Central bank governors, top supervisors reach deal over compromise revisions but capital and liquidity package remains largely intact

By Melvyn Westlake

Regulators have agreed several technical but significant revisions to the far-reaching capital and liquidity reform proposals known as Basel III, softening their impact on international banks. Finding a compromise over the revisions has become critical to getting broad agreement to a regulatory reform package that must be completed in time for November’s Seoul summit of leaders from the Group of 20 largest economies.   More>>>

Regulatory agencies move swiftly to implement the historic financial reform law. Administration sees reforms as an example for the world By Nick Paraskeva

With the mid-July signing of the 2,300 page financial reform law by US President Barack Obama, the way is clear for the most intensive period of financial rule-making that America has ever seen.    More>>>

Too-big-to-fail firms may face exposure curbs and surcharges. G20 gives go-ahead to Financial Stability Board approach

The latest regulatory proposal from the Basel Committee, a countercyclical buffer requirement, was foreshadowed back in December when the main package of capital and liquidity reforms was unveiled. But it has taken several more months to flesh out. The consultative paper on this topic was issued by the Committee in mid-July.*

The idea is that banks will apply a capital buffer “add-on” when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk, thus ensuring the banking system has a buffer of capital to protect it against future potential losses.   More>>>

After prolonged wrangling over far-reaching supervision regime, agreement is tantalisingly close. But there is much at stake

By Melvyn Westlake

Chances of a September deal between EU governments and lawmakers over the adoption of a far-reaching regime for European financial supervision appear high, despite entrenched differences that have blocked agreement for months. A deal by early autumn is essential if potentially powerful new supervisory authorities are to start functioning from the beginning of January 2011 as planned.   More>>>

America’s state-based regulatory system hinders recognition of Solvency II equivalence. Transitional measures urged

By David Keefe

An increasingly alarmed European insurance industry is warning that unless the EU allows enough time for the recognition of equivalent regimes in general, there will be disruption for consumers, unlevel playing-fields for insurers and flights of capital from third countries.    More>>>

Solvency II test calibrations ease up a little but is it enough to satisfy the industry, which may face yet another study?

Final specifications for a crucial, industry-wide test of Europe’s upcoming Solvency II insurance regime have not calmed insurer fears that they will be landed with unjustifiably high capital charges.   More>>>

LONDON – Despite widespread scepticism, European officials insist the much-vaunted stress testing of the EU’s 91 largest banks has been conducted to a very rigorous standard. Presenting the results of the four-month exercise in London in late July, Vítor Constâncio, vice-president of the European Central Bank (ECB), described the assumptions and scenarios underlying the stress test as “severe, rigorous and very comprehensive.” The test results show the “resilience of the EU banking sector” and make a “big contribution to financial stability” in Europe, he claimed.

Indeed, EU officials say these stress tests are more severe than those carried out on 19 American banks last year, which helped restore confidence at the height of the financial crisis.    More>>>

PARIS – European supervisors are continuing to push warily towards greater standardisation of the vast over-the-counter (OTC) derivatives market, and shifting a much larger slice of trading on to regulated exchanges. However, the complexities and diversity of this market are obliging supervisors to move cautiously, with a fresh consultation launched in mid-July,* on the scope for both more standardisation and exchange trading.

MUNICH – The proposed Basel III capital and liquidity reforms will oblige the European banking industry to raise additional capital equivalent to 40% to 50% of its current Tier 1 capital base, or some €700 billion ($910 billion), according to new estimates. And, this does not include any further capital requirement associated with a target leverage ratio.

These additional capital costs are one of the key factors behind a predicted 30% fall – 5 percentage points – in the European banking industry’s return on equity in 2012, compared with its long-run average of 15%.   More>>>

LONDON – Regulators should consider very carefully any initiatives aimed at restricting activities in the huge repo business, and avoid unintended damage to a market which plays a key role at the centre of the financial system. This is particularly important given the greater reliance that will be placed on the repo market by regulators and governments in coming years, says an industry White Paper* published in mid-July.

which securities are sold to a buyer against cash, with a simultaneously agreement by the seller to repurchase the same or similar securities in the future. Repos are a key tool in collateral management and widely used to cover ‘short’ positions in the cash market, as well as being important in maintaining liquidity in both debt and derivatives markets.    More>>>

WASHINGTON – The globally coordinated approach to financial reform endorsed by world leaders is threatened by recent national and regional actions, including aspects of the US reform Bill as well as measures taken recently in Europe, the international banking industry warned in late July.

In a letter to the leaders of the Group of Twenty top economies, the influential Institute of International Finance (IIF) says some provisions of the Wall Street Reform Bill signed into law earlier in July will either limit the options of US regulators in international talks, or are at odds with international proposals.    More>>>

LONDON – Global banking regulators’ support for a new approach to accounting for bank loan losses is coupled with worries about the challenges that reforms, as proposed by the key international accounting body, pose for most banks.

The Basel Committee of top banking supervisors has told the International Accounting Standards Board (IASB), the London-based body that sets the International Financial Reporting Standards (IFRS) recognised in more than 100 countries, that it strongly supports reforms that would mean the earlier flagging up of loan problems in bank financial statements.

But in comments on the IASB’s proposals, Basel Committee chairman Nout Wellink said the plans raise “a number of operational challenges for most banks, including the largest internationally active banks.”    More>>>

BASEL – Regulators coordinating global financial reforms have launched a review of the way countries are putting into effect regulators’ recommendations on risk disclosures by participants in volatile financial markets.

The Financial Stability Board (FSB), the body of regulators co-ordinating the implementation of the reforms endorsed by Group of Twenty leading economies, said the review will focus on implementation of the recommendations by the FSB’s 24 member countries and by the major financial institutions in those countries.    More>>>

WASHINGTON – America’s insurers breathed a sigh of relief as passage of the Dodd-Frank Wall Street Reform Act presaged sweeping reforms of financial markets, but left the way insurance is regulated pretty much in tact.

The major innovation is the creation of a Federal Insurance Office that is intended to keep Washington policymakers abreast of developments in the industry and help negotiate international agreements. The Office has little immediate power to interfere with America’s tradition of state-based insurance regulation which is regarded in Europe as a barrier to the recognition of US rules as equivalent to the European Union’s Solvency II framework.   More>>>

PARIS – Carlos Tavares, chairman of the Spanish securities regulatory agency CMVM, becomes chairman of the Committee of European Securities Regulators (CESR) from August 1 but may serve less than the standard two years.

CESR said the election of Tavares in July by its members will help ensure a smooth transition for CESR as it prepares to become the more powerful European Securities and Market Authority (ESMA), one of three new authorities overseeing securities markets, banking and insurance being set up under European Union financial sector reforms (see page 6).    More>>>

WASHINGTON – Although it is critical that a robust, common set of capital and liquidity rules for internationally active banks be adopted globally, there must also be sufficient flexibility to allow the rules to be tailored to national conditions, according to US Federal Reserve governor Daniel Tarullo. He was giving testimony in mid-July before a sub-committee of the powerful Senate Banking Committee. Lawmakers were holding hearings on international cooperation and financial regulatory modernisation.

“It is neither practical nor desirable to negotiate all details of financial regulation internationally. It is important,” Tarullo told lawmakers, “that the US preserves the flexibility to adopt prudential regulations that work best within the American financial and legal systems. Within a common set of agreed-upon global standards, each jurisdiction will want to tailor some of its rules and supervisory practice to national conditions and preferences.”   More>>>