Replacing Libor, FSB and haircut models

LIBOR REPLACEMENT comes with baggage

FSB could lose grip on international regulation

HAIRCUT MODELLING: the bald truth

COMMENTARY: Insurgent world

Born in April 2009, in the aftermath of the financial crisis, the Financial Stability Board (FSB) is now facing the toughest challenge of its eight-year life. The crisis made the need for a new focus on systemic risk starkly clear. The FSB rose from the ashes of the Financial Stability Forum – now acknowledged to have failed to act on known risks – and in the same response the European Systemic Risk Board and the US Financial Services Oversight Council were set up. At the time, this raised concerns that too many systemic risk bodies could end up pulling regulation in different directions. But the worry now is that the FSB’s fairly successful efforts towards a global regulatory consensus are going to be undermined, and that nations carving their own paths of financial regulation will lead to a renewed race to the bottom, weakening the dykes against another global crisis.

There are a couple of reasons why this could happen now. First, it’s almost time for another crisis. Ten years have passed since the failure of two Bear Stearns hedge funds heralded the onset of crisis in US subprime mortgage markets; long enough for the memory to fade, since it did after the 1998 and 1987 crises, as corporate and governmental experience is eroded by personnel churn and retirement. It should be noted that only one G20 leader from 2009, German chancellor Angela Merkel, is still in the post. The rest – where local politics permits – have been replaced by members of an opposing party. As memory fades, the argument that over-ambitious regulators are crippling banks grows more credible.

The second reason is due to a change in political climate. It’s a popular view in international relations that countries can be divided into status quo and insurgent. Status quo nations include those currently holding most power and that gain from things staying more or less as they are. Insurgents are up-and-coming nations that believe they are being unfairly shut out and want to challenge that.

What’s most striking about 2017 is even countries that should be firmly on the side of the status quo have started to act like insurgents. The UK and the US have variously complained the existing structure of international affairs (the UN, EU, Nato, WTO and so on) is unjustly biased against them.

And so, the US Treasury has begun a comprehensive review of the country’s prudential and financial market regulations, as requested by President Trump, and the UK vote for Brexit has raised questions around whether the British government will choose to create a new regulatory regime separate from the EU. There’s some justice to their concerns – rules intended to keep global banks from crippling the world economy again may legitimately be too onerous for local banks that are small enough to fail. Asian nations, which have a better claim to insurgency at least as far as financial regulation is concerned are, meanwhile, worried they may be caught in the crossfire.

The FSB could be left with few allies on the status quo side – explaining why it has embarked on a bold attempt to cement its regulatory consensus with a broad evalution of post-crisis regulation. In a newly insurgent world, it will have its work cut out.

STAT OF THE WEEK

The Risk.net Broker Rankings 2017 survey of more than 200 bank traders found 27.8% of respondents have reduced their broker fees by more than 20% over the past three years, while 17% reported drops of 10–19%.

QUOTE OF THE WEEK

Physical commodity trading is not going to become simpler, nor will the need to master its tacit knowledge diminish. The unique needs of a specialised few will remain, defying assimilation by automation, and guaranteeing a market. Voice broking, with its access to tacit knowledge and ability to transcend the limitations of trading technology, will remain a critical element of a hedging strategy – Mark Earthey, Maitland Energy Consulting