Margin rules, resolution and the end of QE

The week on, September 22–28, 2018

7 days montage 280918

EBA warns on funding stresses from QE exit

‘Mediterranean’ banks’ reliance on repo funding could be tested by withdrawal of stimulus

Banks will not use NSFR to judge funding risk

Calibration of ratio looks “somewhat insane” when applied to real world, conference hears

Industry calls for 12-fold hike in margin threshold

Request to regulators would permanently exempt almost 1,000 firms from non-cleared margin rules


COMMENTARY: Testing time

Pushback on post-crisis regulation started almost immediately, many focusing on the cost of implementing the higher capital levels and additional layers of oversight intended to prevent another global financial crisis. But the latest criticisms of the post-2008 order this week centred on a different concern: will they actually work?

The Net Stable Funding Ratio (NSFR), rolled out in 2010 as part of the planned Basel III reforms, came under fire on Tuesday – its original intent, to provide assurance that banks’ long-term assets were matched by long-term funding, has been undermined by other competing policy objectives, and the result is, depending on who you ask, inadequate, unreliable or even “somewhat insane”.

The rules on posting margin against non-cleared derivatives transactions were also criticised, with industry lobbying groups calling for an increase in the margin threshold that would exempt almost hundreds of firms from the requirement to post initial margin.

The timing could have been better. It’s only a few days since a single trader managed to blow through two thirds of Nasdaq Commodities’ default fund – as well as all his own margin payments – with a set of bad bets on European electricity futures, so arguing that small traders shouldn’t have to put up initial margin at all can’t have been easy.

Also, one firm pointed out, every participant in a cleared market has to put up margin; so why should there be a threshold at all in the non-cleared market?

Adding to this, regulators have been warning about their ability to save failing banks – the eurozone’s €55 billion Single Resolution Fund may not be enough if a major eurozone bank goes under, according to Gaetan Viallard of the Single Resolution Board.

This is actually a good conversation to be having. The worst consensus for the industry would be that the failure of a major bank is impossible. Fortunately, the lessons of 2008 have not yet been forgotten to this extent. Almost as bad though would be for everyone to believe a major bank could collapse, but the precautions in place would ensure no-one was seriously harmed. A healthy level of fear, uncertainty and doubt is a vital part of financial stability.



The global total of bank equity jumped in the first quarter of the year to $6.1 trillion, 1.5% higher than at the end of 2017



“If you have a large bank failing, and it has already used its high-quality collateral, it no longer has the capacity to go to the European Central Bank for its funding, and the Single Resolution Fund may not be sufficient. There may be a need finally to use some other kind of funding” – Gaetan Viallard, Single Resolution Board

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