Wall Street groups seek further easing of U.S. Basel capital rules

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Wall Street seeks Basel relief

Highlights

Three financial trade bodies estimate U.S. Basel proposals would raise bank capital requirements for trading by 30–89%, urging market risk element changes.
Bank lobbying targets capital charges affecting U.S. Treasury and repo trading as central clearing becomes mandatory by year-end, citing misaligned risk treatment.
U.S. regulatory dilution of Basel plans is expected to reduce overall capital requirements, prompting the Bank of England and EU to delay market risk reforms pending U.S. decisions.

Treasury market concerns drive latest lobbying

As reported by Financial Times, three major financial trade bodies have sent a letter to the U.S. Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, urging them to revise the market risk elements of the Basel rules.

The letter from the International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association and the Institute of International Finance says the latest proposals would raise bank capital requirements for trading activities in this area by between 30 and 89 per cent, based on estimates from eight of the biggest U.S. lenders. The groups argue that several parts of the proposal do not align sufficiently with economic risk.

One of the main objections concerns counterparty credit risk as U.S. Treasury bond and repo trading shifts to central clearing from next year. Banks say that while central clearing reduces the collateral, or margin, needed to support Treasury trades, the Basel proposals would still increase capital charges tied to that lower collateral.

Scott O'Malia, chief executive of Isda, says liquidity providers in the U.S. Treasury market will face higher capital charges as the market moves toward mandatory Treasury clearing at the end of this year. He urges regulators to ensure the capital treatment of Treasury repos reflects economic risk appropriately.

Global regulatory implications come into focus

Wall Street's latest intervention extends a broader lobbying effort that has already delivered a major win for lenders, with U.S. regulators significantly diluting their original Basel plans. Instead of increasing overall capital requirements for American banks, the revised framework is now expected to reduce them, marking the sector's biggest lobbying success since the 2008 financial crisis.

Federal Reserve officials are said to be sceptical of the industry's claims, believing the new requirements would mainly affect less-liquid assets and have limited impact on Treasuries, according to people familiar with their thinking. The Fed declines to comment on the letter.

The outcome is being watched closely beyond the U.S. because other regulators are calibrating their own Basel timetables around Washington's approach. The Bank of England and the EU have already delayed the market risk portion of their reforms while they wait to see how U.S. authorities implement the rules.

Kevin Warsh’s tougher inflation stance at the Federal Reserve reshaped market expectations for rate cuts and reinforced the central bank’s focus on returning inflation to 2%. In our earlier coverage, we noted that this firmer policy tone supported the investment case for longer-term U.S. Treasuries by reducing the odds of aggressive easing if inflation remains elevated.

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