Basel III, bond market liquidity and the Risk awards

The week on, December 2–8, 2017

7 Days Dec 8
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Basel III changes set to create big winners and losers

Capital hit for G-Sibs ranges from 28% drop to 43% jump, QIS reveals


State Street uncovers a bond liquidity mystery

Bigger trades are cheaper, research finds – and investor analytics head, Mark McKeon, knows why


Risk Awards 2018: The winners

Morgan Stanley takes top derivatives prize; lifetime award for Xavier Rolet; Citi lands risk management award


COMMENTARY: Disjointed thinking

This week finally saw the publication of long-awaited revisions to Basel III – more than a year after the Committee’s work was due to be signed off by its overseers.

The headline news is a slight overall cut in Tier 1 capital requirements for the largest banks – but that figure hides massive differences from institution to institution – ranging from an increase of 43.4% for one bank to a drop of 27.8% for another – and from jurisdiction to jurisdiction. As predicted before the changes were published, the curbs on the use of internal models have had a far greater impact on European institutions.

For the losers, there will be a capital hit: Basel’s quantitative impact study finds that global systemically important banks will need to raise a combined €27.6 billion ($32.4 billion) of fresh CET1 capital to maintain their ratios above the target level of 7%, which includes a capital conservation buffer of 2.5%. The total capital shortfall for all G-Sibs – including additional Tier 1 and Tier 2 capital and leverage ratio requirements – under the new rules is estimated to be around €90 billion.

The gloomy truth is that this is not so much a final agreement as a firm basis on which the disagreements of the future will be built. Combing through the details of the final package on the day of its release, one practitioner voiced his suspicion that regulators had treated the various elements of the rules like the array of knobs and sliders on a sound mixing desk – nudging them up and down until the output was about right.

“There are these kinds of recalibrations throughout the whole thing. I am sure it has been fine-tuned to give the right output, as opposed to anyone thinking these numbers reflect some sort of bottom-up risk approach,” he groused.



Between September 30 and December 31, 2016, eight global systemically important banks reduced notional amounts of over-the-counter derivative exposures by a cumulative $13.4 trillion. Citi has been most aggressive in reducing its OTC amounts recently, with third-quarter filings from this year revealing the lender cut its exposure by $970 billion, or around 2% of its June 30 notional.



“Barclays and JP Morgan have both been fined for manipulating Libor, foreign exchange and electricity in California. This is indicative of overarching cultural issues. Selling a subsidiary does not remove these cultural issues, and fixing a firm’s culture is a bit like turning an oil tanker” – a European bank’s head of operational risk

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