Banks say new rules will double capital needed to cover securitised debt
Banks will have to double the amount of capital they hold to cover possible default on their pooled-debt under planned new global rules, a number of the sector's world-leaders said today, potentially hampering the EU's drive to boost market-based financing for the economy.
Overall, capital held against trading books will on average have to quadruple, some 28 banks including Citi, Deutsche Bank, Goldman, HSBC, and JP Morgan said in a submission to regulators.
The banks' study challenges statements from global regulators now finalising the rules that most lenders would be largely unaffected by a reform which is key to making the financial system more resilient to market routs.
The Basel Committee of banking supervisors from nearly 30 countries is due to finalise its "fundamental review of the trading book" (FRTB) in December. Banks have submitted data to Basel to quantify the impact of the rules that are likely to come into effect in 2019.
Industry bodies, including the International Swaps and Derivatives Association (ISDA) ran the numbers themselves and say the rules would quadruple how much capital banks must hold against trading books when calculated under the regulators' own "standardised" method.
The amount held against pooled or securitised debt, a security based on a pool of loans such as mortgages, would double - on top of increases that have already been introduced - to well above possible losses under the FRTB, ISDA said.
The European Union has proposed to cut capital charges on "high quality" securitised debt in a bid to revive a market that was tarnished because of its central role in sowing the seeds of the 2007-09 financial crisis.
Banks provide most funding for companies in the EU and the bloc wants to boost the ability of markets such as securitised debt to raise money.
"We're concerned about the impact this will have on market liquidity and various bank business lines," Mark Gheerbrant, head of risk and capital at ISDA, said in a statement.
"And the businesses that will be hardest hit will likely be those most important for the real economy, such as credit to small- and medium-sized entities, securitisation and small cap equities."
Many banks have pulled out of trading in some assets such as commodities as a lower level of business and the cost of tougher regulation make it uneconomic.
Big banks use their own models for calculating capital requirements, which typically mean less capital is needed. But regulators will require them to use the stricter standard approach as well to set a "floor" on capital, irrespective of what the models come up with.
The amount of capital held against trading books had already risen sharply under interim rules known as Basel 2.5.