SA-CCR, SOFR lending and model approval

The week on Risk.net, November 21-27, 2020

7 days in 60 seconds 271120

SA-CCR switch clouded by confusion over netting sets

An effort by US regulators to incentivise the switch to SA-CCR may be having the opposite effect

US banks cede to SOFR lending as credit hopes fade

Critics of risk-free rate say dynamic spread will be too late for transition

Fed will start FRTB model approvals for US banks in 2021

Senior official says banks should now be deciding desk structure and readying backtests


COMMENTARY: Long Covid and the banking sector

The onset of Covid-19 is rapid, but the recovery can be slow. From infection to onset of symptoms is typically five days; in another five to seven, those seriously ill will need to be hospitalised; five days after that, the worst-affected may move to intensive care or even on to a ventilator. Two to four weeks after hospitalisation, survivors are generally discharged from hospital.

But that isn’t the end of the story; some Covid patients, even those whose acute illness was not particularly severe, will have symptoms such as shortness of breath, cardiac problems and fatigue that may persist for several months. The reasons why are still unclear – but so-called ‘long Covid’ patients represent an overhang of the pandemic that will continue for months or even years after the virus’s spread has been choked off worldwide.

The financial sector, too, faces a long Covid problem. This week, Risk.net looked at some of the pandemic’s enduring consequences.

With many machine learning investment systems having failed badly, their owners are looking at how their training can be changed, and whether long historical datasets have had their day.

State-backed loan schemes, meanwhile, introduced to keep industry afloat during the crisis, have had a disparate impact on capital varying a great deal from country to country, and there are still fears that weaker EU banks may be underestimating their eventual loan losses.

European banks are also becoming concerned about the return to normal capital adequacy rules – if the leeway given by regulators during the pandemic is withdrawn without warning, they face the prospect of emergency fundraising in a market that may still not be entirely recovered.

A relatively light hand, either by choice or by necessity, on conduct and enforcement may also have stored up undetected or unaddressed problems – likely to surface and cause challenges for banks around the world in the years ahead.


STAT OF THE WEEK

Eurozone banks’ holdings of domestic sovereign debt have increased 19% since the start of the year, the most since 2012. As of Q3 2020, home country debt exposures accounted for 3.5% of their total assets, up from 3.2% at end-2019. The growth is a function of banks buying up large amounts of the debt issued by their host governments to fund their response to the Covid-19 pandemic. If banks keep up the current pace of sovereign bond buying, this asset share could grow 165 basis points to 5.1% by end-2022 – a 48% increase in two years.

 

QUOTE OF THE WEEK

“We should be doing [environmental, social and governance-linked deal-contingent hedges]. We will do them. When there’s client demand for a solution then banks will step up to the plate, so I’m already firing emails about it” – Christopher Wall, Deutsche Bank

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