Bloomberg News

Basel Seeks Tougher Boundary Between Banking, Trading Books

May 03, 2012

Banks face tougher rules on how they differentiate between assets they keep in their banking and trading books, making it harder to dodge capital rules, under proposals published by the Basel Committee on Banking Supervision today.

Lenders would have to give regulators evidence of buying and selling of securities in their trading books and face limits on their ability to shift assets between books under the plan. The risk of credit crunches would also need to be taken into account in calculations of how much cash they should keep in reserve against trading losses.

The proposals are “a vital element of the objective to achieve comparability of capital outcomes across banks, particularly those which are most systemically important,” the Basel group said in the report published on its website.

The Basel group, which brings together banking regulators from 27 nations including the U.K., U.S. and China, agreed in 2010 to more than triple the core capital that financial firms must hold. Last year, it also targeted 29 lenders including Deutsche Bank AG (DBK), BNP Paribas SA and Goldman Sachs Group Inc. (GS:US) for capital surcharges of as high as 2.5 percent of their assets in a bid to rein in lenders deemed too big to fail.

Trading books represent portfolios of securities that banks want to actively trade while banking books contain products that lenders intend to hold to maturity.

‘Turn of the Screw’

“This is a further turn of the screw for trading books and will increase the capital banks have to hold for their trading positions,” Patrick Fell, a financial regulation specialist at PricewaterhouseCoopers LLP in London, said in an e- mailed statement. “As capital requirements rise, the return on capital will fall and more banks will question their appetite for trading.”

The committee noted “large differences in capital requirements against similar types of risk” of losses on securities in the different portfolios, meaning that “the overall capital framework proved susceptible to arbitrage.”

Banks and other interested parties have until Sept. 7 to respond with their comments to the proposals, the committee said.

To contact the reporter on this story: Ben Moshinsky in London at

To contact the editor responsible for this story: Anthony Aarons at

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