Proposals to beef up bank capital and liquidity regulation are tougher than expected. They could force banks to simplify their businesses

By Melvyn Westlake

Bankers, lawyers and analysts wrestling with the implications of the extensive pre-Christmas package of bank capital and liquidity reforms unveiled by Basel Committee regulators have been taken aback by what is being described as the “surprisingly harsh,” “onerous” and even “punitive” nature of the proposals.   More>>>

Panel probing causes of 2008 banking crash is told better regulation could have prevented problems. Bankers show little contrition

by Nick Paraskeva

Top bankers are claiming that some of the blame for America's biggest financial crisis since the Great Cepression rests with the regulatory system. Giving testimony at the first hearing of the bipartisan Commission looking into the causes of the 2008 banking debacle, heads of some of the country's biggest banks suggested that better regulation could have helped prevent the crisis. And, they argued against regulatory over-reaction.   More>>>

Moves by FDIC to write new rules for securitised products seems to jump the gun. Washington regulators divided

By Melvyn Westlake

One of the most controversial, yet least developed parts of the Basel Committee’s December 17 reform proposals concerns measures to reduce the procyclicality of the financial system. As demonstrated by the 2007-09 financial crisis, booms and busts can be amplified both by the actions of market participants and the effect of systemic factors, including accounting standards, margining practices, the build up of leverage and the adoption of the risk-based Basel II capital adequacy framework.

Two new ratios are proposed to strengthen bank liquidity. But questions remain over cost and composition of the buffers

A key benefit of the Basel Committee’s proposal to strengthen capital requirements for counterparty credit risk (CCR) is that it will also provide a powerful mechanism to induce banks active in over-the-counter derivatives markets to clear as many deals as possible through central counterparties. It has become a major policy objective among regulators in both the EU and US to ensure as high a proportion as possible of over-the-counter (OTC) derivatives transactions become standardised, cleared through multilateral arrangements and traded on exchanges. Incentives for financial firms using central counterparties are being considered on both sides of the Atlantic, while firms undertaking customised, bilaterally cleared transactions are threatened with higher capital charges.

A tsunami wave of new regulation is heading towards the financial sector in the wake of the global crisis, one top international regulator has famously said, and 2010 is the year when the wave starts hitting the shore. Below is a diary of the implementation dates, events, meetings, deadlines and timelines that will mark the progress of the racing wave. For many of the key regulatory developments there is no precise date, only an aspirational one such as “by the middle of the year” or “by the end of 2010”.

TOKYO – Japan’s Financial Services Agency is beginning a public consultation on a range of new financial regulations that it is considering submitting to the parliament – the Diet – early in 2010. The areas where action is being considered were set out in a paper* issued for comment in mid-December. They include: regulation of over-the-counter (OTC) derivative transactions; regulation of hedge funds; strengthening of securities clearing and settlements systems; investor protection; consolidated regulation for securities firms; and reporting of ‘short selling.’

LONDON – Amid the furore over bankers’ 2010 bonuses, the Bank of England is telling banks that they should not only take advantage of current favourable market conditions to raise new capital, but also conserve capital by reducing staff costs and cutting dividends. While it is not yet clear by how much base capital might need to increase as a consequence of all the new regulatory requirements now in the pipeline, it is likely to be “significant,” the Bank warns in its latest Financial Stability Report, published in mid-December.

£70 billion ($113.7billion)over the next five years, the central bank calculates. This would boost core Tier 1 ratios by 100 basis points over the same period, it says.    More>>>

BASEL – Insurance supervisors will continue to exercise “macroprudential surveillance” of the global reinsurance market, although the industry has shown a robustness and resilience that’s contributed to the overall stability of insurance markets.

MANAMA – Regulators need to consider whether the use of off-balance sheet special purpose vehicles in Islamic finance gives rise to the same lack of transparency that occurred with off-balance sheet structured investment vehicles (SIVs) in conventional finance, a leading Middle East central banker said in mid-December.

WASHINGTON – Moves by US regulators to limit speculation in energy futures, awaited with mixed feelings by non-US exchanges since last summer, appeared at first sight to be less draconian than many had feared.