aggregate shortfall for the 98 largest internationally active banks relative to the 7 percent target for common equity (CET 1) in 2019 amounted to 3.9 billion euros as of June 30, 2014, down from a shortfall of 15.1 billion as of end-2013 and from a shortfall of 485.6 billion euros on June 30, 2011.
    In comparison, these 98 banks - known as Group 1 banks with Tier 1 capital in excess of 3 billion euros - had total after-tax profits prior to distributions of 210.1 billion euros in the six months ending June 30, 2014.
    The shortfall for the smaller Group 2 banks, which have Tier 1 capital below 3 billion euros, narrowed to a mere 0.1 billion euros relative to the minimum level of 4.5 percent and was 1.8 billion relative to the 7.0 percent target, down from shortfalls of 2.0 billion and 9.4 billion, respectively from the previous survey in September last year.
    The Basel Committee, which groups supervisory authorities from almost 30 jurisdictions, has published six previous reviews of how Basel III rules will impact banks and financial markets.
    Basel III was agreed by global leaders ion 2010 in an effort to strengthen the global financial system following the crises in 2008, and imposed higher capital charges on banks to ensure they had enough of a cushion to withstand the stress from a financial crises along with stricter supervision.

FSB adds China AgBank as systemically important bank

    The Agricultural Bank of China Ltd. (AGBank), China's third largest bank by assets, has been added to the list of global systemically important banks (G-SIBs) maintained by the Financial Stability Board (FSB), the Swiss-based body that coordinates global financial regulation.
    The addition of AGBank increases the overall number of G-SIBs on FSB's list to 30.
   Systemically important banks are defined as those whose distress or disorderly failure would cause significant disruption to the global financial system and economic activity due to their size, complexity and interconnectedness. These banks are often referred to as "too-big-to-fail."

    The FSB started identifying banks that are considered systemically important in 2011 following an endorsement by Group of 20 leaders in 2010. The FSB updates its list every November based on a methodology developed by the Basel Committee on Banking Supervision (BCBS) and the latest update is based on end-2013 financial data.

    Both the FSB and the Basel Committee are based at the Bank for International Settlements (BIS) in Basel, Switzerland.
    Banks on FSB's list of G-SIBs are subject to tougher financial regulation, including higher loss absorbency requirement that is being phased in from Jan. 1, 2016, resolution plans in the event of a collapse, and higher supervisory expectations for risk management functions, risk governance and internal controls.

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Global banks narrow Basel III shortfall to 2.2 bln euros

    The world's major banks continue to shore up their risk-based capital as they prepare to meet new stricter banking regulations, narrowing the total shortfall under Basel III's 4.5 percent minimum capital requirement to 2.2 billion euros as of end-2012, 1.5 billion less than as of June 30, 2012.
    In its latest review of the impact of the new, stricter global banking rules that are being phased in by 2019, the Basel Committee on Banking Supervision (BCBS) said the aggregate shortfall for the major banks under a 7.0 percent common equity Tier 1 (CET1) target - which includes surcharges for banks that are considered systemically-important - fell by 82.9 billion euros to 115.0 billion.
    This shortfall compares to combined net tax profit prior to distributions at the so-called Group 1 banks of 419.4 billion euros at the end of 2012, which means the shortfall accounts for just over one-quarter of the banks' total profit.
    The Basel Committee, which groups supervisory authorities from almost 30 jurisdictions, has conducted three previous reviews of the impact of Basel III on financial markets and the result is that banks are slowly but surely making progress in meeting the new rules that were agreed by global leaders in 2010 in an effort to strengthen the global financial system following the 2008 crises.

BIS set to name new economic adviser next week

    The Bank for International Settlements (BIS), known as the central bankers’ bank, will get a new public face next week when it announces a new chief economic adviser, a unique job that combines the art of diplomacy with the rigorous discipline of a scientist.

    It will be the seventh economic adviser to Swiss-based BIS, the world’s oldest international financial institution, and the candidate will succeed the straight-talking Stephen Cecchetti, who once compared the financial sector to cancer because it can grow so large that it suffocates and eventually devours its national host.

