PwC discusses Ten Key Points from Basel’s Fundamental Review of the Trading Book

On January 14th, the Basel Committee on Banking Supervision (BCBS) published its revised capital requirements for market risk. The final standard, also known as the Fundamental Review of the Trading Book (FRTB), is intended to harmonize the treatment of market risk across national jurisdictions and will generally result in higher global capital requirements. BCBS estimates a median capital increase of 22% and a weighted-average capital increase of 40%. However, we believe this impact can be somewhat mitigated by portfolio re-optimization.

  1. Standardized approaches continue to gain regulatory favor. The final framework allows banks to calculate their capital requirements using

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PwC discusses Key Points from Basel’s Re-proposed Standardized Approach for Credit Risk

The Basel Committee on Banking Supervision (BCBS) on December 10th issued the second iteration of its proposed revisions to the standardized approach (SA) for credit risk measurement. Following up on last year’s initial issuance, the proposed revisions are intended to amend BCBS’s currently applicable SA in order to achieve a better balance between risk sensitivity, simplicity, and comparability.

While the latest proposal includes significant changes from last year’s version in response to BCBS’s quantitative impact study (QIS) and industry comments, several important issues remain. Most importantly, the revised proposal does not include an implementation timeline, and kicks the can … Read more

PwC discusses Bank Culture: It’s About More Than Bad Apples

The US Federal Reserve (Fed) again expressed concerns about the culture at financial institutions this month.[1] This has been a recurring theme since the financial crisis, as regulators in the US and abroad have hit industry players with steep fines for employee misconduct. Since 2008, the largest global banks have cumulatively paid out over $300 billion in fines, with US banks paying about half of that amount.

EU and UK regulators have been the most active in pushing banks to address their culture weaknesses.[2] The EU has introduced new rules limiting bonuses paid to senior employees that are … Read more

PwC highlights Ten Key Points from the Fed’s TLAC Proposal

The Fed proposed its long-awaited Total Loss-Absorbing Capacity (TLAC) requirements on October 30th. As expected, the Fed’s proposal came out tougher than the Financial Stability Board’s (FSB) TLAC standard proposed last year,[1] including limitations on capital distributions and bonus payments, and will likely be tougher than the FSB’s final standard expected next week. In an unusual move, the US issued its proposal before the FSB, suggesting that a consensus could not be reached in line with US regulators’ desire for more stringency.

However, the Fed did not go as far in its quantitative TLAC requirements as some feared it … Read more

PwC explains why Broker-Dealers Should Lock in Liquidity

The credit crisis of 2008 highlighted the criticality of effective liquidity management and demonstrated the difficulties broker-dealers face without adequate funding sources. In response, the Financial Industry Regulatory Authority (“FINRA”) has been taking steps to impose new requirements that will impact many broker-dealers, especially those that hold inventory positions or that clear and carry customer transactions.

Following up on guidance issued in November of 2010, FINRA last month issued new liquidity risk management guidance after a year-long liquidity review of 43 member firms under a stressed environment.

While the guidance was issued as a FINRA notice and therefore lacks the … Read more

PwC discusses Asset Managers: The SEC’s road ahead

The debate over asset managers’ potential systemic risk has been ongoing for some years, with little agreement between the industry, US regulators, and global standard setting bodies. US regulators themselves have been divided – the SEC has in particular been skeptical that asset managers or individual funds can be the source of systemic risk of a magnitude akin to that posed by large banks.

Nevertheless, consensus is finally forming on the need to address specific risks of the industry. With the designation of asset managers as systemically important financial institutions (“nonbank SIFIs”) by the Financial Stability Oversight Council (“FSOC”) now … Read more

PwC discusses Cyber-security: Think Risk Not IT

Despite millions of dollars spent on enhancements, cybersecurity remains the area of risk management with the largest gap between threat and preparedness. As the frequency and sophistication of cyber attacks have increased significantly in recent years, counter measures have failed to keep pace.

This gap is especially important for financial institutions, which by our estimate are over 30% more likely to be targeted by cyber crime. While the biggest banks have been dealing with cyber threats for years, they and their smaller peers are largely responding to threats reactively. More specifically, banks continue to address past issues rather than responding … Read more

PwC discusses Market Making Exemption Under the Volcker Rule

With less than six months to conform to the Volcker Rule’s proprietary trading restrictions, large banks are working quickly to build out their compliance programs. Last summer, they scrambled to build systems to report monthly seven metrics by September 2, 2014, as required by the rule.[1] Now banks’ focus has moved to proving their trading desks’ exemptions from the proprietary trading restriction as part of their compliance programs that must be in place by July 21, 2015.[2]

Among these exemptions, market making is becoming the most predominantly used. However, the desks taking this exemption (“market making desks”) face … Read more

PwC discusses Ten Key Points from the FDIC’s Resolution Plan Guidance

On December 17th, the FDIC issued guidance for the 2015 resolution plans of the covered insured depository institutions (CIDIs) of large bank holding companies (BHCs). The guidance (applicable to 36 CIDIs) adds welcome clarification around regulatory expectations, but also raises the bar – in some cases quite significantly – on the nature and depth of required plan content.

