Major banks could be forced to markedly increase the amount of capital they hold against their trading assets, it has emerged.
The Basel Committee on Banking Supervision (BCBS) is considering imposing such a rule - which has been proposed by a number of regulators globally - on financiers to make sure their balance sheets are strong enough to resist significant external shocks, the Financial Times reports.
This forms part of the BCBS's attempts to put the minds of investors at rest with regard to the capital holdings of big banks, after a study conducted by the body last month established that certain lenders are holding just 12.5 per cent in capital against the same assets as some of their counterparts.
Such practice - whereby banks use different time periods when calculating value at risk - is seen by the BCBS as the "most important driver" of such a large discrepancy, which is affecting investor confidence in the financial industry.
Basel Committee Also Issues FX Transaction Risk Guidance
The BCBS has also issued its final guidance for managing risks associated with the settlement of foreign exchange (FX) transactions, an update of its guide issued in 2000 for managing settlement risk in FX transactions. A consultative draft of the new guide was first issued last August.
The BCBS said that in the interim 13 years the FX market has made significant strides in reducing the risks associated with the settlement of FX transactions. Substantial FX settlement-related risks remain, however, not least because of the rapid growth in FX trading.
While the original 2000 guidance focused mainly on the principal risk element of FX settlement-related risks, the new guidance is intended to address a broader spectrum of FX settlement-related risks. It provides more comprehensive and detailed direction on governance arrangements and the management of principal risk as well as all other FX settlement-related risks. In addition, the guidance promotes the use of payment-versus-payment arrangements, where practicable, to reduce principal risk.
The guidance is organised into seven ‘guidelines’ that address governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk and capital for FX transactions.
“The guidance will be an important step towards further improving banks’ management of FX settlement-related risks, which is a potential cause of major financial disruptions,” said Stefan Ingves, BCBS chairman and governor of Sveriges Riksbank. “The Committee encourages full adoption of this guidance by supervisors and their supervised banks, in particular internationally active banks, and intends to monitor and review banks’ and supervisors’ progress in applying this guidance,"
By Asim Shah and Bobsguide editorial