The U.S. Securities Industry Association said Wednesday that the Basel Committee should remedy shortcomings in the new accord that sets capital requirements for financial institutions.
If they fail to do so, the SIA said national regulators should have the discretion to implement rules that are more carefully tailored to securities firms’ underlying risks.
Rather than closely match the amount of regulatory capital that financial institutions must have to their business risks, there is a “substantial disconnect” in the so-called Basel II rules proposal, said David Strongin, SIA’s vice president and director, international finance.
Strongin said, the “new formulas generate capital requirements for many core trading activities of dealers in the capital markets — whether doing business as a bank or a securities firm — that are disproportionate to historical loss experience and managements’ perception of the innate risk.”
Strongin noted that the impact on securities firms is greater than traditional commercial banking because trading activities typically account for a higher percentage of such firms’ total business.
Strongin said the Basel accord fails to deal with the significant differences that exist between financial institutions engaged in commercial lending and those largely devoted to securities trading and investment banking.
One major difference, according to Strongin, is that commercial banks generally accrue earnings and establish formula reserves, while securities firms mark-to-market. ” Mark-to-market accounting forces firms to recognize changes in the risk profile of any position or business, and take timely action to reallocate capital to solve problems or take opportunities,” Strongin said. “In contrast, by assuming that financial service firms are operating on an accrual basis and looking to reserves to tackle concerns about credit erosion, the accord has the effect of requiring mark-to-market firms to ‘double count’ against credit risk.”
If the Basel committee fails to address these shortcomings, Strongin said, “national regulators will need to have the discretion to ensure that the rules governing regulatory capital are more carefully tailored to the underlying risks of securities firms.”
SIA will formally present its views to the committee by late July, when the comment period expires.
U.S. dealers question Basel Committee proposal
Tie capital requirements more closely to risks, says SIA
- By: IE Staff
- June 26, 2003 June 26, 2003
- 08:20