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US Federal Banking Regulators outline Basel III proposal, Fed concludes banking stress test
The Federal Reserve, FDIC and OCC have released the long awaited Basel III endgame proposal. The proposal would increase the amount of capital that banks with at least $100 billion in assets must hold by approximately 16%, with the eight largest banks facing an increase of about 19%. Lenders with between $100 and $250 billion may ultimately see as little as a 5% increase in required capital holdings. In addition to increases in capital requirements, the proposal would require mid-sized banks to include unrealized gains and losses from certain securities in their capital ratios and implement changes to modeling approaches for measuring credit and operational risk. Under the current proposal, large banks would begin to transition to the new framework on July 1, 2025, with full compliance set for July 1, 2028. Comments are due by November 30, 2023.
Separately, the Federal Reserve Board’s stress test demonstrated that large banks are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession. All 23 banks tested remained above their minimum capital requirements during the hypothetical recession.
Australian central bank examines financial stability risks in the non-bank sector
The Reserve Bank of Australia (RBA) has issued a paper that considers the risks that Non-Bank Financial Institutions (NBFIs), including superannuation funds, can pose to financial stability due to their size, complexity and global interconnectedness. The paper considers the vulnerabilities in some NBFIs such as high levels of leverage, liquidity mismatches and weaknesses in risk management practices which have inflicted losses on some NBFI counterparties. While recent episodes of dysfunction such as the ‘dash for cash’ (March 2020), the Archegos collapse (March 2021), the liquidity stress in commodities (March 2022), and UK gilt market stress (September 2022) did not particularly affect Australian markets and institutions, Australian regulators remain focused on the potential future risks posed by the sector.
Turkish Central Bank begins simplification of prudential regime
Turkey’s Central Bank, under new Governor Hafize Gaye Erkan, is easing its security maintenance regulations as its first step to simplifying policies designed to boost Turkish lira savings. The securities maintenance ratio has been lowered to five per cent from ten per cent with immediate effect and has been streamlined to increase the functionality of market mechanisms and strengthen macro financial stability. The easing comes after Turkey’s Treasury and Finance Minister Mehmet Simsek promised a return to “rational” policies.
European legislators reach political agreements on Basel III implementation, central securities depositories and investment funds
European legislators from the Parliament and Council have reached a provisional political agreement on legislation to implement the remaining Basel III banking standards in the European Union (EU). This so-called ‘banking package’ represents a series of wide-ranging amendments to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). Among other issues, this will cover important changes to the areas of credit risk, operational risk, credit valuation adjustment risk and market risk. As part of the reforms, lawmakers have also agreed on a transitional prudential regime for crypto-assets and amendments to improve banks’ management of environmental, social and governance (ESG) risks. The regulation (CRR III) is expected to apply from January 1, 2025, with certain elements of the regulation phasing in over the coming years, and Member States are expected to have until June 30, 2026 to transpose the directive (CRD VI).
In parallel, European legislators have also reached an agreement on reforms to the rules governing central securities depositories under the Central Securities Depositories Regulation (CSDR). CSDs manage the settlement of securities and as such play a key role in Europe’s capital markets ecosystem. The changes are intended to lessen the financial and regulatory burden on CSDs and improve their ability to operate across borders. Specifically, the reforms will simplify the passporting regime, improve cooperation between supervisors, and update the settlement efficiency regime by including preconditions for mandatory buy-ins so that they are only introduced as a last resort.
Finally, European legislators reached a provisional agreement on revisions to the regulatory framework applicable to EU investment funds, the Alternative Investment Fund Managers Directive (AIFMD). The AIFMD review aims to enhance the availability of liquidity management tools, increase transparency on delegation rules and establish a framework for funds that provide credit to companies (‘fund originating loans’).
The three provisional agreements all still need to be confirmed by the Council and the Parliament before becoming final legislation later this year.
South Africa Reserve Bank publishes proposed implementation dates for Basel III
The South Africa Reserve Bank has published proposed implementation dates of selected components of the Basel III banking reforms. The Prudential Authority has proposed July 1, 2025 as the implementation date for the revisions to the internal ratings based approaches for credit risk, operational risk, minimum capital requirements for market risk, and credit valuation adjustment framework.
Indian Central Bank sets capital requirements for operational risk under Basel III
The Reserve Bank of India (RBI) has issued rules on minimum capital requirements under Basel III for operational risk after considering feedback from stakeholders. This will require all specified commercial banks to hold sufficient regulatory capital against their operational risk exposures. The central bank will communicate its effective date of implementation separately.
