Global Banking, Securitization Groups Push Regulatory Overhaul
New global initiatives to strengthen the regulation, supervision and risk management of the banking sector will reduce the likelihood of another global economic crisis, according to the Bank for International Settlements (BIS), an international organization that serves as a bank for central banks. Central bank governors and supervisory heads on Sunday agreed on several key measures to strengthen regulation of the banking sector, including raising the quality of the Tier 1 capital base. They also agreed to introduce a new leverage ratio to act alongside the Basel II risk-based framework. Central bank governors agreed on a measure to introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement. They settled on a measure to introduce a framework for counter-cyclical capital buffers above the minimum requirement, as well as a measure to issue recommendations to reduce systemic risk involved in the resolution of cross-border banks. The Basel Committee will issue formal proposals on these issues by year-end and will begin assessing the impact of new requirements in early 2010, BIS said. "[T]hese measures will result over time in higher capital and liquidity requirements and less leverage in the banking system, less procyclicality, greater banking sector resilience to stress and strong incentives to ensure that compensation practices are properly aligned with long-term performance and prudent risk-taking," said Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank. As the banking industry faces regulatory overhaul on a global level, the securitization industry itself faces a push for more regulation. The International Organization of Securities Commissions (IOSCO) issued a report last week recommending greater regulation of several areas of the securitization process. IOSCO recommends addressing imbalanced incentives, inadequate risk management practices, counterparty risk, lack of transparency, regulatory structure and oversight issues, according to the report. IOSCO called for a requirement that originators retain some form of long-term exposure to securitization, and for regulation of improved disclosure to investors regarding underlying asset pool performance. The report urged the formation of a regulatory structure to establish central counter parties (CCPs) to clear standardized credit default swaps (CDS). IOSCO also called for jurisdictions to assess the scope of their regulatory reach within each recommended measure and to determine what enhancements would be needed to ensure international regulatory coordination. “The recommendations contained in this Final Report are aimed at restoring investor confidence and at improving the functioning, integrity and oversight of unregulated financial market segments and products, such as securitisation and credit default swaps, and international financial markets generally," said Kathleen Casey, chairman of IOSCO's technical committee, in the report. Write to Diana Golobay.