Stress testing, Simm and non-cleared margin

The week on, December 9–15, 2016

STRESS TESTS causing strain in Europe

SIMM PROBLEMS due in 2017

NON-CLEARED MARGIN – take a trip through history

COMMENTARY: Raising the standard

The Bank of England's (BoE) stress tests were bad enough for many UK banks, with only four of the country's seven largest lenders making it through unscathed at the end of November. But there is more bad news to come. The BoE has warned the institutions it supervises that they should be ready to use International Financial Reporting Standard (IFRS) 9 (although not immediately), including for future credit risk stress scenarios. The full move to IFRS 9 could mean a significant capital hit, as well as transition costs – the UK's banks are believed to be further advanced in the move to IFRS 9 than their counterparts elsewhere in Europe.

And there is still more bad news from the US. In 2017, 12 non-US banks with significant US assets will fall under the Comprehensive Capital Analysis and Review (CCAR) – reputedly the toughest financial stress tests in the world – for the first time. Experts don't expect all 12 to make it through without trouble.

Hard news for the banks, but justified – one of the most important lessons of the financial crisis, backed up by subsequent research, is the speed with which instability can spread across national boundaries. The result in many areas of financial regulation has been that regulators have developed global ambitions. Laws such as the Bribery Act (2010) have extended the reach of enforcement far beyond the shores of the UK itself. The US Foreign Account Tax Compliance Act has done the same, pushing much of the world towards a new normal of international enforcement and co-operation. And post-crisis bodies such as the Financial Stability Board are explicitly intended to bring about this sort of universal approach. The downside, of course, is the cost – and the potential for long international arguments over every change in national regulation.


US regulators meted out a combined $264 million in fines to JP Morgan's Hong Kong unit, JP Morgan Securities (Asia-Pacific) Ltd, for its part in a scheme to corruptly gain advantage in winning business by awarding prestigious jobs to relatives and friends of Chinese government officials – the largest single operational risk loss in November.


"Our future derivatives markets are likely to be marked by deeper liquidity, greater efficiency, and a better ability to distribute risk effectively if European Union firms subject to the EU trading mandate trade at the same venues as US firms subject to US trading mandates. So the prize to be gained from agreeing mutual equivalency is substantial" – Edwin Schooling Latter, head of markets policy at the UK Financial Conduct Authority

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