Bloomberg News

Banks Need More Capital to Protect Against Rogue Traders

November 01, 2012

Banks deemed to be too-big-to-fail should hold more capital reserves to protect against operational risks, such as rogue traders, regulatory fines and fraudulent employees, the Financial Stability Board said.

Supervisors found “real weaknesses in the assessment of capital for operational risk and in the models used and their assumptions,” the FSB, a group of global regulators, said in a report today. The Basel Committee on Banking Supervision should update its capital guidelines to reflect the importance of the issue by the end of 2014, the FSB said.

Global regulators have observed mistakes and scandals at some of the world’s largest banks in the last year. JPMorgan Chase & Co. (JPM:US) lost at least $6.2 billion this year after failing to manage flawed positions on synthetic credit securities, UBS AG (UBSN) lost $2.3 billion after an unauthorized trading scandal in London, and Barclays Plc (BARC) was fined 290 million pounds ($468 million) in June over manipulations of interbank lending rates.

“The recent spate of high-profile, and potentially solvency-threatening, operational risk events and failures have added urgency to fundamentally reviewing these capital approaches,” the FSB said.

Lehman Brothers

The capital surcharges for systemic banks come on top of agreements by the Basel committee to more than triple the core reserves that lenders have to hold against possible losses. The so-called Basel III rules are intended to apply fully starting in 2019 and are designed to protect taxpayer money from the types of bank bailouts seen after the 2008 collapse of Lehman Brothers Holdings Inc.

Large international lenders would have faced a 374.1 billion-euro ($484 billion) shortfall in the capital needed to meet Basel III had it been in force at the end of 2011, the Basel group said in September. The figure factors in the surcharges for globally systemic banks.

The FSB also recommended today that regulators intensify oversight of banks deemed too-big-to-fail, and become more intrusive in how they assess lenders’ succession planning, risk culture and the effectiveness of their boards, the FSB said in a statement.

Global regulators today trimmed their list of 29 banks that must hold additional capital down to 28. The list is published in advance of a Nov. 4 meeting in Mexico of finance officials from the world’s biggest economies.

SIFI List

The FSB last year published a list of 29 so-called globally systemic banks that should have to hold more capital than required by other international agreements. Citigroup Inc. (C:US), JPMorgan, BNP Paribas SA (BNP), Royal Bank of Scotland Group Plc (RBS), and HSBC Holdings Plc (HSBA) were provisionally earmarked to face the top level of surcharges, set at 2.5 percent of risk-weighted assets.

The FSB said last year that regulators would update the list on an annual basis, with each revision to be published in November. The FSB brings together central bankers, regulators and government officials from G-20 nations to coordinate financial rulemaking.

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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