    The choice of economic adviser is significant because it provides an insight into how central banking will evolve in coming decades as it faces the twin challenge of exiting from years of ultra-easy monetary policy and integrating financial stability into its operational framework.

    From managing Germany’s war reparations to helping extinguish international financial crises and give birth to Europe’s single currency, the BIS has evolved into a truly global institution, at the core of international efforts to design and implement many of the policies that make up a new international financial architecture.

    The common thread that binds all BIS advisers is a deep personal commitment to public policy. Not only were all its past advisers marked by the policy issues of their time, they put their own mark on public policy.

FSP issues shadow banking rules on securities, regulation

    Global plans to strengthen the regulatory oversight of shadow banking are nearing completion as the Financial Stability Board (FSB) released two new policy frameworks covering securities lending and supervision.

    The latest proposals are part of the international community’s efforts since the global financial crises to tackle the threat from shadow banking, the vast and largely unregulated world of hedge funds, money market funds and investment vehicles.

    The financial crises revealed that shadow banking - roughly half the size of the regulated banking sector - posed a severe threat to financial stability, not only because of its size and global reach but also because it is part of a complex chain of financial transactions with banks and insurance companies.

    “ Like banks, a leveraged and maturity-transforming shadow banking system can be vulnerable to “runs” and create contagion risk, thereby amplifying systemic risk,” said the FSB, the international body that monitors and coordinates global financial regulation on behalf of the Group of 20 (G20) leading economies.

    Over the last two years, the FSB has been developing a string of policies aimed at reducing the risk from shadow banking by creating a monitoring framework to track the sector and strengthen the oversight and regulation of the shadow banking system.

    "Most of these policy measures are now finalised and will be adopted by FSB members in an internationally-coordinated manner," said the FSB, adding that some of its latest proposals that cover minimum haircuts for securities financing transactions would be refined further to avoid any unintended consequences for the financial system.

     The challenge for the FSP, along with the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), has been to devise rules that limit the risks yet retain the benefits and don’t stymie future financial innovation.

     "When implemented, this integrated set of policies should mitigate financial stability risks emanating from shadow banking. They should also limit the incentives of risky activities to move to the unregulated sector as tighter regulations on banks and other traditional market participants come into effect," the FSB said.

    While off-balance sheet financial entities and various forms of securitization have been around for centuries, the current form of shadow banking first took off in the last decades as banks exploited regulatory gaps and used regulatory arbitrage to minimize cost.  

     Click to read the FSB’s latest policy recommendations for shadow banking.

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Major global banks narrow capital shortfall to 3.7 bln euros

    The world's major banks have bolstered their capital base by 8.2 billion euros during the first half of last year and now only have a shortfall of 3.7 billion euros under the new Basel III 4.5 percent minimum capital requirement, global banking supervisors said.
    In its latest assessment of how global banks would do under the new global banking rules that are being phased in, the average common equity Tier 1 (CET1) for so-called Group 1 banks - international banks with Tier 1 equity in excess of 3 billion euros - fell to 8.5 percent from 10.8 percent at the end of 2011, reflecting regulatory changes.
    For the 7.0 percent minimum capital ratios, which includes surcharges for the systemically-important banks, the aggregate equity shortfall plunged by 45.8 percent to 208.2 billion euros, the Basel Committee on Banking Supervision (BCBS) said.
    To put the capital shortfall into perspective, the BCBS said the sum of after tax profits for all the Group 1 banks between July 1, 2011 and June 30, 2012 was 379.6 billion euros.
    For smaller, internationally-active banks, the so-called Group 2, the capital shortfall is estimated at 4.8 billion euros under the 4.5 percent minimum capital requirement and 16 billion for the 7 percent capital requirement.

