Contributor: SunGard Viewpoint
Q&A with Mat Newman, vice president, product management, SunGard’s capital markets business
Q: In June the Federal Reserve announced what was called by some a rigorous interpretation of Basel III, the international agreement on higher capital standards for banks. What are three key points that people need to understand about this development?
A: I’m not sure really that the interpretation is particularly onerous in the sense that they haven’t gone the route for example that the Swiss regulators went and piled even more capital on top of the Basel proposals, but I suppose you could argue that it’s rigorous in the sense that they haven’t made too many concessions that the domestic market was lobbying for. So from my point of view, three key factors here are:
- Firstly, that the US is broadly adhering to the original Basel proposals, and that bodes well for international harmonization of the rules. So, as I said, they haven’t given in to any pressure to make exemptions in areas that are particularly heavily used in the US markets – so no special considerations for mortgaging servicing rights and the like.
- The second point though is that they have had to make some changes, and principally this is to stay within the strictures of the Dodd-Frank Act. So one that I’ll share here is divergence on a Dodd-Frank rule that precludes banks from using rating agency information when determining their risk profile. Instead they’ve adopted a sensible approach which is to try to capture the same sorts of risks for example by using OECD risk assessments. And it will be interesting to see how those match up with the ratings agency approach that the rest of the world is using.
- Thirdly, there is still a long way to go. So this is really the start of the process. And there’s still consultation to be had. There are some areas where they have yet to give details on how they are actually going to implement some of the rules. For example the countercyclical buffer, which is currently set at 0% because we’re in an economic downturn, can rise to 2.5% due to macroeconomic conditions, but they haven’t really given any clear guidelines on exactly what those conditions would be or at what rate that buffer might grow. So it’s a good solid start and overall I think it will fit in well with what is going on internationally.