Regulatory Changes: Update for 2010___________________________________

The task of understanding the plethora of revised regulatory documents spinning out of the credit crunch may seem like the equivalent of translating War and Peace from Swahili. Getting to know the new regulatory landscape, and in some cases inputting into how it should be constructed, however, is essential. Volterra has been working with clients to assess the implications of the changing regulatory background and to identify appropriate action to meet the new requirements; below is a brief summary of what the major publications are and what they are addressing.

The Basel Committee on Banking Supervision is currently reviewing the Basel framework in the light of the recent shocks to the global banking system. The committee lately published a consultation paper on strengthening the resilience of the banking sector, which contains a number of proposals including counter cyclical capital buffers, forward looking provisioning (in line with the IASB consultation paper), and other measures to address procyclicality. The committee has also published a separate paper on liquidity standards to establish robust minimum liquidity levels for internationally active banks.

Within the UK, the FSA has published a policy statement on Stress and Scenario Testing which enhances the scope of stress testing under Pillar 2. This introduces the new requirement of reverse stress testing, where scenarios that would be fatal must be identified. A supplementary consultation paper on Capital Planning Buffers aims to provide further guidance on the circumstances in which firms will be permitted to use Pillar 2 capital planning buffers to absorb losses in adverse scenarios.

Specific reforms have been proposed to the supervision of Building Societies in the FSA consultation paper on a new specialist sourcebook. This paper proposes restricting the lending policy criteria of societies on the basis of their risk management framework. A significant expansion of stress testing requirements is being proposed which will apply equally to those that have taken the standardised and the AIRB approaches under Basel II.

In terms of market risk, the FSA is currently consulting on the implementation of the new Incremental Risk Charge as part of their strengthening capital standards 3 consultation paper. This reform, along with others including the introduction of a Stressed VAR and changes to the treatment of securitised assets, follows the Basel Committee paper on revisions to the market risk framework published in July 2009.

For further advice about any of the issues raised in these papers please contact Matt Salisbury.

Major Recent Regulatory Publications