Models, supervision determine banks' risk weights - report

    Investors have a hard time comparing the riskiness of the major global banks because there are differences in how each bank calculates the potential danger of their assets, according to a report by the Basel Committee on Banking Supervision.
    Based on tests of how 15 major banks assign risks to a simple, hypothetical portfolio of financial instruments, the Basel Committee found differences, either due to supervisory decisions or due to the in-house models that banks use to calculate risk.
    “While some variation in risk weightings should be expected, excessive variation arising from bank modelling choices is undesirable when it does not reflect actual risk-taking,” said Stefan Ingves, Chairman of the Basel Committee and governor of Sveriges Riksbank.
    The Swiss-based Basel Committee, which includes banking supervisors from almost 30 countries, sets global standards and has been tightening its rules in recent years in an effort to prevent another global financial crises.
    The Committee’s analysis of how banks assess the risks from financial instruments is important because the global financial crises in 2007-2009 was largely triggered by major losses on banks’ investments in housing related securities that were held in their trading books.

Bank regulators propose new securitisation framework

    Global banking regulators have proposed a new framework for banks to calculate potential losses on asset-back securities that aims to reduce their automatic reliance on credit ratings agencies whose  assumptions proved far too optimistic and contributed to the severity of the global financial crises.
    The Basel Committee on Banking Supervision said the proposal - "Revisions to the Basel Securitisation Framework - did not include a specific text but was a revision to the framework. The Committee is now asking for industry feedback and will carry out an impact study of the proposals before deciding on the "definite way forward."
    The popularity of securitised debt, such as mortgage-backed securities, exploded in the last decade but the financial crises revealed that banks and ratings agencies severely underestimated the expected loss in underlying exposures and the concentration of systemic risk. They were also far too optimistic in their view of the benefits to banks of such diversification.
    As the crises started to unfold in 2007, it became clear that capital requirements assigned to both highly-rated and low-rated securitised products were too low. So when ratings agencies downgraded the products as credit quality deteriorated, banks suddenly had to come up with additional regulatory capital and often sought to get rid of their securitisation exposure, further depressing their value.

Nearly all major nations to implement Basel III in 2013

    Nearly all major countries will be implementing new, stricter global banking rules by the end of 2013 even if some countries will not meet the deadline of January 1, the Basel Committee on Banking Supervision (BCBS) said.
    Following a two-day meeting of global banking supervisors in Basel, Switzerland, it's chairman, Stefan Ingves, said 11 jurisdictions had now published final Basel III banking regulations that take effect on January 1, 2013 and seven other jurisdictions had issued draft regulations and indicated they are working towards issuing final versions as quickly as possible.
    "While some jurisdictions have not been able to meet the planned start date, a large number will be ready to begin introducing the new capital requirements as planned on 1 January 2013," Ingves said in a statement.
    During 2013 the remaining jurisdictions will incorporate all remaining deadlines in their national rules in line with the original agreement, even if they didn't meet the January 1 deadline, he said.
    "Hence, by the end of 2013, almost all Basel Committee jurisdictions will be implementing Basel III in accordance with the agreed timetable. This is an absolutely critical step towards strengthening the resilience of the global banking system," Ingves added.

Liquidity rule may alter monetary policy operations - BIS

    A new liquidity rule to be imposed on banks by global regulators will not fundamentally impair central banks’ ability to conduct monetary policy but may alter the way they carry out their operations, the Bank for International Settlements (BIS) said.
    The liquidity Coverage Ratio (LCR), which requires banks to hold enough liquid assets to survive 30 days of customer withdrawals and a credit squeeze, forms a critical part of the new Basel III banking regulations and is set to be introduced in 2015.
    But the new requirement, which has been agreed by global political leaders but recently run into headwinds from Europe, fundamentally affects monetary policy because central bank reserves form a major portion of banks’ liquid assets.
    Many central banks, for example the Federal Reserve, carry out monetary policy by setting a target for the interest rate at which banks lend to each other, typically reserves held in their accounts at the central bank, on an overnight and an unsecured basis.
    As these reserves are part of a bank’s portfolio of highly liquid assets, along with public and highly rated non-financial corporate bonds, the liquidity rule will potentially change the demand for those reserves and thus the relationship between market conditions and the resulting interest rate, BIS said.
    “The key takeaway from our analysis is that, while the LCR will not impair central banks’ ability to implement monetary policy, the process whereby this is done may need to adjust,” BIS said in a special feature in its December quarterly review.