Hong Kong regulator consults on banking regulation reform
The Hong Kong Monetary Authority (HKMA) has published a public consultation to review the current three-tier structure of the banking system that classifies banks into licensed banks, restricted license banks, deposit-taking companies. Under the HKMA’s proposals, the current three-tier system would become two-tiers with restricted licensed banks and deposit-taking companies becoming second-tier institutions. There will be a five year transition period for existing deposit-taking companies to conform. The consultation runs until September 25, 2023.
US SEC adopts money market fund reforms and amendments to Form PF reporting requirements for large liquidity fund advisers.
The amendments adopted by the SEC will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The amendments will also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress. The rule amendments will become effective 60 days after publication in the Federal Register with a tiered transition period for funds to comply with the amendments. The reporting form amendments will become effective June 11, 2024.
UK FCA sets out results of liquidity management multi-firm review
The UK Financial Conduct Authority (FCA) has published the results of its review into liquidity management within the asset management sector and has concluded that firms need to increase their focus on liquidity risk to avoid potential investor harm. Following its multi-firm review, the FCA has found that:
- The building blocks for effective liquidity management are usually in place but that they often lack coherence and are not always embedded into daily activities;
- Regarding governance, the FCA found that many firms do not sufficiently account for liquidity risk management in their governance oversight arrangements;
- Firms were seen to adopt a wide range of approaches to liquidity stress testing and the assumptions used are not always sufficiently conservative;
- Firms typically had governance and organizational arrangements in place to meet large one-off redemptions but did not have sufficient arrangements in place to oversee cumulative or market-wide redemptions that could have a significant impact on a fund; and
- Wide variations in the application of anti-dilution tools such as swing pricing, which could affect the price investors receive when redeeming.
Alongside the findings, the FCA also published a Dear CEO letter that underlines the regulator’s expectation that chief executives will review their firm’s liquidity management arrangements and make any necessary enhancements. The review comes as the FCA looks to promote competition and enhance liquidity risk practices to strengthen UK wholesale markets and encourage growth in the UK.
UK prudential regulator sketches out a new regulatory regime for insurance firms
The UK Prudential Regulation Authority (PRA) has published for consultation a major set of reforms to the UK Solvency II (‘Solvency UK’) rules to create a new regulatory regime for insurance firms in the UK. Under the proposals, reporting requirements for all firms will be streamlined, internal model assessments will be simplified, and new entry requirements will be eased. The PRA considers the existing requirements to be overly onerous and insufficiently flexible, and is seeking to increase the size threshold above which Solvency UK will apply to firms. The consultation closed on July 31, 2023 for Chapter 11 and September 1, 2023 for Chapters 2-10. The PRA expects to consult on reforms to life insurers in September this year.
Hong Kong insurance industry prepares for implementation of risk-based capital regime
Legislation has been passed in Hong Kong to implement the Risk-based Capital (RBC) regime for the Hong Kong insurance industry. The Insurance Authority plans to begin the work on drafting implementing rules for consultation ahead of the expected implementation in 2024.
Saudi Central Bank issues financial stability report
The Saudi Central Bank (SAMA) issued its Financial Stability Report for 2023, which highlights key local and global economic developments and associated risks as well as the latest developments in the Saudi financial sector. The report covers SAMA’s initiatives to support technological innovations and emerging issues in the financial sector. Despite the global economic challenges in 2022, the Saudi financial sector saw an increase in bank assets and credit. Alongside this, the Saudi banking sector remained well capitalized in 2022, with prudential liquidity ratios well above regulatory requirements. The report also recorded the strong performance of non-financial institutions, with a rebound in insurance companies’ gross written premiums in line with non-oil growth and an increase in finance companies’ total assets in 2022.
US CFTC extends temporary no-action letter regarding certain financial reporting requirements for bank swap dealers
US Commodity Futures Trading Commission’s (CFTC) Market Participants Division (MPD) announced it issued a temporary no-action letter extending CFTC Staff Letter No. 21-18 concerning financial reporting obligations for swap dealers (SDs) subject to capital requirements of a prudential regulator (bank SDs) under the CFTC’s SD financial reporting rules. Through CFTC Staff Letter 23-11, MPD is extending a no-action position to bank SDs that report utilizing certain alternative forms, filing deadlines, and/or reporting standards otherwise applicable to them by their prudential or home country regulators, in lieu of complying with the CFTC’s financial reporting requirements and subject to certain specified conditions. MPD determined that extending the no-action position temporarily would not adversely impact its ability to monitor the capital position of bank SDs under the Commodity Exchange Act and CFTC regulations.
US SEC Chair Gensler testifies before the Senate
US Securities and Exchange Commission (SEC) Chair Gary Gensler testified in a hearing on the SEC’s FY24 budget before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee, where he discussed topics including: (1) cryptocurrency; (2) artificial intelligence; (3) SEC rulemaking process and the climate disclosure proposal; (4) Rule 10b-1; (5) swing pricing; and (6) proxy advisors.
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