Citi’s CRO, BNP’s regulatory windfall and a new market correlation

The week on, June 2-8, 2018

7 days montage 080618

Citi’s CRO on the importance of risk sensitivity

Brad Hu talks modelling, CECL and setting risk culture

The special one: a eurozone G-Sib waiver for BNP Paribas

Experts say French bank’s G-Sib buffer could fall to 1%, saving €3 billion in regulatory capital

Buy-side modellers seek ‘Holy Grail’ of investing

When stocks and bonds fell in tandem this year, it sparked a debate about whether a lasting regime shift could be predicted


COMMENTARY: The political game

Several stories this week highlight how European Union banking reforms are becoming a political as well as a financial battleground. A French proposal to exempt intra-EU exposure from the equation used to calculate capital buffers for global systemically important banks (G-Sibs) isn’t based on prudential or market stability concerns; it’s justified as a way to encourage the development of an EU-wide banking union (previous efforts in this direction haven’t always gone well). The proposal would have dropped several banks below the G-Sib threshold altogether. Meanwhile another move to counter this by keeping them in the lowest bracket of G-Sib status meant the proposal would end up conferring substantial capital benefits on exactly one bank, BNP Paribas.

In the unintended consequences category, other regulatory changes, designed to build buffers to eliminate the need for public bailouts, may be set to give larger European lenders a decisive edge over their smaller rivals – it will become tougher to raise capital to fill those buffers, as retail investors are warned off buying subordinated bank debt, and this could be crippling for smaller European banks.

Finally, a leaked proposal has raised suspicions that the EU’s equivalence regime – which allows non-EU firms to operate inside the union as long as their home nation regulations are similar to the EU’s – could be on the way out. Current procedures, the paper’s French authors say, don’t actually confirm equivalence in every area of regulation. It’s been called a bomb shell, and is being seen – probably justly – as part of the continued morass that is the Brexit negotiations, because UK firms would be badly hit by it once the UK leaves the union.

All this could be dismissed as simply part of Bismarck’s sausage-making process (“Laws are like sausages: they cease to inspire respect when you know how they are made”), but it’s also perhaps a sign of the peculiarly fraught political climate in the EU right now. Brexit is only one of many strains on the union’s policymakers: French and German electorates have rejected their own populists, but they have triumphed in Italy, the US and the UK, as well as elsewhere, and in the new political climate, even banking regulations will become battlegrounds on which bitter political disputes are played out.



Inter-dealer credit default swap positions declined from 26% to 5% from the first half of 2010 to end-2017. Outstanding notionals for these trades have also shrunk faster than the overall market, by 87% compared with 72% in the period from mid-2011. The share of dealer positions traded with central counterparties, meanwhile, hit 55% at end-2017, up from 10% in mid-2010.



“The focus is shifting from the measures introduced after the last crisis towards a more business-as-usual framework. While I’ve been on the PRC [Prudential Regulation Committee], we’ve still been in the business of de-risking banks – raising capital standards, increasing liquidity, improving governance standards. The next three years are going to be much more about how prudential regulators manage the challenges of new technology, and the revolution that has been brought about in the banking industry” – Mark Yallop, Bank of England PRC

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