IM split, Sonia choices and non-bank oversight gaps

IM big bang split confirmed with new $50bn threshold

Addition of sixth compliance phase looks set to slash September 2020 in-scope entities by more than half

Sonia users face three-way choice in term rate

Trio of rival forward-looking versions of sterling Libor successor set to be available

Gaps emerge in US plan to regulate non-bank systemic risk

Former regulators say FSOC may struggle to measure systemic risk in repo, loan markets

COMMENTARY: Someone to watch over me

The US Financial Stability Oversight Council’s proposed shift from entity-based to activities-based assessment of non-banks’ riskiness has left many observers scratching their heads. In theory, it could be a valid way of identifying areas likely to threaten the stability of the financial system, but detractors say putting it into practice will be a messy process likely to leave the industry worse off.

This week, we take a look at how activities-based regulation would work in practice, and there are a lot of warning signs.

We wrote about the proposal back in April, focusing on it as a win for insurers and asset managers who deplored the previous approach. Moving to activities-based oversight would make it much harder to class them as systemically important, a status they have long been keen to avoid or discard, because the uncertain benefit of a possible bailout in times of trouble isn’t outweighed by the very real additional compliance costs.

No country is immune from bureaucratic bloat (Parkinson’s Law is universal), but it seems particularly bad in the US. Notoriously, the US Navy not only has its own air force, but also its own army, which in turn has its own separate air force. Most countries have one or two intelligence agencies; the US has at least 18, that we know about. And its financial regulatory system is similarly ramified; US banks come under the eye of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Commodity Futures Trading Commission (if they deal in derivatives), the Financial Industry Regulatory Authority, and any number of state-level regulators. 

This didn’t make supervision any easier even 10 years ago, when the now-merged Office of Thrift Supervision was seen as the soft option by regulator-shopping mortgage lenders. Moving to an untested activities-based approach will add new problems, detractors claim. Monitoring risky activities will require constant cooperation, and involve data that may not currently even be collected, and it also represents a hugely demanding analytic task. The new system may see firms designated as systemically important only once they are already in difficulties; useless for financial stability purposes, and possibly even exacerbating the problem.

With systemic risk indicators rising, a lot is riding on the US’s ability to get its prickly and semi-detached regulators to work far more closely together. The US has had its longest period of economic growth in history since the crisis, but now the cycle is slowing, and the financial oversight system will come under stress again – the new model, if it’s introduced soon, will be tested under far from benign conditions.

STAT OF THE WEEK

Model updates and lower regulatory add-ons helped UBS cut market risk-weighted assets by 16% in the second quarter, to their lowest level since Q1 2017. The bank’s market RWAs fell to $10.9 billion at end-June, from $13 billion the quarter prior. Updates to the firm’s risks-not-in-VAR framework led to lower regulatory add-ons, which in turn cut RWA by $1.5 billion. Model updates produced a further saving of $200 million. Model refinements slim UBS market risk RWAs

QUOTE OF THE WEEK

“Libra will not help to bank the unbanked. In reality, if libra becomes popular in developing countries, it will result in runaway inflation, because its issuance is not immunised” – Alexander Lipton