French banks, jump-to-default and STS for synthetics

The week on, October 26–November 1, 2019

7 days montage 011119

French banks cry foul over EBA’s 2020 stress-test plan

Assumptions about the cost of household sight deposits are “not plausible”, critics say

LCH to cut jump-to-default margin for cleared CDS

Move could bring margin for cleared CDS closer to bilateral trades, but mismatch remains

Structural snags frustrate STS for synthetics

Curbs on excess spread and collateral stymie route to ‘high-quality’ signifier


COMMENTARY: Strength in numbers

Banks in France are pushing back against a one-size-fits-all policy imposed by their European regulator. In its stress-test methodology, the European Banking Authority measures banks against a funding shock to consumer deposits caused by an increase in interest rates – when in fact such deposits in France pay no interest.

The nub of the matter goes back to a 2004 European Court of Justice case. The court found preventing interest payments to retail depositors impedes free movement of capital within Europe’s single market. At the time, the judgement – repudiating a 1986 French regulation – allowed challenger banks to start paying interest on deposits. Established banks in the country, however, continue to shun the practice.

But because of the ECJ case, French banks cannot claim that zero interest rates are imposed by law, and cannot therefore take advantage of an EBA carve-out for deposits operating under such restrictions.

Sources say the EBA is unlikely to change tack, but that will not silence calls for the regulator to be more flexible in its approach to stress-testing the continent’s banks.

Enforcing the same shock on all banks without distinguishing between products and organisations “doesn’t work”, a stress-testing manager tells, adding that a lobbying effort against the measure is likely.

Elsewhere, collective action is also brewing to tackle the costs associated with model development and validation for stress tests. A group of banks has been incentivised to team up and create a utility that pools data and methodologies necessary for these regulatory examinations.

Banks fork out not insignificant sums to develop proprietary models for stress-testing. The resulting data hardly represents drivers of competitive differentiation for them. Therefore, it should be possible to share the uniform underlying calculations in a standardised format.

The initiative is a promising development for banks. They may need to seek the blessing of the European Central Bank, but it has previously endorsed a similar idea for pooling techniques to model credit risk capital requirements.


HSBC swallowed a $883 million charge to cover future expected credit losses in the third quarter of this year, some of which was in response to the protests rocking Hong Kong – turmoil pushes HSBC’s credit loss charge higher.


“There’s a certain cost associated with having a trading operation. Within a best execution setting, you need to continuously improve, and those improvements might lead to cost reduction, but also might lead to an increase in cost because you need new technology, different technology, more people, different insights, other ways of trading that are more costly but better for your client” – Jan Mark van Mill, head of treasury and trading at APG Asset Management.

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