Reading the Basel Tea Leaves
Months after the Basel Committee on Banking Supervision extended the timeline for compliance with Basel III capital adequacy requirements into phases running through 2019, the committee is now starting to fill in some of the gaps in the rules.
This week, the committee re-emerged with proposals on leverage ratios, collateral and derivatives exposures. Other than a concrete minimum of 3% for leverage ratios, which the committee is testing, the proposals are short on numbers and long on complex verbiage and formulas for determining aspects of capital adequacy.
Although the complexity of the language in these proposed Basel III provisions could conceal loopholes that legal experts might be more likely to find, a layman's reading uncovers statements that firms may not net collateral against derivatives exposures and must increase the calculations of their exposure based on how much collateral is in derivatives.
This appears to be an about-face—if not in scope, at least in temperament—from the committee's actions in January, when it allowed more types of securities to be counted as liquid assets and lowered thresholds for depositor exits.
What is the Basel Committee up to? The latest action apears to take a harder line on what can be counted toward capital adequacy. Its guidance in January on liquidity coverage ratios leaned toward leniency.
Watching from afar, these developments remind a US observer of the classic TV game show "To Tell The Truth." To play on that show's signature moment—will the real Basel Committee please stand up?
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