Basel III

Basel Committee Interim Rules on Bank Exposure to CCPs

On July 25, the Basel Committee issued interim rules as part of Basel III for the capitalization of bank exposures to central counterparties (“CCPs”). The interim rules are intended to create incentives for banks to increase their use of CCPs, while also ensuring that banks’ exposures to CCPs are adequately capitalized. The rules will be effective as of January 2013. Release. Interim Rules.

UK Government White Paper on Banking Reform

On 14 June 2012, HM Treasury and the Department for Business, Innovation and Skills (BIS) published a white paper on banking reform setting out the government’s proposals for implementing the key recommendations of the Independent Commission on Banking (ICB) chaired by Sir John Vickers. White Paper.

Key proposals of the White Paper are:

• Retail banking operations will be ring-fenced, with operations core to consumer and small business services separated from investment banking.

• Those ring-fenced operations will face limits on exposures to other banks – they will only be allowed to carry out tasks like facilitating other institutions’ payments and managing liquidity.

• The biggest banks will hold 17% of risk-weighted assets as primary loss-absorbing capital.

• Bail-in bonds will be used to make creditors cover some of the cost of a bank failing, without a full collapse.

• But depositors will still be protected and will have a senior claim to bondholders, as well as a legal guarantee on deposits up to £85,000.

• Banks must comply with Basel III’s 3% tier one leverage ratio.

The deadline for responses to the White Paper is 6 September 2012 with the Government due to publish a draft bill in the autumn. The Government states in the white paper that it is committed to completing all primary and secondary legislation by the end of this Parliament in May 2015. The deadline for banks to comply with all of the ICB recommendations is 2019.

OCC, Fed and FDIC Proposed Capital Rules

On June 12, the OCC, Fed, and FDIC announced that they are seeking comment on three notices of proposed rulemaking (NPRs) that would revise and replace the agencies’ current capital rules. In the first Basel III NPR, the agencies propose to revise their risk-based and leverage capital requirements consistent with agreements reached by the Basel Committee on Banking Supervision. The second Basel III NPR would revise the agencies’ prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of tangible common equity. In the third capital NPR, the agencies propose to revise and harmonize rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified over recent years, including by incorporating aspects of the Basel II standardized framework, and alternatives to credit ratings, consistent with section 939A of the Dodd-Frank Act. Comments on the three NPRs are requested by September 7. The agencies also announced the finalization of the market risk capital rule that was proposed in 2011, which will be effective on January 1, 2013.  Joint Release.

Fed Proposed Basel III Rules

On June 7, the Fed issued three notices of proposed rulemakings revising: (i) risk-based and leverage capital requirements; (ii) general risk-based capital requirements for determining risk-weighted assets; and (iii) the advanced approaches risk-based capital rule, each of which incorporate certain aspects of Basel III. The proposed rules are to be issued jointly with the FDIC and OCC, which are expected to issue the rules next week. Comments to the proposed rules must be submitted by September 7. Fed Memo. Fed Proposed Rule Risked-based and Leverage Capital Requirements. Fed Proposed Rule Standardized Approach. Fed Proposed Rule Advanced Approaches.

Michael Barnier Reassures the City Over Euro Zone Integration

Michael Barnier, the European commissioner overseeing financial services, has used the opportunity of speaking before an audience in London on 4 November 2011 to highlight the commission’s view on the key areas of progress in the development of European Financial Regulation and to address growing concerns that increased integration within the euro-zone will isolate or penalise EU member states who are not subscribed to the single currency.

The key areas of regulatory development referred to in the speech included:

  • The proposed increase in capital and liquidity requirements in compliance with Basel III;
  • The measures designed to increase transparency within hedge funds;
  • The new rules regarding short selling and credit default swaps;
  • The increased transparency of over the counter derivatives;
  • The revision of the Markets in Financial Instruments Directive (MiFID 2) which will regulate technological developments such as high frequency trading; and
  • New proposals on how to target Market Abuse.

European Commission: Press release (SPEECH/11/721) (4 November 2011).

Fed Report on Credit Ratings

On July 25, pursuant to Section 939A of the Dodd-Frank Act, the Fed published a report identifying instances in which Fed regulations reference or have requirements regarding credit ratings. The report finds that most references to credit ratings occur in the Fed’s capital requirements for state member banks and bank holding companies, and anticipates the removal of these references upon the implementation of recent Basel III international agreements on regulatory capital. Fed Report.

European Commission Capital Requirements Directive Proposal

On July 20, the European Commission issued proposal CRD IV, which would replace the Capital Requirements Directives issued in 2006. The proposal would: (i) require European banks to hold more capital of higher quality, applying the international bank capital standards agreed to under Basel III; (ii) set up a new corporate governance framework; and (iii) compile all applicable legislation in a Single Rule Book for banking regulation. European Commission Release.

Text of Basel III Rules

On December 16, the Basel Committee issued the text of the Basel III rules that present global regulatory standards on bank capital adequacy and liquidity, along with the results of its comprehensive quantitative impact study. Basel Press Release. Basel International Framework for Liquidity Risk. Basel Global Regulatory Framework. Quantitative Impact Study Results.