RD News 21Dec11

• Fed: Large bank and SIFI rules
• Applies to all US bank holding companies with consolidated assets of $50 billion or more and any nonbank financial firms that may be designated by FSOC as systemically important companies.
• Proposing a number of measures including:
• Risk-based capital and leverage requirements. Firms must develop annual capital plans, conduct stress tests, and maintain adequate capital, including a tier one common risk-based capital ratio greater than 5%, under both expected and stressed conditions. In a second phase, the Board will issue a proposal to implement a risk-based capital surcharge based on the framework and methodology developed by the BCBS.
• Liquidity requirements. Institutions subject to qualitative liquidity risk-management standards generally based on the interagency liquidity risk-management guidance. These standards would require companies to conduct internal liquidity stress tests and set internal quantitative limits to manage liquidity risk. In the second phase, the Board would issue one or more proposals to implement quantitative liquidity requirements based on the Basel III liquidity rules.
• Stress tests. Stress tests of the companies would be conducted annually by the Board using three economic and financial market scenarios. A summary of the results, including company-specific information, would be made public. In addition, the proposal requires companies to conduct one or more company-run stress tests each year and to make a summary of their results public.
• Single-counterparty credit limits. Requirements limit credit exposure of a covered financial firm to a single counterparty as a percentage of the firm's regulatory capital. Credit exposure between the largest financial companies would be subject to a tighter limit.
• Early remediation requirements. A number of triggers for remediation--such as capital levels, stress test results, and risk-management weaknesses--in some cases calibrated to be forward-looking. Required actions could include restrictions on growth, capital distributions, and executive compensation, as well as capital raising or asset sales.

• BCBS: Application of own credit risk adjustments to derivatives - consultative document
• A deterioration in a bank's own creditworthiness can lead to an increase in the bank's common equity as a result of a reduction in the value of its liabilities. Basel III seeks to prevent this.
• Application to fair valued derivatives is not straightforward since their valuations depend on a range of factors other than the bank's own creditworthiness.
• Paper proposes that debit valuation adjustments (DVAs) for over-the-counter derivatives and securities financing transactions should be fully deducted in the calculation of Common Equity Tier 1.

• IMF: The New Economics of Capital Controls Imposed for Prudential Reasons
• Externalities are associated with financial crises because individual market participants do not internalize their contribution to aggregate financial instability when they make their financing decisions.
• As a result they impose externalities in the form of greater financial instability on each other, and the private financing decisions of individuals are distorted towards excessive risk-taking.
• Prudential capital controls can induce private agents to internalize these externalities and thereby increase macroeconomic stability and enhance welfare.
• At a microeconomic level, we need to better understand the breadth of balance sheet effects that occur during episodes of financial amplification and how they relate to macroeconomic phenomena.
• At the level of implementation, more research is needed on what forms of capital controls are most desirable and effective in preventing the buildup of risks that may result in large financial crises.

• K C Chakrabarty (Dep Gov RBI): Ten Commandments for a successful banking career
• Thou shalt:
• manage the people with empathy
• strive to become a knowledge worker
• be accountable for all your work
• do hard work
• develop the right attitude
• attempt to become a pioneer
• develop a professional approach
• be analytical
• be information literate
• avoid complacency during good times and not lose hope during bad times