Tuesday, June 25, 2024
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HomeInside ViewISDA says US Basel III "endgame" to heighten market risk capital
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ISDA says US Basel III “endgame” to heighten market risk capital

The US Basel III proposal will have a significant negative impact on trading activity and the liquidity and vibrancy of the US capital markets, according to a report by ISDA.

We are to expect adverse effects on derivatives end users, investors, businesses, and consumers should the drafted proposal be implemented.

The US Basel III ‘endgame’ refers to new capital rules proposed by the Fed, the OCC, and the FDIC in July 2023, and focused on the global minimum regulatory capital standards developed by the Basel Committee on Banking Supervision (BCBS).

Market risk capital up by 73%-101%

ISDA and SIFMA conducted a quantitative impact study (QIS) that showed that the market risk portion of the proposal, known as the Fundamental Review of the Trading Book, will result in a substantial increase in market risk capital of between 73% and 101%, depending on the extent to which banks use internal models.

This matters because trading and capital markets activities play a crucial role in the ability of US businesses to raise funds and perform risk management functions, with debt capital markets in the US representing 75% of total financing.

ISDA further explained that, by requiring banks to hold additional capital that is misaligned with levels of risk, the proposal would significantly reduce capital market access for US end users and businesses, restrict the ability of businesses to hedge exposures to changes in commodity prices, and increase the cost of everyday consumer goods, including food and gasoline.

Basel Committee has no enforcing powers

It was the Basel Committee on Banking Supervision (BCBS) that developed global minimum regulatory capital and liquidity standards through a multi-year process involving regulators from participating countries around the world.

The BCBS, however, has no enforcing powers. This means that each jurisdiction transposes those standards into local law or regulation, as applicable.

Although jurisdictions participating in the Basel process generally follow these standards, they may deviate to reflect philosophical differences and national priorities on local markets and economies. However, the US Basel III proposal would impose more stringent requirements than those embodied in the global framework in several areas.

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