Banks Face Capital Hit as Basel Overhauls Trading-Book Rules

Updated on
  • Average increase skewed by banks with large trading assets
  • Capital set aside for market risk rises 18% for median bank

Banks face higher capital requirements under an overhaul of market-risk rules that the Basel Committee on Banking Supervision plans to complete by the end of the year, though the increase will be less dramatic than industry groups warned, according to the regulator.

The new rules result in a 4.7 percent increase in overall capital requirements, the Basel Committee said Wednesday in a study based on a 44-bank sample, meaning a bank with a hypothetical total capital requirement of 10 percent would face a 47 basis-point surcharge. Yet this average conceals wide variations: the changes for individual banks range from a 20 percent reduction to an increase of nearly 80 percent.

“We’ve seen regulators come out with proposals that have headline-grabbing numbers quite a lot,” Steve Hussey, head of financial institutions credit research at AllianceBernstein, said by telephone. “What tends to happen is the banks push back, over time the proposal gets watered down and in the interim the banks pre-position for it. Risk-weighted assets, and thus capital consumption, are clearly driving the way banks think about the businesses they’re in.”

Risk Weights

The Basel committee, which brings together regulators such as the U.S. Federal Reserve and the European Central Bank, is overhauling its capital rules on swaps, bonds and other securities that banks intend to trade after the financial crisis revealed that capital against trading-book exposures was insufficient to absorb losses. The regulator also found wide variability among risk weights for similar assets across banks that use their own models.

“The Basel committee conducted a trading-book quantitative impact study using Dec. 31, 2014, data to provide a better understanding of the capital impact and/or implementation dynamics,” the regulator said. The parameters used may eventually change in Basel’s final rules, known collectively as the Fundamental Review of the Trading Book. The study doesn’t reflect changes the Basel committee is pondering for the accounting of securitizations.

Basel’s proposals met with a backlash from industry groups that have warned banks’ capital charges for market risk in the trading book may multiply under the new rules, crimping their ability to lend. The International Swaps and Derivatives Association, the Global Financial Markets Association and the Institute of International Finance last month released their own impact study based on a 28-bank sample that showed the capital requirement for market risk would be 4.2 times the level they currently hold.

New Rules

With a key Basel meeting set to endorse the new rules approaching in early December, the main message of the regulator’s analysis is that the impact on banks’ total capital requirements will be less pronounced except in exceptional cases.

Excluding the bank with the “largest value of market risk-weighted assets” in the sample, the higher market-risk capital charges translate to a 2.3 percent overall capital-requirement gain, the regulator said. The study doesn’t identify the bank.

Similarly, the capital that has to be set aside for market risk in the sample would be 74 percent higher than what it is now, well below the industry’s estimate. Yet it will be lower for a third of the banks, and the median bank’s increase is just 18 percent.