The Basel Committee has agreed that supervisors may allow banks to apply a 0% risk weight to claims on the European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF). The ESM and EFSF will be included in the list of entities receiving a 0% risk weight under the Basel capital framework — paragraph 56 of Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework (June 2006). Claims on the ESM and EFSF will also be included as Level 1 High Quality Liquid Assets (HQLA) under the Basel Committee’s liquidity coverage ratio (LCR) framework — paragraph 50 (c) of Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools (Jan.… Read More
The following chart provides a high-level comparison of the Federal Reserve’s Dodd-Frank stress testing requirements, related reporting requirements and supervisory expectations for (1) large banking organizations (≥$50 billion in total consolidated assets) and (2) mid-size banking organizations (>$10 billion and < $50 billion in total consolidated assets). The comparison chart is based on information contained in a recent Federal Reserve Supervision and Regulation (SR) letter. Our blackline of the U.S. banking agencies’ final vs. proposed Dodd-Frank stress test supervisory guidance for mid-size banking organizations is available here.… Read More
We have prepared a blackline that compares (1) the U.S. banking agencies’ final supervisory guidance regarding annual Dodd-Frank company-run stress tests for banking organizations with $10 billion to $50 billion in total consolidated assets (mid-sized banking organizations) against (2) the July 2013 proposed supervisory guidance.
The European Banking Authority (EBA) has announced key components of the forthcoming 2014 EU stress test that will be conducted on a sample of 124 EU banks covering at least 50% of the national banking sector in each EU Member State. According to the EBA, the EU stress test aims at ensuring consistency and comparability of the outcomes across all sample banks based on common methodologies, scenarios and disclosures.
Key Features of the 2014 EU Bank Stress Test: According to the EBA, the 2014 EU stress test will include the following key features:
Capital Thresholds: A Common Equity Tier 1 (CET1) risk-based capital ratio of 8% will be the capital hurdle rate for the baseline scenario and a CET1 risk-based capital ratio of 5.5% will be the capital hurdle rate for the adverse scenario. … Read More
Today, the Basel Committee published a paper that discusses four fundamental components of a sound capital planning process: (1) internal control and governance; (2) capital policy and sufficient risk capture; (3) forward-looking view through stress testing; and (4) management framework for preserving capital.
The Basel Committee stated that its paper does not set forth new capital planning guidance. Rather, it presents sound practices observed at some banks, which the Basel Committee believes can foster overall improvement in banks’ capital planning processes. … Read More
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