World’s biggest banks warn against new trading risk models

The world’s biggest banks are seeking to play on regulators’ fear of another “flash crash” in debt markets to lobby against new risk-calculation models, which they warn will treble the capital needed in their trading businesses.

Rules to change how banks assess risk in their trading operations are being finalised by global policy makers, who aim to set the regime in stone by the end of this year.

But three of the most powerful financial lobbying groups have written to the Basel Committee on Banking Supervision, warning the proposals will make financial markets more volatile and unstable.

Bankers argue recent market volatility, such as last October’s “flash crash” in US treasury securities and the rise in the value of the Swiss franc in January, reflected a drying up of liquidity due to restrictions on banks’ trading activities.

Regulators are concerned an expected rise in US interest rates this year could bring the 30-year bull market in bonds to a sudden end and trigger painful increases in volatility across credit and currency markets.

Negative impact

“Investor participation in certain markets is likely to fall further thereby negatively impacting on their depth and efficiency,” wrote the International Swaps and

Derivatives Association

, the

Global Financial Markets Association

and the Institute of International Finance.

“Higher trading book capital requirements in these markets will further increase issuance costs and will negatively impact a secondary market liquidity that is already subdued due to the impact of other regulatory initiatives,” the letter said.

Such an environment was expected to “discourage some market participants from hedging their risks, raising the prospect of increased market volatility and significant financial instability”, the lobbyists wrote.

Bankers and their advisers said a number of tweaks had been made to the proposals for dealing with trading-book risk.

“The changes couldn’t be characterised as concessions to the industry as such,” one financier said, but as “adjustments to fine-tune technical elements of a new framework that weren’t working as expected”.

More detail

Lobbyists are pushing for the Basel Committee to carry out another quantitative study this year to look in more detail at the likely effect of the changes. Policy makers may be reluctant to accept the delay having already conducted three studies.

The planned rules include liquidity horizons for calculating how long banks would take to sell assets in a crisis. But financiers warn they will cause some "punitive capital increases". – © The Financial Times Limited 2015