US bank capital experts packing their bags for an August vacation may well have had to ditch the John Grisham in favour of somewhat heavier reading, after US prudential regulators published their keenly-awaited Basel III ‘endgame’ proposals on July 27. But while the 1,000-plus-page notice of proposed rulemaking may lack the thrills and spills of Grisham’s The Pelican Brief, it does contain one or two plot twists and surprises of its own.
Chief among them is the decision to replace the advanced approaches with a new expanded risk-based approach (ERBA) – a methodology that no longer provides banks with the option to use internal models for credit risk, counterparty credit risk and operational risk. The only area where sophisticated banks still have the option to use internal models is market risk. Under the proposed framework, all US banks with total assets of $100 billion or more will have to calculate risk-weighted assets amounts using both the current US standardised approach and the new ERBA and use whichever is higher – an approach that differs from that taken by regulators in other jurisdictions.
The US agencies estimate the new proposals will result in an aggregate 16% increase in common equity tier-one capital requirements for banks, but with the increase falling principally on the largest and most complex banks. That’s despite the roughly 3.7 times increase in capital at US global systemically important banks since the 2008 financial crisis. ISDA plans to run a quantitative impact study to get a more detailed breakdown of how the rules will play out in terms of capital requirements. We’ll also delve into the detail of the proposals during our dedicated capital events in the fourth quarter – the London event on November 30 is already open for registration (isda.org/events) and the New York event on December 12 will open shortly. Spaces will be strictly limited, so make sure you don’t miss out.
Our cover story for this issue is also capital-related – it explores the efforts of ISDA, Deloitte and a group of banks to develop an approach to help assess the impact of climate-related risks on short-dated trading book assets. Having developed a conceptual framework for scenario analysis earlier this year, the next step will be to create a set of scenarios for the trading book – work that is already underway.
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Documents (1) for Green Future – IQ September 2023
Latest
Expanding Legal Agreement Coverage in the CDM
This paper examines the recent extension of the Common Domain Model (CDM)1 to represent two of the most significant, and previously undeveloped, areas of its legal agreement model: umbrella agreements and contract amendments. Umbrella agreements are widely used to document...
ISDA Omnibus Canadian Representation Letter
On September 2, ISDA published the Omnibus Canadian Representation Letter, which combines previously published representation letters drafted to assist firms in compliance with Canadian trade reporting, business conduct, regulatory margin and clearing classification rules. The Omnibus Canadian Letter is designed...
Joint Response on Cross-margining
On August 31, ISDA and FIA submitted a letter to the US Commodity Futures and Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) on the agencies’ joint request for comment on the implementation of portfolio margining and cross-margining...
Accounting for Carbon Credits: Latest Developments
This paper updates and extends the analysis set out in ISDA’s October 2023 paper on accounting for carbon credits. While preserving the original focus on the accounting treatment of voluntary carbon credits (VCCs) and compliance carbon credits (CCCs), it expands...
