#Basel

10 09, 2024

FedFin on: Barr Bows to Capital Reality

Arezou Rafikian2024-09-10T16:44:00-04:00September 10th, 2024|The Vault|

Noting that the Basel process reminded him of the need for “humility,” FRB Vice Chair Barr today laid out next steps for the contentious end-game capital proposal. In short, it will be entirely re-proposed with many specific changes to the current proposal (see FSM Report CAPITAL230) and a request to commenters to argue for still more over the planned sixty-day comment period. The re-proposal as it now stands along with changes to the proposed GSIB surcharge (see FSM Report GSIB22) would cut the hike for GSIBs under the new standards by about half to nine percent and the impact for FBOs is now said to be minimal. The impact on covered regional banks is also considerably less, likely now…..

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

22 01, 2024

Karen Petrou: How the Banking Agencies Dealt Themselves Such a Weak End-Game Hand

Shane Smith2024-01-22T09:22:56-05:00January 22nd, 2024|The Vault|

We said from the start that finalizing the capital rules as proposed would be difficult because I have truly never seen a sweeping rule buttressed by such shoddy analytics. It’s of course true that lots of rules make little sense, but rules that cost companies as much as the capital rules are uniquely vulnerable to substantive and legal challenges. This is even more likely when, as now, the proposal’s victims know how to temper political claims with well-founded assertions of analytical flaws and unintended consequences. When regulatory credibility is effectively undermined, even those who might otherwise side with the regulators become cautious, if not actually averse to doing so. And thus, it has come to pass for the end-game rules.

As our analyses of all of the comment letters filed last week by dozens of Democrats make clear, only a few super-progressive Democrats now stand firmly with the regulators and even they have a few qualms. Maybe the agencies will try to bull it out – we thought so as recently as early this month in our outlook. We were clear there that major changes would need to be made to finalize the end-game rules; now, we’re not sure even these will do. The odds now are considerably higher for the re-proposal pressed last week by FRB Govs. Waller and Bowman.

The agencies are of course not naïve. They knew that the final rule would have to show a few concessions to its critics. As a result, …

6 10, 2023

FedFin Assessment: Basel Lays Big Plans for Basel V

Arezou Rafikian2023-10-06T14:47:18-04:00October 6th, 2023|The Vault|

As we noted yesterday, the Basel Committee’s October meeting concluded not only with plans for new disclosure consultations, but also a report on lessons learned from the 2023 crisis. We have long considered the “end-game” standards so substantive as to constitute Basel IV; now, as this report details, Basel is laying plans for Basel V via new liquidity, interest-rate, capital, and structural changes to the current construct. We thus focus on the supervisory and regulatory action steps Basel posits as necessary responses to the financial-market volatility sparked earlier this year by SVB, SBNY, FRC, and CS’s failures. While Basel states that none of its recommendations necessarily presages near-term global standards, …

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

22 08, 2023

FedFin on: GSIB Surcharge

Arezou Rafikian2023-08-23T10:19:58-04:00August 22nd, 2023|The Vault|

As anticipated in the wake of recent bank failures, the FRB has proposed a significant revision to the current rules calculating systemic-risk scores that lead to GSIB designation. These indicators are used not only for GSIB designation or a higher surcharge, but also for categorizing U.S. and foreign banks for other purposes and thus would also bring some banking organizations into categories subject to very strict prudential standards. The Board estimates that the overall impact of the changes to the surcharge and risk-scoring methodology are small and, regardless, warranted to enhance systemic resilience and consistency. It also estimates that the interaction of this new approach with certain liquidity and TLAC standards is generally minimal. However, the Fed has not assessed the relationship of scoring revisions to one way to calculate the GSIB charges, nor does the Board assess the cumulative impact of all of the changes proposed here in concert with its sweeping revisions to U.S. capital rules for all banking organizations with assets over $100 billion. It is also unclear how these changes in concert with all the others interact with the stress capital buffer applicable to large U.S.-domiciled banking organizations…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

14 08, 2023

Karen Petrou: Why The Operational-Risk Capital Rules Make No Sense

Eliza Allen2023-08-14T10:41:30-04:00August 14th, 2023|The Vault|

While there are many risks for which regulatory capital is a vital panacea, operational risk is not among them. The proposed approach to these capital standards makes it still more clear that regulators don’t trust themselves or banks and thus deploy the only tool they seem to know – ever-higher capital – no matter the cost and, more important, the risk. In fact, the best way to address operational risk is to spend money, not put it in a capital piggybank regulators can shake to hear coins rattle when they worry even though getting the coins out in a hurry will prove devilishly difficult.

