Capital relief, FRTB and negative oil

The week on, April 18-24, 2020

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BoE and ECB weigh calls to follow US lead on capital relief

European regulators face pressure to exempt sovereign exposures from the leverage ratio

FRTB comes too late for the Covid crisis

Expected shortfall would stop Basel 2.5 duplicate capital charges, but backtesting still a problem

CME was ill-prepared for negative oil prices, FCMs say

Bourse draws criticism over timing of options model change; delay in sending key margin file

COMMENTARY: Decades of weakness

The Covid-19 pandemic comes at an awkward time for the financial sector – but would any other recent year have been better?

This week, reported on the ways in which the pandemic is stepping on regulatory reform. The planned end of US dollar Libor and its replacement with the Secured Overnight Funding Rate has run up against the Fed’s Covid emergency lending schemes. Delays to non-cleared margin rules, justified by the problems caused by the pandemic, are leaving some firms exasperated at the thought of wasted and duplicated effort. And the changes grouped under the Fundamental Review of the Trading Book are coming too late for the Covid crisis – problems around capital charges still exist.

But before concluding that the pandemic has struck when the financial industry was unfortunately unprepared, it’s worth asking what year would have been any better than this: is there any point in recent history at which the industry was more ready for a shock like this? Since 2007, it has, firstly, been struggling to survive a succession of credit and liquidity shocks, and then wrestling with the extensive and complex regulatory reforms that the crises engendered. And before that, with vast and poorly risk-managed holdings of mortgage-backed derivatives and exposure to the evanescent short-term funding market, the industry was probably even less ready.

Now, admittedly, the Covid pandemic has had consequences far more severe than regulatory stress tests ever anticipated. A pandemic of this scale would inevitably have caused global turbulence and stress. Also, many of the associated problems – such as the continuing crash of oil prices – have to do with political ineptitude rather than anything being amiss within the financial or energy sectors.

But what does it say about the industry to conclude, as we probably should, that January 2020 found it more resilient and better prepared than at any time in perhaps the previous 20 years? Six years ago, the London School of Economics’ Charles Goodhart warned that the next emergency was all but inevitable – predicting a 2025 crisis, but warning that “political mishandling, not a financial or economic process” could bring one on sooner, and that regulatory reform would not prevent it.

Now, the next several years may be spent recovering from the present crisis – and introducing further reforms in turn. Can the financial industry, or indeed any industry, really spend decades in a state of perpetual crisis?


Top US banks’ estimated loan losses for Q1 2020 overshot their projections for the 2019 round of the Comprehensive Capital Analysis and Review stress test, Risk Quantum analysis shows. JP Morgan announced provisions for credit losses of $8.3 billion for Q1 2020, reflecting the deterioration of its loan book due to the coronavirus crisis. Under the most recent Federal Reserve stress tests, the bank estimated it would take $38.6 billion of loan losses over the nine-quarter horizon of the toughest Fed scenario – an average of $4.3 billion each quarter.



“With less than 20 months until Libor becomes unavailable or unusable – and FCA acknowledgement that a degraded form of Libor should be avoided – the impact of Covid-19 probably increases the likelihood that consensus will be reached to identify a supplemental dynamic credit spread for SOFR [and it] becomes more widely adopted than previously anticipated, as Covid-19 has offered a stark reminder that the Libor vs SOFR basis will widen in times of market stress” – Marcus Burnett, SOFR Academy

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