BIS not worried by U.S. delay of Basel III bank rules

    The Bank for International Settlements (BIS) is looking forward to full implementation of the new Basel III banking regulations and is not worried by the United States' delay in applying the global rules.
    BIS Economic Adviser Stephen Cecchetti said "some jurisdictions are having small technical problems on meeting the exact timetable to which they have committed so there are modest and immaterial delays."
    Last month the United States said it had delayed indefinitely the implementation of Basel III beyond the internationally-agreed date of January 1, 2013 due to the high volume of comments received and the range of views that were expressed.
    The delay raised fears that other countries could backtrack on their commitments to implement the new tougher banking rules following criticism by both U.S. and UK officials that the Basel III rules were too complex and should be redrafted.
    But Cecchetti said the Basel III rules had been agreed by global leaders and were now in the process of being implemented.
   The Financial Stability Board (FSB), which monitors the implementation of global financial rules, said in October that only eight of 27 countries had issued their new banking rules so it was highly likely that only six of 28 global systemically important banks would be subject to Basel III in January.

Global supervisors aim to limit risks from shadow banking

    Shadow banking, the huge but unregulated frontier of the financial world, will soon be subject to bank-like supervision as global policymakers start to hammer out rules that reduce the chances of future crises yet still allow new creative financing models to emerge.
    The Financial Stability Board (FSB), which monitors and coordinates global financial regulation, has proposed an ambitious policy framework and recommendations that it believes are needed to “mitigate the potential systemic risks associated with shadow banking,” and expects to issue final proposals in September 2013 following industry comment.
    The term shadow banking describes the murky world of hedge funds, money market funds and investment vehicles that are often used by major banks to carry out sophisticated financial transactions.
    As these shadow legal entities do not take customer deposits, they don’t need banking licenses and are not subject to supervision.
    The 2008 global financial crises exposed the threat from shadow banking to financial stability, not just because of its vast size but because it was completely interwoven with the supervised banking system; a regulated banking system relied on unregulated entities with a razor-thin capital base.
    Global political leaders, meeting as the Group of 20, decided that the risks from shadow banking – about half the size of the normal banking system - posed too great a threat and asked the FSB to come up with policy recommendations.

US delays start of Basel III bank rules, no new date set

    The United States has delayed indefinitely the implementation of new tougher banking standards, known as Basel III, beyond the internationally-agreed date of January 1, 2013.

    Under Basel III, banking regulators worldwide would have raised capital charges around three times and imposed stricter supervision, especially on major banks such as Citigroup and JP Morgan Chase, to prevent a repeat of the 2008 global financial crises.

    Although Group of 20 finance ministers and central bank governors, including those from the U.S., agreed to implement Basel III only last week, there has been increasing pressure to delay the start due to the complexity of the rules and the cost to banks at a time of weak global economic growth.

     The Federal Reserve issued its version of the Basel III rules in June and asked for comment. Today it said that many bankers had told it they were concerned they would be subject to the new capital rules “without sufficient time to understand the rule or to make necessary systems changes.”

    “In light of the volume of comments received and the wide range of views expressed during the comment period, the (U.S. federal banking) agencies do not expect that any of the proposed rules would become effective on January 1, 2013,” the Federal Reserve said.

FSB adds BBVA, Standard Chartered to list of key banks

    The Financial Stability Board (FSB), which coordinates global financial regulation, has added Spain’s BBVA and UK-headquartered Standard Chartered banks to its list of global systemically important banks (G-SIBs) and removed Germany’s Commerzbank, the UK’s Lloyds Banking Group and Franco-Belgian Dexia from the list.

    The FSB's latest list of globally important banks is based on data from end-2011 and now comprises 28 banks, down from last year’s list of 29 banks.  Lloyds and Commerzbank were removed from the list due to a “decline in their global systemic importance” while Dexia was taken off as its going through an orderly resolution process.