The reason why regulatory capital doesn’t do diddly for operational-risk absorption is self-evident when one understands what constitutes operational risk. It’s essentially what God does to banks (natural disasters), what people do to banks (fraud), and what banks do to themselves (fragile systems) and to others (endangering consumers or markets at ultimate legal cost).

None of these risks is meaningfully reduced with more capital and, even if it were, the way the new rules work frustrates the way it might. As our in-depth analysis of the proposed operational risk-based capital (ORBC) rules makes clear, regulators want banks to look back as long as ten years to see how many operational losses they booked, measure business volume over the past three years, ramp up these sums via mysterious “scaling factors,” and then somehow discern what operational risk will be in coming years and how much shareholder …

10 08, 2023

FedFin on: Operational Risk-Based Capital Standards

Arezou Rafikian2023-08-11T16:25:34-04:00August 10th, 2023|The Vault|

Noting that operational risk is present at all banks due to most activities, the U.S. regulatory-capital rewrite would end the current approach to operational risk-based capital (ORBC). This now subjects only categories I and II banks to ORBC and then only to the advanced measurement approach (AMA) premised on each bank’s internal models. Consistent with the overall decision to end internal-model reliance, this section of the proposal subjects categories I, II, III, and IV banks to a new operational-risk standardized approach (SA). This would result in very steep capital requirements based on a bank’s experience over the past ten years compared to various sources of revenue over the past three years, perhaps taking business-model changes over the course of the last three years into account if regulatory standards are met for doing so….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

8 08, 2023

FedFin on: Say It’s Simple

Arezou Rafikian2023-08-09T14:19:41-04:00August 8th, 2023|The Vault|

Our most recent analysis of the inter-agency capital proposal focuses on significant changes to the rules for securitization and credit-risk transfer positions. In short, super-traditional securitizations have an easier path to the secondary market, but GSEs still beat banks. Complex ABS face often-formidable obstacles, as does CRT given or taken by banks.

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

8 08, 2023

FedFin on: Equity and Securitization Capital Standards

Arezou Rafikian2023-08-08T13:44:33-04:00August 8th, 2023|The Vault|

Based on our analysis of the inter-agency capital proposal’s framework and its credit-risk provisions, FedFin turns now to the proposed approach to equities as well as to that for securitization exposures (i.e., those that are tranched rather than simple secondary-market issuances of packages of loans or other assets backed as needed by a single credit enhancement). The proposal in some cases liberalizes the current, “general” standardized approach (SA), but more often toughens it to account for elimination of the advanced approach…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

4 08, 2023

FedFin on: Credit-Risk Capital Rewrite

Arezou Rafikian2023-08-04T13:41:04-04:00August 4th, 2023|The Vault|

In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus ….

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

1 08, 2023

FedFin Analysis: U.S. Regulatory-Capital Rewrite: Framework

Eliza Allen2023-08-01T16:31:19-04:00August 1st, 2023|The Vault|

In this in-depth report, we begin our analysis of the 1089-page capital proposal released by the U.S. banking agencies not only to make U.S. standards more consistent with Basel’s 2017 “end-game” rules, but also to correct failings in the current capital framework the agencies believed were laid bare by recent bank failures. The new standards rewrite the 2019 “tailoring” rule with regard to application of the toughest capital standards, now covering all BHCs with assets over $100 billion along with their insured depository institutions (IDIs) regardless of size. For smaller BHCs, the most significant impact of the new approach requires recognition of accumulated other comprehensive income (AOCI) unrealized gains and losses related to available-for-sale (AFS) and held-to-maturity (HTM) securities; the agencies recognize this cost but believe the proposed three-year transition reduces any adverse impact.

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…