Banks Win Break on Capital Requirement Hitting Trading Desks

(Bloomberg) -- Banks that spent years lobbying against billions of dollars of new capital requirements are being rewarded for their efforts.

On Thursday, they won concessions from global regulators that may cut the amount of extra capital the industry’s biggest companies will need in 2022, when the new market-risk rules are due to take effect. The proposed revisions will come as a relief to traders in swaps, bonds and other securities.

The Basel Committee on Banking Supervision acknowledged that without change, the rule would wind up costing the banking industry much more than the regulator had intended. The revisions will make it easier for lenders to rely on their own internal models to assess risk and reduce the burden on those that can’t.

The Basel Committee’s decision to take a second look at the rule, known as the Fundamental Review of the Trading Book, follows an outpouring of industry opposition since it was published in 2016. At the time, the panel -- which includes the U.S. Federal Reserve and European Central Bank -- estimated that on a weighted average, banks would need to increase their trading-book capital levels by 40 percent.

Last year, the International Swaps and Derivatives Association -- one of the main industry groups pressing for the rule to be amended -- said instead that lenders would have needed anywhere from 1.6 times their current trading book capital to 2.5 times as much.

That difference could translate into billions of dollars in additional risk-weighted assets for some banks with big trading arms. At the end of 2017, Goldman Sachs Group Inc. had about $87 billion in risk-weighted assets covered by the market-risk regulations, while Deutsche Bank AG had about 31 billion euros ($38 billion), according to regulatory reports.

On Thursday, ISDA’s head of risk and capital, Mark Gheerbrant, welcomed the proposals.

“The requirements as they stood would have had a negative impact on banks’ trading book activities and their ability to provide financing and hedging solutions to end users,” he said in an emailed statement.

Karen Shaw Petrou, a managing partner at Washington-based Federal Financial Analytics, said the Basel Committee’s quantitative impact surveys “were so off the mark and the structural implications were demonstrably different than had been understood.”

‘Crucial Topics’

The proposed shifts in the regulation include changes to “two crucial topics” for banks, McKinsey & Co. partner Anke Raufuss said on March 20. The first applies to profit-and-loss tests, the second to risks that are hard to quantify.

The Basel Committee gave banks more leeway to rely on their own estimates of risk to comply with the tests. The panel also modified the tests they’ll use to determine whether or not the models pass muster, and softened the blow if they don’t.

Instead of banks automatically needing to fall back on more stringent regulator-set capital formulas, the committee said they will allow an interim step to ease the impact. For firms with 50 or 100 desks, the test is one of the main hurdles, according to Raufuss.

Sharing Data

The Basel Committee also intends to make it easier for banks to share data to help build models that are based on real market prices to comply with the regulations.

For desks that must fall back on regulators’ formulas, the Basel Committee also proposed reducing the penalty for doing so after acknowledging that the cost was greater than intended. The panel said it would reduce the risk weightings necessary under their own standards by 20 percent to 40 percent for interest-rate risks, and by 25 percent to 50 percent for equity and foreign-exchange risks.

The proposal is open for public comment until June 20. The Basel Committee said it wants to complete the standard as soon as possible.

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