Wall Street Banks Have Basel's Ear in Pushback on Market Risk

  • Regulators said to plan to meet with finance firms next month
  • Industry concerned rule will squeeze FX, interest-rate desks

Wall Street is used to getting the opportunity to influence bank rules before they are unveiled. Now financial firms are getting the chance to argue that a key capital requirement should be softened even after it was supposed to be finished.

A global panel of regulators that includes the U.S. Federal Reserve and Bank of England will let the world’s largest banks provide additional feedback on a rule released in January that forces lenders to have sufficient capital to back bonds, derivatives and other securities they intend to trade, according to three people with knowledge of the matter. Scheduled to take effect in 2019, the directive seeks to ensure that banks can weather plunges in asset values.

With the ink barely dry, banks plan to air their grievances at a meeting in London next month, said the people who asked not to be named because the planned discussions are private. The talks are slated as regulators, particularly in Europe, signal an increased willingness to assess the impact of dozens of rules put in place since the 2008 financial crisis. While more capital makes banks safer, it’s a tough pill to swallow for European lenders that are struggling to make money.

The Basel Committee on Banking Supervision, the group of regulators that published the rule, said it would monitor aspects of the “framework during the implementation period,” said Mark Gheerbrant, head of risk and capital at the International Swaps and Derivatives Association in London. The issues Basel is examining include “capital impact, which is a positive,” he said.

The Basel committee declined to comment. The group sets regulations that are then put in place by authorities in various countries.

This month, the Bank of England’s Sarah Breeden highlighted concerns that rules have tamed the finance industry to the point that it could affect economic growth. Ensuring the “resilience and stability” of banks shouldn’t produce a regulatory approach that results in the “stability of the graveyard,” Breeden, an acting executive director who oversees international banks, said in a March 23 speech.

The rule to be discussed at the April gathering is known as the Fundamental Review of the Trading Book. One of the people described it as unusual for Basel officials to meet with bankers to talk about a just-completed regulation.

The panel had already eased the requirement from earlier drafts after lobbying by ISDA, the Institute of International Finance and the Global Financial Markets Association, industry groups that represent banks such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Plc. The final rule issued two months ago will result in a weighted average increase of about 40 percent in market-risk capital charges compared with the earlier proposal’s 74 percent increase, according to the Basel Committee.

Internal Models

While the change led to praise from the industry, banks want to persuade regulators to make additional revisions, the people said.

For instance, the 92-page rule requires that banks win approval from regulators for the risk models used by their individual trading desks. Desks that aren’t cleared to use internal models must then use standardized approaches set by regulators, potentially leading to higher capital charges. Firms are particularly concerned that the standardized models will show they need a lot more capital to offset risks from foreign-exchange and interest-rate trading, the people said.

Banks such as Credit Suisse Group AG and Deutsche Bank AG have already been retrenching, and a capital standard that disproportionately affects certain types of trades could prompt firms to curtail operations further.

Rule’s Impact

In preparation for next month’s meeting, banks have assigned large groups of employees to comb through trades to try to determine the impact of the rule, one of the people said. Industry groups are also preparing new economic estimates to demonstrate how lenders will be affected, the people said.

The gathering in London won’t be banks last chance to influence regulators. Because the Fed and other authorities must implement the rule in each of their individual countries, lenders will get another crack at lobbying.

“In the absence of implementing domestic rules, there is a bit of a window of opportunity for change,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics. Still, she said a change would require “quick action by Basel, for which they are not well known.”

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