The Basel Committee trading book proposals
Tricumen today publishes its initial analysis of the Basel Committee on Banking Stability’s trading book proposals:
- Our initial analysis of the Basel Committee’s 3-May-12 consultative document suggests that the most stringent application of all proposals could increase risk-weighted assets (RWA) at CIB units of banks we cover by as much as 23%.
- We approve of ‘trading evidence’-based boundary and stressed calibration proposals. The proposals on liquidity risk modelling, however, appear overly complex and could introduce feedback that would lead to chaotic behaviour during a crisis.
- While some options for ‘regulatory arbitrage’ would be closed, tight(er) focus on the composition of banking and trading books could create a market worth $800m as banks seek to restructure trading risks with financial institutions that have greater capacity to manage them.
- Many of the proposals are well thought out, but the framework still focuses on individual banks rather than the overall financial markets ‘ecosystem’. The value of monitoring daily P&L trends is also overlooked. We regard both these omissions as flaws.
- Data from the Committee exposes the fallacy of the ‘Volcker Rule’ as prop trading is shown to have been responsible for less than 4% of losses during the 2007-09 crisis.