Trump reforms, euro clearing and FRTB

TRUMP REFORMS dilute banking rules

EURO CLEARING relocation proposed

FRTB could hit syndicated loans

COMMENTARY: Less stress, more angst

The US was accused this week of attempting to water down banking regulation.

A recommendation by the US Treasury to dilute the Federal Reserve’s annual stress-testing programme would return bank oversight to the “bad old days”, when the supervisor had less power to force banks to improve their risk management, according to critics. They argue the Fed should not be neutered, and that it needs tough sanctions that can hurt banks through their share prices.

Under the proposals, the Fed would conduct the Comprehensive Capital Analysis and Review every two years instead of annually, and it could not fail a bank on qualitative grounds alone.

The recommendation surfaced in a 147-page report on regulatory reforms to the US financial system sought by President Donald Trump’s administration.

The same document proposed to bring prudential regulation of US banks into line with existing global standards – largely ending the country’s practice of gold-plating rules agreed at international level. Bankers claim a delay to the implementation of new market risk rules and the net stable funding ratio will allow time for recalibration, rather than signalling the US will stall on implementation altogether. But the proposed exemption of US Treasury bonds from the leverage ratio represents a major departure from international standards, and this could cause difficulties in the final round of Basel negotiations.

Meanwhile, if the recommendations are adopted by prudential regulators, the US repo market could receive a liquidity boost. Cash on deposit with central banks, US Treasuries, and initial margin for centrally cleared derivatives would be removed from the calculation of a bank’s leverage exposure in the supplementary leverage ratio (SLR) and the enhanced SLR. But the move would undermine new clearing services that aim to shore up the market, and would see the US depart from internationally agreed standards.

Passing legislation to enact the recommendations, however, is likely to be “complicated”, admits Republican senator Mike Crapo, chair of the Senate Committee on Banking, Housing and Urban Affairs. Around a fifth of the recommendations are estimated to require legislative change and Democrats are in no mood to support their Republican counterparts.

STAT OF THE WEEK

The average bank employs more quants now than in 2007. One chief front-office quant at a major US bank says his team – which has roughly doubled in size since 2007 – makes up one-third of the bank’s total quant workforce of more than 1,000. For other banks, the numbers differ. The head of quant analytics at one large European bank says his team’s size is 400; a similarly sized peer says closer to 300 – though he currently feels under-resourced – while a major dealer with a smaller markets business puts the total closer to 200

QUOTE OF THE WEEK

“An attempt to frighten politicians” – One of LCH’s opponents describes the barrage of statistics from London that estimate the cost of relocating euro clearing.