fpmi supports stiffening of capital backing regulations
01. Apr 2010, Munich Financial Centre Initiative
Munich Financial Center Initiative (known by its German abbreviation of fpmi) has voiced its support of the proposed stiffening of the regulations applying to the capital backing possessed by banks. fpmi expects the new regulation to lead to an increasing of the banks’ core capital, and thus of their risk reserves as well. The net result of the regulation will be an augmenting of financial markets’ stability. To further this objective, fpmi is calling for the retention and expansion of the instruments facilitating the creation of core capital. A failure to do such would give rise to the peril of a credit crunch.
fpmi is advocating undisclosed reserves’ being continued to be permitted to be recognized by all banks as being a component of core capital. The Basel Committee for Banking Supervision takes an opposing view; this is regarded by fpmi as being counterproductive. There are no practical reasons for treating the undisclosed reserves held by Landesbanken (state-level publicly-held banks) owned by the public sector in ways differing from those accorded to Landesbanken whose corporate form is that of a joint stock company (AG). The determinant of incorporation should be the quality of the capital instrument and not the legal form of its issuer.
At the very least, grandfather provisions should be maintained. The way for achieving this is shown by the EU’s regulations on hybrid capital. These take effect at the beginning of 2011. Supported by fpmi, these stipulate that legacy issues not fulfilling the stipulations of the new regulation are to be accorded complete protection through grandfather provisions for the first ten years after promulgation of the new act. This protection will be lessened on a step-by-step basis until 2040.
As part of its consolidation of banking supervision, the Basel Committee has proposed enacting the asymmetrical elimination in core capital of stakes held by minority interests in subsidiaries, while retaining the full incorporation of risk-bearing items maintained in these subsidiaries’ balance sheets. fpmi rejects this proposal, as it does not understand why such a discrepancy should be allowed to exist between, on the one hand, the corporate parent’s having to fully recognize these items when determining the consolidated capital adequacy rate, and, on the other, the parent’s not being allowed to include in its core capital that involving the stakes held by minority interests in subsidiaries. This rule would constitute putting an end to a procedure which has proven amply proven its value.
fpmi has come out strongly for the levying of supplements on the backing to underpin claims due from banks whose balance sum exceeds $25 billion, and from non-regulated financial corporations. This proposal would lead to a better coverage of delinquency risks. To avoid creating disincentives, the supplement on capital backing should be introduced, simultaneously, in both IRB and standard versions.
fpmi has criticized the introduction of a leverage ratio. The greatest possible impact of this instrument could be as a “wakeup call” to bank supervision authorities. As the USA’s track record shows, it is not capable of serving as the “firm limit” foreseen for the initial thrust of Basel II (quantitative minimum requirements). The divergences existing among international standards of accounting would cause the institution of a leverage ratio to give rise to distortions of competition.
fpmi is advocating undisclosed reserves’ being continued to be permitted to be recognized by all banks as being a component of core capital. The Basel Committee for Banking Supervision takes an opposing view; this is regarded by fpmi as being counterproductive. There are no practical reasons for treating the undisclosed reserves held by Landesbanken (state-level publicly-held banks) owned by the public sector in ways differing from those accorded to Landesbanken whose corporate form is that of a joint stock company (AG). The determinant of incorporation should be the quality of the capital instrument and not the legal form of its issuer.
At the very least, grandfather provisions should be maintained. The way for achieving this is shown by the EU’s regulations on hybrid capital. These take effect at the beginning of 2011. Supported by fpmi, these stipulate that legacy issues not fulfilling the stipulations of the new regulation are to be accorded complete protection through grandfather provisions for the first ten years after promulgation of the new act. This protection will be lessened on a step-by-step basis until 2040.
As part of its consolidation of banking supervision, the Basel Committee has proposed enacting the asymmetrical elimination in core capital of stakes held by minority interests in subsidiaries, while retaining the full incorporation of risk-bearing items maintained in these subsidiaries’ balance sheets. fpmi rejects this proposal, as it does not understand why such a discrepancy should be allowed to exist between, on the one hand, the corporate parent’s having to fully recognize these items when determining the consolidated capital adequacy rate, and, on the other, the parent’s not being allowed to include in its core capital that involving the stakes held by minority interests in subsidiaries. This rule would constitute putting an end to a procedure which has proven amply proven its value.
fpmi has come out strongly for the levying of supplements on the backing to underpin claims due from banks whose balance sum exceeds $25 billion, and from non-regulated financial corporations. This proposal would lead to a better coverage of delinquency risks. To avoid creating disincentives, the supplement on capital backing should be introduced, simultaneously, in both IRB and standard versions.
fpmi has criticized the introduction of a leverage ratio. The greatest possible impact of this instrument could be as a “wakeup call” to bank supervision authorities. As the USA’s track record shows, it is not capable of serving as the “firm limit” foreseen for the initial thrust of Basel II (quantitative minimum requirements). The divergences existing among international standards of accounting would cause the institution of a leverage ratio to give rise to distortions of competition.