PuzzlePieces–#IMF FSAP, #FSB and #G20 process
Subscribers to The Risk Telescope News Channel–PuzzlePieces on www.hedgehogs.net can access a quick update on today’s IMF action here.
Subscribe to PuzzlePieces FSB-PuzzlePieces
Subscribers to The Risk Telescope News Channel–PuzzlePieces can access a short update regarding today’s FSB press release here.
Subscribe to PuzzlePieces MiFID review — PuzzlePieces
What’s really at stake in MiFID review:
http://www.hedgehogs.net/pg/blog/BCMstrategy/read/5054304/mifid-review
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Strategic Partnership Announcement
BCM International Regulatory Analytics LLC today announces a strategic partnership with Hedgehogs.net. The press release can be found here. A one-page summary of the company’s expanded product offerings and capabilities can be found here as well as on the Awareness section of the website.
In a nutshell, we are finding innovative ways to distribute our cutting-edge research on the nexus of global regulatory and economic policy and its strategic implications for risk management and asset allocation. Together with Hedgehogs.net, subscribers to The Risk Telescope acquire content management and archiving capacity in a web-based content.
In addition, for those interested in a “just the facts” approach to strategic developments, we have developed a proprietary news channel for Hedgehogs.net. That news channel consolidates feeds from this blog and our Twitter feed together with proprietary content posted only to Hedgehogs.net. The Risk Telescope News Channel-PuzzlePieces will provide subscribers with direct access to strategically significant source documents on a timely basis.
The products will facilitate access to analytical content relevant to the development of scenario analysis, strategic asset allocation, strategic capital management, and information technology platform construction by providing insight into how global policy changes are evolving…and how that evolution will shape the form, structure, and content of risk intermediation.
For more information on the product specifications and how to access the new tools, please go to: www.hedgehogs.net.
New Issue: Basel Committee Agreement analyzed
The 8% Cooke Ratio lives on! A number selected rather randomly in 1987 has become the Pole Star for global capital regulation. It did not change when the Market Risk Amendment was added. It did not change after the East Asian and Russian market meltdowns in the late 1990s. It did not change as the basis for calibration when Basel 2’s models-based calculation methods were introduced. And now it has not changed as the basis for calibrating the capital framework after the largest financial crisis in living memory. Of all the possible outcomes associated with the G20 reform process, this consistency of calibration for “minimum total capital” is stunning. However, it would be a grave mistake to conclude that the fixation on the 8% means the Basel Committee has backed away from reform. When the various buffers have been added, minimum capital requirements increase to 10.5%. And the Basel Committee is only getting started.
This issue of The Risk Telescope suggests that far more important reforms are embedded in today’s agreement beyond the bottom-line number. The capital ratio has been redistributed between portfolio risk and systemic risk; the universe of instruments banks can use to meet the new requirement has narrowed. These redistributions and redefinitions will change the business model of banking as we know it. In addition, “systemically significant” banks (a term still not yet defined) will attract additional requirements including, says Basel, possible “combinations of capital surcharges, contingent capital and bail-in debt” and, possibly special “resolution regimes.” By year-end 2010, large financial firms may yet face a new environment that requires them to post far more capital above and beyond the 8% minimum standard.
Today’s agreement also signals subtle but important evolutionary priorities within the Basel Committee. The original 8% Basel I standard applied to the systemically significant banks of its day (“internationally active” banks). Basel II backed away from the calibration, saying that the overall amount of capital in the system would remain the same, but it would be re-distributed across the system so that riskier banks held more capital than well-managed, well-hedged ones. And the U.S. refused to implement it for any banks except internationally active ones. Today’s Basel III agreement signals a mean reversion back to the 8% calibration (plus a separately identified buffer) for all banks, as well as a major U.S. concession that global standards will apply to all U.S. banks, even if they are not internationally active. In addition, requiring all banks to hold buffers attributed to an imputed contribution of systemic risk represents a major shift in perspective beyond balance sheet risks, particularly when paired with the prospect of requiring a subset of “systemically significant” firms to meet additional, as yet unspecified requirements including possible issuance of new (experimental) debt obligations.
Receive the rest of this post by Subscribing to the Risk Telescope #Basel, #banking, the #G20 and the road ahead
A long time ago, in a galaxy far, far away, decisions taken by the Basel Committee were i) final and ii) boring. Their decisions were no less meaningful; they had no less impact on the shape and structure of banking (particularly when regulatory capital was on the agenda). But their deliberations were far less well understood beyond a relatively small and select group.
Welcome to the 21st century. The economic importance of the Basel Committee’s decisions on bank regulatory capital are now well understood by a much larger audience. But the price of fame is high. The Basel Committee no longer has the last word. Its agreements now require formal, public, political validation first by the Board of the Bank for International Settlements (formerly an informal process) and by the G20 Heads of State and Government. Between Basel Committee “decisions” and final decisions lies an eternity (2 months) for political jockeying and small but significant changes. Welcome to autumn 2010.
This weekend, the BIS Basel Committee leadership is expected to endorse a new global approach to regulatory capital required to cover the risks associated with banks’ even as the types of capital officially recognized as being available to cover that risk narrow. Some will say the Basel has caved to the banking sector by relaxing some key components. Others will complain that the framework decisions today will adversely affect the availability of credit tomorrow. The Basel Committee and the Financial Stability Board disagree: last month they released a report indicating that before borrowers are asked to shoulder the burden of the new framework, shareholders (through new dividend policies) and senior executives (through new compensation policies) take the hit first.
Anyone who believes that the regulatory reform debate ends this weekend in Basel does not understand the nature and scope of the global process underway. Between now and November, key constituencies will lobby heads of state for “minor” “calibration” adjustments to take into account the unique impact the global framework will have on the local financial community and the local economy. After November and throughout the implementation period, the debate will shift to increasingly technical but no less important components that are intelligible mostly to experts. A different approach to risk management and risk assessment (not to mention bank analysis) will be required that takes into account the liquidity and provisioning issues that are not center stage this weekend in Basel. And that is all before we start discussing the implications of the impasse over asset valuation between the IASB and FASB…and the possibility that regulators via the Basel Committee and/or the FSB may intervene to resolve the dispute before year end-2010
This weekend marks an important decision point when the main framework receives broad endorsement. The details will be filled in over the next few years, shaped not just by regulators but also by finance ministries, the IMF, the BIS, the FSB, and the G20. Are you ready? Are your service providers and analysts ready for the paradigm shift underway that is changing the business model for banking and risk intermediation?
#G20 and FSB work on #financial #regulation reform
Another day, another major conference concerning financial regulation reform. While most in Western financial capitals are transfixed by policy developments in the US (implementing Dodd-Frank) and the EU (creating new regulators and new roles for elected politicians in financial regulation), major global discussions on the structure of the financial system are underway half a world away in Korea. The Republic of Korea together with the Financial Stability Board have convened a conference with blue chip names from around the world (not just New York, DC. Brussels, London, Paris and Basel). You can find the official announcement and final agenda here.
A few of the speeches may make it onto individual websites. And, like the Federal Reserve Bank of Kansas City, the final papers are finding their way ultimately into the public domain. But if you are trying to determine how to make decisions today regarding model parameterization, strategic asset allocation, strategic asset and liability management, or regulatory and compliance policy priorities, you will have to do alot of digging to find out what what said and, more importantly, what it means.
The Risk Telescope is committed to helping market participants find more effective ways to track and understand key developments, like those under discussion right now in Asia.
