CCAR, conduct in Asia, and Coen’s departing thoughts

Double jeopardy: CCAR and the countercyclical buffer

Some US regulators want to hike capital while times are good; banks say the Fed’s stress test already does

Q&A: ‘Stop talking about rules’ – Basel’s Coen

The standard-setter’s top staffer is moving on. He wants the industry to do the same

Asia-Pacific banks revise conduct scorecards in culture push

DBS, Maybank and others tweak performance metrics to reward good behaviour over hard sales

COMMENTARY: The risk of a late buffer

We are now in the longest economic expansion in US history. Since the end of the last recession in May 2009, more than 10 years have passed. The previous record was 1991–2001; despite many financial crises elsewhere in the world, the Nineties were good for the US economy.

And so this week Risk.net looks at regulations – both in the US and elsewhere – aimed at stopping the good times from running out of control. Both banks and central counterparties (CCPs) are required to hold buffers aimed at preventing procyclical events. And there are many ways in which this could go wrong: buffers that are too high will discourage clearing (at CCPs) and lending (at banks); buffers that are too low will leave the institution exposed to collapse; buffers that fail to change quickly enough with the economic cycle will end up exacerbating cyclical effects rather than damping them.

And most of these criticisms are being voiced at once. The countercyclical margin buffers imposed by CCPs are too large, some researchers argue – they would allow CCPs to survive market moves far more extreme than anyone has ever seen, and by demanding high-quality collateral they are discouraging clearing in the first place. The CCAR stress-testing requirements put in place after the crisis by the US Fed are said to be taking over the banks, by constraining them to the point that they lose the ability to decide their own strategies – a US Federal Reserve conference this week heard calls for them to be reshaped for ‘peacetime’ operations. And the Fed’s own countercyclical buffer rule is coming under fire from both sides: from banks, who want it removed altogether, and from insiders at the Fed, who believe the buffer should be set higher than its current level of zero.

The Fed’s vice-chair of supervision, Randal Quarles, argues the buffer can stay where it is: other reforms have meant US banks hold plenty of high-quality capital “through the cycle”, he says, and there are no signs the US is outside a “normal risk environment”. His argument is that only when various signs of distress – asset overvaluation, high volumes of business lending and others – have gone outside their normal range should the buffer be activated.

This is a dangerous argument. For one thing, there are serious reasons (demonstrated in a blog post on the Fed site) to believe the other capital reforms have not in fact solved procyclicality; even as the stress scenarios used have grown more severe, the effect has been weaker rather than stronger constraints on bank activity.

For another, it puts a lot of reliance on the Fed’s ability to spot the danger signs early enough. The announcement that the buffer will be switched on will have to come well before the danger materialises, and, in light of Quarles’ position, the markets may well take the announcement as a sign that the next crisis is not only looming but has arrived. His position is that the buffer will only rise above zero once the market has left a “normal risk environment”. That may well be too late.

STAT OF THE WEEK

Deutsche Bank’s plan to jettison a “bad bank” of unwanted assets could shrink the German giant down into the smallest systemic lender in the eurozone. Deutsche’s total leverage exposure would drop 23% to around €985 billion ($1.1 trillion) on its end-2018 level after the planned transfer and unwinding of €288 billion worth of assets in a new capital release unit.

QUOTE OF THE WEEK

“Citi’s clients have called us. But they are not just funds with smaller assets under management and high-frequency trading firms. They are also clients who haven’t been put on the [Citi cull] list but are just looking for a bit more stability than they have” One bank’s head of prime services on the fallout from Citi’s decision to cut its clients.