    Being labeled a systemically important bank or financial institution has consequences as regulators will not only impose stricter supervision but also higher capital charges than other financial institutions.

     The list for the first time divides banks into buckets of additional loss absorbency that is required by regulators. G-SIBs will be subject to resolution planning rules by end-2012 and the additional loss-absorbency requirements will be phased in by January 2016 and fully implanted by January 2019.

    Systemically important banks are defined as those institutions whose distress or disorderly failure would cause significant disruption to the global financial system and economic activity due to their size, complexity and interconnectedness.

Task force issues 7 disclosure principles for banks

    A task force comprised of bankers, investors, analysts, auditors and credit ratings’ officers has issued seven principles that should make it easier for shareholders to grasp the risks posed by banks and help restore their trust in the financial industry.

    The principles from the Enhanced Disclosure Task Force (EDTF), which was formed in May at the initiative of the Financial Stability Board (FSB), is different from recommendations by banking regulators because they arise from discussions between users and prepares of financial reports.

    “These principles provide a firm foundation for developing high-quality, transparent disclosures that clearly communicate banks’ business models and the key risks that arise from them,” said the report, co-chaired by Hugo Baenziger, supervisory board chairman of Eurex, Russell Picot, group general manager of HSBC, and Christian Stracke, managing director of Pimco.

    The principles are mainly aimed at improving risk disclosure by large international banks, but should also be applicable to all banks that access equity and debt markets.

U.S., Russia, Turkey make progress with Basel 2.5 - report

    The United States, Russia and Turkey have made significant progress in implementing the Basel 2.5 global banking rules, while Argentina, Indonesia and Mexico still have work to do, according to the latest progress report by the Basel Committee on Banking Supervision.
    Basel 2.5 was agreed by global banking regulators in July 2009 as the first institutional response to the global financial crises, ahead of the more comprehensive revision of banking rules under Basel III.
    While Basel 2.5, which imposed higher capital charges on banks' trading activities and specifically on securities composed of bundles of assets, was due to be implemented by the end of 2011, Basel III is first due to be implemented in phases from January 2013.
    The Basel Committee conducts period reviews of the implementation of its standards by national lawmakers and found progress at the end of September compared with its April report.
     “It is clear that not all jurisdictions will be ready in time. Still, we see continuing signs of progress," said Stefan Ingves, chairman of the Basel Committee and governor of Sweden’s central bank.

Banks progress, but still short of capital under Basel III

    Major banks have made major progress in thickening their capital cushion to prepare for the new tougher Basel III rules but they were still short of up to 374 billion euros by the end of 2011.
    In order for all the 102 largest banks to reach a 4.5 percent minimum level of capital to risk-weighted assets, an additional 11.9 billion euros is needed, the Basel Committee on Banking Supervision said in its latest study of the impact of the new, more stringent rules.
    To reach Basel III's target of a 7.0 percent capital ratio, which includes a surcharge for globally systemic important banks and a capital conservation buffer, the largest banks have to put aside an additional 374.1 billion euros, more than their combined 2011 net profits of 356 billion euros.
    In comparison to the previous study from April, the Basel Committee of global bank regulators found that largest banks had reduced the total shortfall by 111.5 billion euros.

Bank supervisors propose how to gauge intraday liquidity

    Banks must have enough liquid funds to make payments during extreme stress in financial markets and proposed indicators will allow supervisors to monitor banks' ability to live up to their obligations.

    The Basel III banking regulations, created in the aftermath of the 2008 financial crises, raised both the quality and quantity of banks’ capital. The reforms also included minimum standards for short-term liquidity but not intraday liquidity.

     Intraday liquidity is money that can be accessed real time, such as a bank’s reserves and collateral at a central bank and uncommitted credit lines.

    During the early phase of the financial crises in 2007, many banks ran into difficulties because they didn’t manage their liquidity properly, despite adequate capital, driving home the importance of liquidity to the proper functioning of financial markets and banks. A rapid switch in market conditions showed how quickly liquidity can evaporate.