{"product_id":"2940012840349","title":"Risk Management News, July 2011","description":"The members of the International Association of Risk and Compliance Professionals (IARCP) are these professionals interested in Sarbanes Oxley, Dodd Frank, Basel ii, Basel iii, Solvency ii and risk management principles derived from laws and regulations.\u003cbr\u003e\u003cbr\u003eWeb: http:\/\/www.risk-compliance-association.com.\u003cbr\u003e\u003cbr\u003eA. Basel III News\u003cbr\u003e\u003cbr\u003eIs it true that investors will lose money because of Basel III?\u003cbr\u003e\u003cbr\u003eIt is true. This is the price we pay because the banking system becomes more resilient. More risks, more profits - do you remember the principle? You cannot make much money in a \"deep, liquid and transparent\" market where you take limited risks.\u003cbr\u003e\u003cbr\u003eIs it that simple? Less profit because of fewer risks?\u003cbr\u003e\u003cbr\u003eThere is a second reason.\u003cbr\u003e\u003cbr\u003eThe objective of the Basel III reforms is to reduce the probability and severity of future crises. So, we will face fewer risks. But this involves costs arising from stronger regulatory capital and liquidity requirements and more intense and intrusive supervision. \u003cbr\u003e\u003cbr\u003eWe will do have \"benefits to the society that will well exceed the costs to individual institutions\", but investors will pay the cost.\u003cbr\u003e\u003cbr\u003eAccording to the Bank for International Settlements (BIS), banks may need to scale back their profit expectations. \u003cbr\u003e\u003cbr\u003eAccording to the annual report of the BIS, we could have lower, more stable returns on equity (ROEs), a key measure of profitability, since bank balance sheets will be less risky.\u003cbr\u003e\u003cbr\u003eThere is a third reason also.\u003cbr\u003e\u003cbr\u003eBasel III makes regulatory arbitrage harder. \u003cbr\u003e\u003cbr\u003eBasel II allowed banks to play more games. Basel II mispriced the risk inherent in securitizations and let banks load up on off-balance-sheet instruments and collateralized debt obligations. Basel III adds a leverage ratio, and capital has to be at least 3% of total assets (TOTAL assets, not risk weighted assets).\u003cbr\u003eYes, Basel III introduces a simple leverage ratio that provides a backstop to the risk-based regime. \u003cbr\u003e\u003cbr\u003eThe supplementary ratio, which is a measure of a bank’s Tier 1 capital as a percentage of its assets plus off-balance sheet exposures and derivatives, will serve as an additional safeguard against attempts to “game” the risk-based requirements, and will mitigate model risk. \u003cbr\u003e\u003cbr\u003eThe packaging and selling of loans is no longer the great way to avoid capital requirements.\u003cbr\u003e\u003cbr\u003eBanks must consolidate positions from all their trading desks and make their trading book compatible with their banking book (a read IT and data management challenge). \u003cbr\u003e\u003cbr\u003eAnother opportunity lost - it will not be that simple for banks to transfer assets out of their banking book into the trading book to get better capital treatment. \u003cbr\u003e\u003cbr\u003eOh, yes, this is going to be a real challenge for US banks that are not currently under the Basel II framework.\u003cbr\u003eThe moral of the story: Forget bank returns that are at the range of 20 percent.\u003cbr\u003e\u003cbr\u003eI was surprised to read that Deutsche Bank AG is targeting a pretax investment bank return of 20 to 25 percent after 2013 (down from 28 percent in 2010). \u003cbr\u003e\u003cbr\u003eDeutsche Bank AG may have to raise additional capital for another reason: Regulators have agreed to make as many as 30 of the world’s largest and systemically important banks hold as much as 2.5 percent more capital than the 7 percent core Tier 1 capital required. \u003cbr\u003e\u003cbr\u003eThis adds to the problem that banks cannot use hybrid capital instruments that are using now, such as contingent convertible bonds, to meet the target. \u003cbr\u003e\u003cbr\u003eHSBC Holdings Plc (HSBA), Bank of America Corp. (BAC), Citigroup, Deutsche Bank, BNP Paribas, JPMorgan Chase \u0026amp; Co. (JPM), Barclays Plc (BARC) and Royal Bank of Scotland Group Plc may be subject to the surcharge of the 2.5 percent. \u003cbr\u003e\u003cbr\u003eUBS AG, Credit Suisse, Goldman Sachs Group Inc. and Societe Generale may be subject to a lower charge of 2 percent.\u003cbr\u003e\u003cbr\u003eThe size of the potential market for contingent convertible bonds (CoCos) in the UK has already shrunk by two thirds, as banks cannot count the instruments as capital cushions, according to an analysis by Bank of America\/Merrill Lynch.\u003cbr\u003eThe U.K.’s Financial Services Authority has asked banks to prepare a “flight path” to put them in compliance with the Basel III capital rules, taking into account dividends, bonuses and stress testing (they must take into account the possibility of another economic recession). \u003cbr\u003e\u003cbr\u003ePaul Tucker, Deputy Governor of the Bank of England, challenges banks and asks them to build up capital ahead of the Basel III requirements (rather than using strong earnings to make payouts to staff and investors).\u003cbr\u003e\u003cbr\u003eIn the States, although major banks try to keep a brave face, they have already challenged Fed Chairman Ben S. Bernanke on whether regulators have gone too far and are slowing economic growth.","brand":"IARCP","offers":[{"title":"Default Title","offer_id":47174418497776,"sku":"2940012840349","price":0.99,"currency_code":"USD","in_stock":true}],"thumbnail_url":"\/\/cdn.shopify.com\/s\/files\/1\/0737\/7593\/9824\/files\/2940012840349_p0.jpg?v=1763573406","url":"https:\/\/shop-qa.barnesandnoble.com\/products\/2940012840349","provider":"Barnes \u0026 Noble (DEV)","version":"1.0","type":"link"}