Caruana pleased with trading book progress
BARCELONA - The world's top banking regulator is highly satisfied with the progress of work on the treatment of double default and trading book exposures under the complex Basel II upgrade of international bank safety rules.
Basel Committee on Banking Supervision chairman Jaime Caruana reiterated in March that the Committee, the body of senior banking supervisors from North America, Europe and Japan that developed Basel II, plans to issue proposals in April for a six-week comment period. The aim is to finalise the proposals this summer, he told the annual meeting in Barcelona, Spain of the International Swaps and Derivatives Association, the trade body for the privately traded, or over-the-counter (OTC), derivatives industry.
But Caruana said he couldn't comment on the solutions that might be suggested in the forthcoming papers. That's because intensive work continues prior to meetings at the end of March and the beginning of April of the Basel Committee and the technical steering committee of the International Organization of Securities Commissions, the Madrid-based grouping of the world's stock market regulators that's co-operating on the project with the Basel supervisors.
However, as a guiding principle the goal is "to apply Basel II to these exposures in a manner that reflects as best as possible sound practices already in use when those practices appeared to be both prudent and broadly acceptable to many kinds of banks and markets".
Double default relates to the risk of borrower and guarantor both defaulting on the same loan, something that's generally reckoned to be substantially lower than the risk of only one of the parties defaulting. The review of exposures arising from a bank's trading activities covers five areas: the treatment of counterparty credit risk for OTC derivatives, repo-style and securities financing deals; the treatment of double-default effects for hedged transactions; short term maturity adjustment under the internal ratings based approach to measuring credit risk; a limited number of improvements to the current trading book regime; and the design of a specific capital treatment for unsettled and failed transactions.
Caruana, who is also Spain's central bank governor, said he sympathises with the view that the wide range of financial regulations that are currently evolving in parallel represent a drain on the limited resources of firms.
The Basel Committee's main focus in the near future "will be on completing the current work and on implementing Basel II in a sound, consistent and effective manner. This will allow us to digest the framework we have designed".
