I’m Sorry for What I Said When I Was Worried About Systemic Risk
FRG | Financial Risk Group
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A good and true apology* is hard to come by. This week, however, Team Regulator gave it a try.
?We have reported on the US proposals for the Basel III endgame and the G-SIB surcharge many times before so here’s an ultra-short recap:?
Though the re-proposal is still to be re-published, Michael Barr of the Federal Reserve (and the architect of the props) floated the most important re-treats in a speech this week.
The proposed rule to include banks, that have $100BN-$250BN in assets, is off the table. What stays on the table is that these banks have to recognize unrealized gains and losses on securities in their regulatory capital. (Hello, SVB!)
Under credit risk, the proposed increases to risk weights for mortgages, some credit and charge cards, as well as low-risk corporate exposures will also go away.
Under operational risk, the suggestion to adjust the charge to past operational losses is out, presumably meaning that Team Regulator trusts banks have learned the lessons of the past and won’t keep dinging them for it.
And instead of saying that all lines of business carry the same operational risk, it will be recognized that fee-based activities—investment management—has had significantly less loss (relative to income) than other LOBs.
Under market risk, banks will get a longer—multiyear—period to implement tests that measure the performance of their internal models.
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Team Regulator still maintains that large banks ($250BN+ in assets and Globally Systemically Important Banks (G-SIBs)) should have the strictest capital requirements because they pose the greatest systemic risk.
However, they do acknowledge that the biggies were not the riskiest ones in the latest round of bank failures. It was the ones that were growing (too) fast. (Hello again, SVB!) ?????????
Team Regulator thanks Team Bank for pointing that out and suggests that the G-SIB surcharge–what they have to keep extra for being big—is adjusted for economic growth and inflation so that G-SIBs “just” growing at the rate of the economy aren’t unfairly punished.
?All in all, a valiant attempt at saying “Sorry, we might have overreacted” with dignity. And thus, we get a re-do, just in time for the holidays.
?*For the recipe for a genuine apology, I recommend Dr. Harriet Lerner’s book Why Won’t You Apologize? and her conversation with Brené Brown on the Unlocking Us podcast in 2020.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/ .