Banks Say Too Much Capital Required by Market Risk Rules

WASHINGTON - Bank regulators' latest attempt to measure market risk is an improvement over earlier efforts, bankers say, but it's still too rigid and too burdensome.

The bankers' critiques, in the form of comment letters filed with the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp., are chock full of charts, mathematical formulas, and extremely technical arguments.

At the heart of the banks' dispute with regulators, however, is simple arithmetic - the agencies plan to force banks to set aside more capital for currency, securities, and derivatives trading than the banks want to.

"In many of their securities and derivatives activities, commercial banks face intense competition from nonbank participants," wrote Arjun K. Mathrani, executive vice president and chief financial officer of Chase Manhattan Bank. "The imposition of costly capital requirements could force banks to increase the costs of their products and, potentially, lose customers to these competitors."

Regulators' first foray into market risk came in 1993, when the Basel Committee on Banking Supervision proposed using a standardized formula to measure the risk banks face from their trading activities.

Money-center banks protested that they should be able to use their own risk models instead, and in April the committee - made up of bank regulators from 11 leading industrial nations - proposed letting them do so.

That garnered regulators some praise in bankers' comment letters. But bankers still complained that the rules they would have to follow to use internal models are too burdensome. Those rules were outlined in detail in a proposed rule published by the Fed, Comptroller's office, and FDIC in the July 25 Federal Register.

"For many portfolios, the standardized method generates lower capital requirements than the internal model approach as set forth in the proposal," wrote Gay Evans, a managing director of Bankers Trust International in London and chairman of the International Swaps and Derivatives Association.

The regulatory agencies propose to let banks with significant trading activities calculate their "value-at-risk" - the maximum amount by which their trading portfolios could decline during a specific period of time - and use that to set capital requirements.

Under the proposed regulation, value-at-risk computations would have to assume a 10-day holding period for financial instruments and add up banks' exposures to different categories of risk. To come up with the actual capital requirement, the value-at-risk number would then be multiplied by a "prudential factor" of three.

These standards are "unnecessarily rigid and extremely conservative," complained Jill M. Considine, president of the New York Clearing House, a group of money-center banks. The market risk rules should be used to "protect banks against normal market risks in their portfolios," she added, not "as a tool to protect the banking system against systemic risk."

Lewis W. Teel, executive vice president in charge of trading risk management at Bank of America, argued for dropping the multiplication factor to one. Several banks called for using a one-day holding period, not 10 days, in calculating value-at-risk.

Comments closed Sept. 18 on the market risk proposal. A tentative proposal by the Fed to let banks set their own capital cushions for market risk - and punish them if their trading losses exceed that cushion - remains open for comment through Nov. 1.

The market risk rules will affect about 25 large banks with significant trading operations, as well as any banks with assets under $5 billion whose trading assets and liabilities exceed 10% of assets.

In a letter to the Federal Reserve, Paul D. Berkley, chairman and chief executive of the State Bank of Downs in Kansas, said that while his bank would be exempt from the rules, he still didn't like them.

"I do not know who the Basel Committee on Banking Supervision is," Mr. Berkley wrote, "but I would suggest that we send them to China to add more regulations to their regulated economy. I used to advise sending them to Russia, but Russia has seen the light and has done away with a lot of unnecessary regulation while our bureaucrats continue to add more."

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