Machine learning, leverage ratios and a transatlantic dispute

The week on Risk.net, July 21-27, 2018

Leverage ratio redux: the fallout from French bank court win

EU member states could seek to benefit from exclusion of state-backed deposits from leverage ratio

Oversight row could cut EU firms off from US CCPs - CFTC

EU’s planned post-Brexit CCP reforms “irreconcilable” with US rules, says Giancarlo

GDPR uncertainty could spell trouble for machine learning

Advisers warn of discrepancy in advice to regulators over automated decision-making

 

COMMENTARY: The borders go up

At the start of the year, the World Economic Forum warned of a new threat in its 2018 Global Risks Report – the rise of nationalism. “The world has moved into a new and unsettling geopolitical phase,” the report’s authors wrote. “Multilateral rules-based approaches have been fraying. Re-establishing the state as the primary locus of power and legitimacy has become an increasingly attractive strategy for many countries, but one that leaves many smaller states squeezed as the geopolitical sands shift. There is currently no sign that norms and institutions exist towards which the world’s major powers might converge.”

That’s bad news for everyone, not just the smaller states, which (as the WEF noted) rely on international institutions for their prosperity and, in some cases, their survival. Mainstays of the postwar international order such as Nato are now coming under threat from the new nationalism. And the growing number of disputes over international financial regulation shows this sector hasn’t been immune from the change in atmosphere.

US Commodity Futures Trading Commission (CFTC) chairman Chris Giancarlo locked horns with the EU this week, arguing that EU proposals for supervising third-country central counterparties (CCPs), intended to keep tabs on UK CCPs after Brexit, would tear up an equivalence agreement between the EU and the US and force US companies to comply with EU law and inspections. He’s even argued the EU’s proposal would be “unconstitutional” – an extremely sensitive issue in the US, and a signal that the US side is unlikely to compromise. He also adds that the EU does not bargain from a strong position – its financial institutions need access to US CCPs in order to trade products such as dollar interest rate futures.

The EU’s move is a response to Brexit, of course – the equivalence agreement was signed in early 2016, before the UK’s referendum went ahead. And the combination of Brexit with White House scepticism of international rules and alliances make a particularly toxic mix. But Brexit’s impact on markets will be significant elsewhere as well, with uncertainty continuing over the UK’s future in EU financial markets and the prospects for a pan-EU capital market – and growing risks of regulatory arbitrage.

On a macroeconomic level, too, the US continues to threaten tariffs in all directions, and may continue to expand its use of sanctions as well after unilaterally re-imposing them on Iran earlier this year. Both moves will mean huge new exposures to political risks for banks in the EU and elsewhere, and that does not bode well for a climate of mutual recognition and co-operation. The positive impact of the EU’s Mifid rules on regulatory climates in Asia seems to be a rare bright spot in an increasingly stormy sky.

 

STAT OF THE WEEK

UBS cut market risk-weighted assets (RWAs) almost in half during the second quarter, to Sfr12.4 billion ($12.5 billion) from Sfr22.4 billion reported at end-March. The Swiss lender attributed the drop to lower value-at-risk levels and a smaller asset portfolio.

 

QUOTE OF THE WEEK

“You can continue to fix old [electricity] infrastructure, but there is a limit to how many times you can do that. And when the system is under stress – which doesn’t happen every day – but when it does and is relying on old infrastructure, it’s just a risky way to do things. We know renewable energy, demand response and batteries are cheaper [than traditional peaking power], and we know all of these technologies work. We just need to make a decision to implement them and not continue to rely on the old system, which is cheaper in the short term, but not in the long term or potentially even in the medium term” – Yoav Zingher, Kiwi Power
 

Further reading

• Risk management

Banks call for revamped G-Sib surcharge

• 27 Jul 2018

• Regulation

Banks still face risk of Fed disapproval on exposure limits

• 27 Jul 2018

• Markets

Industry seeks smaller ‘big bang’ for margin

• 26 Jul 2018

• Regulation

Hosting the world: HKMA on cross-border bank resolution

• 25 Jul 2018

• Risk Quantum

VM switch shrinks Nomura's balance sheet

• 26 Jul 2018

• Regulation

ECB mulls response to French leverage ratio exemption

• 26 Jul 2018