The Basel Committee on Banking Supervision (previously known as the Basle Committee or the Bâle Committee, which always made me think it had something to do with Ba’al) has been meeting this week and plotting to transform the world of banking regulation. The two big changes that the UN Security Council of banking regulators has in store, according to a story on Risk.net (via FT Alphaville) have to do with liquidity ratios and with capital requirements for derivatives transactions. Here’s the word on liquidity ratios:
the Committee made much progress on the two liquidity ratios that have been drawn up by its liquidity working group – one ratio to mandate the size and composition of a liquid assets buffer, and the other to constrain banks’ ability to use short-term funding for longer-term assets.
and on derivatives:
the Committee member suggests there will be recommendations on capital incentives for the central clearing of over-the-counter derivatives – in other words, uncleared trades would attract a capital hit.
No, I don’t really understand all this either (if only I’d stayed at American Banker longer than 11 months!), but my sense is that all the liquidity ratio stuff will be about as successful in containing risk as all the Basel Committee’s past efforts at standardizing capital ratios have been. But I think I like the OTC derivatives plan. Basically, if you want to keep doing your derivatives deals completely in the dark, go for it—but then you’ll have to pay. Which seems like a better way of forcing OTC derivatives onto clearinghouses and exchanges than attempting to come up with some kind of standard that requires regulators to distinguish between standardized derivatives and customized ones.
