Daily Management Review

Stricter Banking Rules to Cover Cyber, Fraud Risks Proposed by Global Regulators


Stricter Banking Rules to Cover Cyber, Fraud Risks Proposed by Global Regulators
The rules that banks use to calculate the amount of capital they need to cover risks to operations from cyber attacks, fraud or hefty fines are going to be stricter if the proposals of global regulators are implemented.
The ability of big banks to use their own models to cut the amount of capital they need would be limited by the latest proposals that are put forward by the Basel Committee of regulators.
Regulators found huge differences in capital holdings because of the way big banks used models when taxpayers had to shore up undercapitalised lenders during the 2007-09 financial crisis.
"The proposals are an important step toward completing the post-crisis reforms during the current year," Stefan Ingves, Basel Committee chairman and governor of Sweden's central bank said in a statement.
Ditching the use of models altogether was proposed in a second public consultation by Basel.
The complexity and size of balance sheets would get reflected by the new proposed regulations in place of the present regulations that are used by a vast majority of lenders and a model that makes use of a "business indicator" based on their financial statements.
Complexity has come to be regarded as a good pointer to losses from operational failures over the years.
The actual losses going back a decade was reflected by a "loss indicator" often used by the biggest banks.
This model can and is generally used in the justification of a lower capital figure in comparison to the one that is thrown up by the business indicator.
Regulators, however, could still insist on the higher number.
It is however a cause of concern that can be expressed by some banks that relate to the millions of dollars in fines that the banks have paid for trying to rig benchmark interest rates or currency markets and it would inflate the loss indicator further. However Basel has introduced a mechanism to help smooth out extreme losses.
With credit risk or threat from loans turning sour, a much larger component, operational risk is typically equivalent to about 15 percent of a bank's overall capital holdings.
The matter of calibration or how much extra capital, if at all, banks would have to hold against operational risks under the proposed changes is yet ot be decided by Basel whose rules are applied in about 100 countries.
The allegations that this proposal and other proposals in Basel's pipeline amount to a "Basel IV", or a step change in capital requirements from Basel III which forced lenders to hold far more capital since the financial crisis have been dismissed by Basel and other regulatory bodies.
"For most banks, the committee expects that these proposals will have a relatively neutral impact on capital," Ingves said.
"While the objective of these proposals is not to significantly increase overall capital requirements, it is inevitable that minimum capital requirements will increase for some banks," Ingves added.
The committee has yet to decide when the new rules might come into force.