We've told you that the Basel Committee is the standard setter on bank capital adequacy, and an international institution that could just be called a club of 12 central bankers. It certainly wasn't created by a treaty. Now Basel has proposed some reforms of its members' regulatory structure in the wake of the current unpleasantness. Two notable proposals:
the Committee will ... establish higher capital requirements for certain complex structured credit products, such as so-called "resecuritisations" or CDOs of ABS, which have produced the majority of losses during the recent market turbulence. It will strengthen the capital treatment of liquidity facilities extended to support off-balance sheet vehicles such as ABCP conduits. ....
The Committee will strengthen the capital requirements in the trading book. Global banks' trading assets have grown at double digit rates in recent years, and in some cases represent the majority of a bank's assets. The proportion of complex, less liquid credit products held in the trading book has likewise increased rapidly. The current value-at-risk based treatment for assessing capital for trading book risk does not capture extraordinary events that can affect many such exposures. The Committee, in cooperation with the International Organization of Securities Commissions (IOSCO), therefore is extending the scope of its existing proposed guidelines for "incremental default risk" to include other potential event risks in the trading book. Until this event risk charge is in place (planned for 2010), an interim treatment will be applied for complex securitisations held in the trading book.
So international problems, international solutions. My imprecise thoughts: it isn't so surprising that banks will have to keep more capital on hand if they want to deal in complex structured products and increase their leverage. It's is a bit more surprising that it looks like Basel will be the institution that requires it.
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1. Posted by M.D. Fatwa on April 18, 2008 @ 10:14 | Permalink
Assuming, of course, that the individual Basel members implement these policies. Basel is still a club with no legal or regulatory authority, and with a history of at least one member (i.e., the Fed) going its own way on interpretation.
But, hey, I'd take Basel's word on it more than I would the Financial Stability Forum's. At least Basel's members have the power to implement the policies it proposes. Many of the FSF's lead members (i.e., the U.S. Treasury Dept) don't.
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