The industry hopes the impact study will lead to a rewrite of proposed new rules on capital, liquidity and leverage. Banks have until tomorrow to submit a 21-page, 3,000-row spreadsheet to the Basel Committee on Banking Supervision – and believe the results will cause a major rethink of rules the Committee proposed last December, or at least persuade it a fresh round of consultation is needed. "Now we've got the results there's a conviction throughout the bank that the proposals don't make sense and will therefore have to change. The rules as they stand are so extreme this can't possibly be where they'll come out," says a senior New York-based risk manager with one large US bank. The spreadsheets are part of an exercise called a Quantitative Impact Study (QIS) and ask banks to provide comprehensive information on how the Basel Committee's proposals on capital, liquidity and leverage would affect them. Bankers involved in the QIS say the calculations are spitting out unexpectedly large numbers, notably for the credit valuation adjustment (CVA) charge, which would require banks to hold capital to cover the market value of their counterparty exposures. In the CVA worksheet of the QIS, bankers were required to compute four different scenarios, plugging in different factors for each scenario. The results vary by bank, from scary to horrifying. One French banker said the figures obtained would mean an additional capital charge almost as big as all the other proposed measures put together, and his findings are widely shared. "Given the impact estimates, the CVA charge looks unworkable in its current form. The industry is certainly of the view that it has been poorly designed and mis-calibrated, and without material change will be disruptive to trading activities," says Andrew Cross, a managing director in the risk division at Credit Suisse in London. Other banks say the QIS has highlighted problems with the proposed leverage ratio and liquidity rules. "Under the regulations, banks are going to leap from a leverage ratio of 15 or 20 to one, to a ratio of 50, 60, 70 to one – that's how they're going to look. But that is only because the proposal throws everything in on a gross basis, from derivatives to undrawn credit card lines. Those types of things really create – arithmetically – huge problems," says the US bank's risk manager. Banks have already registered their criticisms during the comment period, which ended on April 16, but it is the QIS that will shape the final rules, says Credit Suisse's Cross. "There is a lot of disquiet in the industry about the current shape of the proposals, but the dialogue with regulators is important to make sure the right adjustments are made to the framework. I don't think some of the qualitative commentary made so far will be as influential as the QIS analysis, where problems should be sized more precisely and the root of real issues should be clearer." Hitting the QIS deadline has been a Herculean task: dozens of staff have been involved since January, says the US bank's risk manager, putting in "hours upon hours upon hours – it's been a huge resource commitment". And regulators now face what looks – even to them – like an impossible mission. They have promised to use the QIS results to calibrate their proposals and hope to deliver a final package to leaders of the Group of 20 countries in November. "One of the biggest issues is the time schedule for doing everything – there's quite a bit of supervisory fatigue because there's just so much that has to be done and the time schedule is so short. And the proposals are complicated, they have many implications and a lot of potential for adverse consequences," one US-based regulator and senior committee member tells Risk. Given the numbers the QIS is expected to produce once it is collated, many bankers hope and believe the exercise will lead regulators to ask the G-20 to delay both the calibration and the implementation, allowing time to properly rework the proposals and submit them to a further round of consultation. The May issue of Risk will include a feature looking in detail at the early findings of the QIS....
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