SMA, CCAR and structured notes

SMA brings more losers than winners, study says

CCAR and the Big Four consultancies

STRUCTURED NOTES saved from TLAC limits

COMMENTARY: Headwinds for the SMA

Opposition is gathering to the Basel Committee's proposed Standardised Measurement Approach, which would sweep away current methods of calculating operational risk capital – including the internal model-based Advanced Measurement Approach – in favour of a single simple method combining a business indicator representing the size of the institution with historical internal loss data. Ditching other AMA inputs – external loss data in particular – and completely abandoning internal models has attracted criticism, but this week we've looked at research that implies some of the complexity of AMA models could be unnecessary: dimensional analysis shows that, scale aside, most types of operational risk loss behave almost exactly the same way.

But there are more serious problems with SMA. An ORX study of 54 banks found that implementing the new rules last year would have meant the banks raising an additional €115 billion ($129 billion) in capital, with the impact most severe among the largest banks.

Defenders of SMA can argue this shows how larger banks – especially AMA banks – were exploiting the flexibility of the older methods to bring capital levels down below where they should be, but whether it is justified or not, this sort of capital increase will be a hard blow for many institutions, especially systemically important ones already facing higher capital demands from other sources.

QUOTE OF THE WEEK

"The LCR is ill-conceived and it's not necessary. Even if you think there is some reason to get the banks to hold more liquidity, the LCR is about as destructive a regulation as you can imagine, especially given the Fed's power in the US to pay interest on reserves." Marvin Goodfriend, professor of economics at Carnegie Mellon University

STAT OF THE WEEK

75% of banks sampled by ORX would have seen a capital increase in 2015 if the Standardised Measurement Approach had been in force, with aggregate Pillar 1 capital rising by €115 billion ($129 billion)

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