New capital rule to cost banks $200m each

January 10, 2017

Oyetunji Abioye with agency report

Some of the world’s biggest banks are set to spend more than $200m each — much higher than their original estimates — to implement new regulations that will dramatically increase capital demands for some parts of their trading business.

   

Consultancy Oliver Wyman came up with the new cost estimates of implementing the fundamental review of the trading book rules after studying the plans of 20 European, the United States and Asian banks with large trading businesses, Financial Times reported.

The consultants’ latest figures of implementation costs, ranging from $100m to $200m, are a small percentage of big banks’ total annual cost bases of about $60bn. But they dwarf the $43m to $129m estimates the consultants

came up with 12 months ago. “Last year, banks were in the early stages of costing,” Oliver Wyman’s Aude Schonbachler said.

“Some of them clearly misunderstood how big the effort would be,” he added.

The fundamental review of the trading book, or the FRTB, set out by the Basel Committee on Banking Supervision, overhauls the way banks treat the risk of the bonds, stocks, commodities and other assets they hold in the short term so they can facilitate clients’ trading.

Its earliest iteration would have increased capital demands for some banks by as much as 800 per cent, the Basel Committee found.

Since then, the rules have been eased, but banks will still have to increase capital significantly for some activities.

The Central Bank of Nigeria is currently guiding the nation’s banks to implement Basel II. This development is costing Nigerian banks a lot of funds.  Local economic and financial experts, who said the move was good for Nigeria, stressed the need to implement Basel III in the country in the future.

The latest Oliver Wyman research highlights the significant operational costs that banks would face. The consultants put the industry-wide costs of implementation at $5bn, including more than $500m that has already been spent, mainly on “impact studies and planning”. The consultancy said banks would have to add 2,000 new staff to their FRTB programmes, through a combination of hiring new staff, reassigning existing staff and using consultants.

The Basel committee is likely to miss year-end deadline for securing agreement on rules

The new rules are due to come into force globally by the end of 2019. Schonbachler said banks were still working to that time frame despite a European Union directive in November that suggested a three-year phase-in period.

Another factor that could delay implementation is the splintering of the regulatory policies of the American and European authorities, which recently missed a critical deadline for agreeing on how banks should treat the riskiness of their loans.

There are still some technical aspects of the FRTB to be agreed, and Schonbachler said some banks were holding off on hiring workers and spending money until the rules were finalised.

“The banks are quite cost-conscious and resource-constrained,” she said, adding that some banks said they would prioritise investing in areas such as the US stress testing, the only regulatory programme with higher costs than the FRTB.

But a wait-and-see approach could be risky, Schonbachler said that the IT market risk analysts were already “extremely difficult to hire” in London. Even banks that have started early might have to make their implementation plans less ambitious,” he said.