Making Sense
FICC Market Structure: Breaking Down Basel III: What the US Proposals Could Mean
Dec 11, 2023
Understanding Basel III regulations and the recent US proposals, the podcast explores their potential impact on market functioning and liquidity. Topics discussed include revisions to risk-based capital framework, changes to G-SIB scores and surcharges, proposed changes to risk-weighted assets and capital surcharges for large banks, and the role of US G-Sibs in providing market liquidity.
10:06
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Quick takeaways
- The US proposal for Basel III could lead to a potential 30% increase in risk-weighted assets for JPMorgan due to the elimination of models for credit risk exposures and the addition of operational risk capital.
- The revisions to the calculation of capital surcharges for Global Systemically Important Banks (G-SIBs) include changes in the measurement date, broader definition of financial institutions, and incorporating derivatives exposures in the cross-jurisdictional category, resulting in higher capital requirements for G-SIBs.
Deep dives
Key Proposal: Basel 3 Endgame
The Basel 3 endgame proposal suggests sweeping amendments to the calculation of risk-weighted assets (RWA) for large banks. The US proposal introduces the concept of the expanded risk-based approach (OBA), which eliminates a bank's ability to internally model capital requirements for all risk stripes except market risk. If finalized, the OBA would significantly increase bank capital requirements, with estimates indicating a potential 30% increase in RWA for JPMorgan. The elimination of models for credit risk exposures and the addition of operational risk capital to the OBA capital stack are the main contributors to this increase.
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