RMA: US banking regulators ‘failing’ to deliver on Basel III Endgame goals
13 October 2023 US
Image: SFT
US banking regulators are not delivering Basel III Endgame goals of improving risk sensitivity and comparability, panellists heard at the Risk Management Association’s (RMA’s) Securities Finance and Collateral Management Conference.
The panel provided the foundation for a two-part discussion on Basel III Endgame, a regulation that is being closely watched by market participants.
Part 1 of this discussion relates to the ‘significant implications’ for the securities finance industry and saw panellists raise concerns for beneficial owners, banks and broker dealers.
The Basel Committee on Banking Supervision (BCBS) introduced a dual-stack requirement into capital rules for Basel III Endgame. This development means that firms have to compute capital requirements under two different methodologies; the standardised approach and the expanded approach.
The dual-stack risk-weighted asset (RWA) requirement is currently applicable to Category I and II banks, and will now extend to Category III and IV banks.
It requires these banks to calculate two RWAs. Banks will calculate their risk-based capital ratios under the two approaches, with the higher of the two being used to set the firm’s minimum capital ratios.
The aim is to create a more risk-sensitive framework and improve comparability in terms of the capital framework, panel attendees heard.
The revision to the Basel III framework under the expanded approach is intended to ‘make things more risk sensitive’, a panellist commented. However, the panellist believed that the rules did not go far enough to achieve this.
Market risk capital requirements will ‘go up significantly’, a panellist indicated. Consequently, it will be more expensive for dealers to carry inventory.
The Basel III Endgame Part 1 panel revealed that the US banks today are subject to ‘the most onerous’ and ‘the highest minimum capital standards’ globally.
A key purpose of Basel III Endgame was to reduce the gap between the US banks and the European banks, in this respect.
However, a panellist indicated that due to the way the US is implementing and proposing these rules and requirements, this gap is widening.
The panel heard from Chen Xu, corporate counsel at Debevoise & Plimpton, Glenn Horner, chief regulatory officer at State Street Global Markets, Joseph Hwang, head of US regulatory policy at Goldman Sachs, and Michael McAuley, head of product development and strategy at BNY Mellon.
The panel provided the foundation for a two-part discussion on Basel III Endgame, a regulation that is being closely watched by market participants.
Part 1 of this discussion relates to the ‘significant implications’ for the securities finance industry and saw panellists raise concerns for beneficial owners, banks and broker dealers.
The Basel Committee on Banking Supervision (BCBS) introduced a dual-stack requirement into capital rules for Basel III Endgame. This development means that firms have to compute capital requirements under two different methodologies; the standardised approach and the expanded approach.
The dual-stack risk-weighted asset (RWA) requirement is currently applicable to Category I and II banks, and will now extend to Category III and IV banks.
It requires these banks to calculate two RWAs. Banks will calculate their risk-based capital ratios under the two approaches, with the higher of the two being used to set the firm’s minimum capital ratios.
The aim is to create a more risk-sensitive framework and improve comparability in terms of the capital framework, panel attendees heard.
The revision to the Basel III framework under the expanded approach is intended to ‘make things more risk sensitive’, a panellist commented. However, the panellist believed that the rules did not go far enough to achieve this.
Market risk capital requirements will ‘go up significantly’, a panellist indicated. Consequently, it will be more expensive for dealers to carry inventory.
The Basel III Endgame Part 1 panel revealed that the US banks today are subject to ‘the most onerous’ and ‘the highest minimum capital standards’ globally.
A key purpose of Basel III Endgame was to reduce the gap between the US banks and the European banks, in this respect.
However, a panellist indicated that due to the way the US is implementing and proposing these rules and requirements, this gap is widening.
The panel heard from Chen Xu, corporate counsel at Debevoise & Plimpton, Glenn Horner, chief regulatory officer at State Street Global Markets, Joseph Hwang, head of US regulatory policy at Goldman Sachs, and Michael McAuley, head of product development and strategy at BNY Mellon.
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