In addition to the BHC resolution plans required under Dodd Frank Section 165(d) [1], the FDIC requires a separate CIDI resolution plan for US insured depositories with assets of $50 billion or more. Most of the largest, most complex BHCs are subject … Read more

PwC discusses Margin Requirements for Uncleared Swaps

On September 3rd, the prudential regulators (including the Federal Reserve, FDIC, and OCC) re-proposed the second major element of derivatives reform – mandatory margin on uncleared swaps. The re-proposed rule is designed to end years of debate that began with the release of the proposed rule in April 2011 and reflects the international guidelines for uncleared margin finalized by the Basel Committee of Banking Supervision and the International Organization of Securities Commissions (BCBS/IOSCO) in September 2013. See PwC’s Regulatory Brief, Margin on uncleared swaps: Global agreement in theory but not yet in practice (September 2013).

The US re-proposal is largely … Read more

PwC discusses Foreign Bank Compliance with Fed’s Enhanced Prudential Standards

More than five months since the Federal Reserve (Fed) issued its final Enhanced Prudential Standards[1] (EPS) for foreign banking organizations (FBOs), a considerable number of critical questions remain unanswered despite guidance from regulators. The June 26th publication of frequently asked questions (FAQs) primarily repeated or reinforced the EPS rule’s text; however, some additional clarity on key issues such as the level of detail needed for FBOs’ required implementation plans was provided.[2]

We believe the key takeaway is that details matter – both in what has been explained by the Fed and what has yet to be clarified. The Fed … Read more

PwC discusses FINRA’s Proposed Margin Rule on TBA Transactions

With over $186 billion in average daily trading volume, the To-Be-Announced (“TBA”) market serves as a significant funding and hedging vehicle for consumer mortgage origination. Although a large portion of the TBA market is comprised of highly liquid agency MBS, the exchange of margin has not typically been required. Without the backstop of collateral, another financial crisis could spell significant turmoil for investors.

Given the TBA market’s significance to lenders, in an effort to address counterparty risk, FINRA issued its long-awaited proposed margin rule requiring margin on TBA transactions for the first time (FINRA Rule 4210).

After its release in … Read more

PricewaterhouseCoopers discusses the US Liquidity Coverage Ratio Proposal

The following post comes to us from Dan Ryan, Financial Services Advisory Leader at PricewaterhouseCoopers LLP, and is based on a PwC publication.

The US Liquidity Coverage Ratio (“LCR”) debuted in October 2013 when the federal banking agencies – Federal Reserve, FDIC and OCC (“Agencies”) – jointly released their proposal. Although the industry had expected the US LCR to largely mirror the Basel Committee on Banking Supervision’s (“BCBS”) proposal that was finalized earlier, the US proposal came out quite differently.[1] This difference between expectations and reality is reflected in the 83 letters submitted during the US proposal’s comment period that … Read more

PricewaterhouseCoopers discusses ten key points about the new supplementary leverage ratio

The following post comes to us from Dan Ryan, Financial Services Advisory Leader at PricewaterhouseCoopers LLP, and is based on a PwC publication.

On April 8, the US banking regulators finalized the Enhanced Supplementary Leverage Ratio (“ESLR”) and released a Notice of Proposed Rulemaking (“NPR”) to modify the exposure calculation (i.e., the denominator) of the underlying Supplementary Leverage Ratio (“SLR”). Although the SLR was issued as a final rule by the Fed and OCC in July 2013, the agencies re-opened it, which we had suggested as a possibility in our Regulatory Brief, Heightened Leverage Ratio: US regulators unveil next act Read more

PricewaterhouseCoopers discusses EU bonus cap

The following post comes to us from Dan Ryan, Financial Services Advisory Leader at PricewaterhouseCoopers LLP, and is based on a PwC publication.


On February 25th, the EU’s two legislative bodies, the European Parliament (EP) and the European Council (Council), agreed to restrict retail asset managers’ bonuses. After going back and forth during 2013, the two bodies settled their differences last month as part of the fifth iteration of the Undertakings for Collective Investments in Transferable Securities Directive (UCITS V). We expect UCITS V to be passed into law by both the EP and Council this spring, … Read more