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Capital and Prudential Standards Blog

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Definition of High-Quality Liquid Assets: U.S. LCR Proposal vs. European Banking Authority Recommendations

We have prepared a high-level comparison of (1) the definition of high-quality liquid assets in the U.S. liquidity coverage ratio (LCR) proposal and (2) the assets found to be of extremely high liquidity and credit quality (extremely HQLAs) and of high liquidity and credit quality (HQLAs) in the European Banking Authority’s recent report on the uniform definitions of extremely HQLAs and HQLAs.  Pursuant to CRD IV, the European Commission will consider the European Banking Authority’s report for purposes of introducing a detailed and harmonized LCR requirement in the EU.…  Read More

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Federal Reserve Issues Guidance to Large Financial Institutions on Managing Foreign Exchange Settlement Risks for Physically Settled Transactions

Today, the Federal Reserve issued a Supervision and Regulation letter (SR letter) regarding the Basel Committee’s February 2013 guidance for managing risks associated with the settlement of foreign exchange transactions.  The Basel Committee’s guidance sets forth seven guidelines for managing foreign exchange transaction settlement risks.  Our earlier blog post on the Basel Committee’s guidance is available here.  The Federal Reserve stated that large financial institutions subject to the SR letter should apply the Basel Committee’s seven guidelines to their foreign exchange activities. …  Read More

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Federal Reserve Advises Large Banking Organizations to Carefully Evaluate Certain Risk-Transfer Transactions

Today, the Federal Reserve issued a Supervision and Regulation letter (SR letter) entitled Risk Transfer Considerations When Assessing Capital Adequacy – Supplemental Guidance on Consolidated Supervision Framework for Large Financial Institutions.

The SR letter applies to U.S. bank holding companies and savings and loan holding companies with consolidated assets of $50 billion or more as well as foreign banking organizations with combined assets of U.S. operations of $50 billion or more (collectively, “large banking organizations”).

The purpose of the SR letter is to provide guidance on how certain risk transfer transactions affect assessments of capital adequacy at large banking organizations. …  Read More

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European Banking Authority Publishes Reports on Liquidity Coverage Ratio

Today, pursuant to CRD IV, the European Banking Authority (EBA) published two reports on the liquidity coverage ratio (LCR).  The first report concerns the appropriate uniform definitions of extremely high quality liquid assets (extremely HQLAs) and high quality liquid assets (HQLAs) and operational requirements for liquid assets.  The second report assesses the impact of an LCR requirement in the EU.  The two reports provide the European Commission with specific recommendations for the purpose of its forthcoming delegated act setting forth a uniform LCR requirement in the EU.…  Read More

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Basel Committee Issues Second Proposal on Risk-Based Capital Requirements for Securitization

Today, the Basel Committee issued a second proposal to revise the risk-based capital requirements for securitization exposures.  In developing the proposal, the Basel Committee took into account comments received on its first proposal and the results of a quantitative impact study (QIS).

Compared with the Basel Committee’s first proposal, the major changes in the second proposal relate to the hierarchy of approaches for securitization exposures and the calibration of capital requirements.

Proposed hierarchy of approaches.  The Basel Committee proposes the following hierarchy of approaches for determining the capital requirement for securitization exposures:

  1. Where banks have the capacity and supervisory approval to do so, they may use an internal ratings-based approach to determine the capital requirement based on the internal ratings based approach capital charge for the underlying pool of exposures, including expected losses.
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Basel Committee Issues Final Capital Standards for Equity Investments in Funds

Today, the Basel Committee finalized its revised risk-based capital framework for a bank’s equity investments in funds, which was proposed in July 2013.  The revised framework includes three approaches for calculating risk-based capital requirements for equity investments in funds (hierarchy of approaches), which are in decreasing order of risk-sensitivity.

Scope of Application:  The revised framework is applicable to banks’ equity investments in all types of funds that are held in their banking book, including off-balance sheet exposures (e.g., unfunded commitments to subscribe to a fund’s future capital calls).  …  Read More

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