Monday, August 10, 2015

Summer 2015 Financial Regulatory Update

Author: David Schwartz J.D. CPA

The Fed, Financial Stability Board, and the Bank for International Settlements have beein quite busy this summer, and each issued rules or consultations in July furthering Basel III initiatives. On July 1, the Basel Committee issued a consultative document on its review of the credit valuation adjustment risk framework; on July 2, the FSB launched a peer review on the implementation of its policy framework for financial stability risks posed by non-bank financial entities other than money market funds (i.e., shadow banks"); and on July 20, the Fed finalized its capital surcharge rule for the eight US global systemically important banks (G-SIBs).

  • Basel Committee consultative document on its review of the credit valuation adjustment risk framework.    The objectives of the review are to (i) ensure that all important drivers of credit valuation adjustment (CVA) risk and CVA hedges are covered in the Basel regulatory capital standard; (ii) align the capital standard with the fair value measurement of CVA employed under various accounting regimes; and (iii) ensure consistency with the proposed revisions to the market risk framework under the Basel Committee's Fundamental review of the trading book

    This consultative paper envisages a CVA risk framework that takes into account the market risk exposure component of CVA along with its associated hedges. The regulatory capital requirement for CVA risk would be based on exposure models that banks also use to determine their accounting CVA, subject to conditions intended to reduce potential variability due to risk-weighted asset (RWA) calculations or remaining discrepancies in financial reporting practices across banks and jurisdictions.

    Comments on this consultation are due October 1, 2015.

  • FSB peer review on the implementation of its policy framework for shadow banking entities and invitation for feedback from stakeholders.  The objective of this review is to evaluate the progress made by FSB jurisdictions in implementing the overarching principles set out in the framework – in particular, to assess shadow banking entities based on economic functions, to adopt policy tools if necessary to mitigate any identified financial stability risks, and to participate in the FSB information-sharing process.

    As part of this peer review, the FSB invites feedback from financial institutions, industry and consumer associations as well as other stakeholders on the areas covered by the peer review. This could include comments on:
    •  institutional arrangements needed to define and update the regulatory perimeter to
      capture new forms of shadow banking if necessary to ensure financial stability;
    • types of information that may be necessary to assess shadow banking risks for
      entities identified as having the potential to pose risks to the financial system;
    • possible ways to enhance public disclosure of shadow bank entities’ risks; and
    • the design of policy tools to mitigate identified financial stability risks.

Feedback should be submitted by 24 July 2015.  

  • Fed’s Final G-SIB Surcharge Rule.  Under the final rule, a firm that is identified as a global systemically important bank holding company, or GSIB, will have to hold additional capital to increase its resiliency in light of the greater threat it poses to the financial stability of the United States.

    The final rule establishes the criteria for identifying a GSIB and the methods that those firms will use to calculate a risk-based capital surcharge, which is calibrated to each firm's overall systemic risk. Eight U.S. firms are currently expected to be identified as GSIBs under the final rule: Bank of America Corporation; The Bank of New York Mellon Corporation; Citigroup, Inc.; The Goldman Sachs Group, Inc.; JPMorgan Chase & Co.; Morgan Stanley; State Street Corporation; and Wells Fargo & Company.

    The final rule is relatively the same as the rule proposed in December 2014. The rule based on, on the international standard adopted by the Basel Committee on Banking Supervisionstricter, but is somewhat stricter than the BIS framework. As in the proposal, under the final rule, estimated surcharges for the eight G-SIBs range from 1.0 to 4.5 percent of each firm’s total risk-weighted assets. Failure to meet the G-SIB surcharge will result in limitations on a G-SIB’s ability to make certain capital distributions and discretionary bonus payments. The G-SIB surcharge will be phased in starting in 2016, and will become fully effective on January 1, 2019.