Global Meeting Soon on Securities Ratios
Top banking and securities regulators from 15 industrialized nations will meet as early as November to begin hammering out minimum capital standards for debt and equity securities.
The moving force behind the talks is a capital accord unveiled last week by the securities regulators, who met in Washington for the annual gathering of the International Organizations of Securities Commissions.
After two years of informal talks among banking and securities regulators, the formal proposal to the Basel Committee on Banking Supervision marks a new stage in the discussions.
"We intend to work actively together, and compare [proposals] in very great detail," said Securities and Exchange Commission Chairman Richard C. Breeden, who chairs the IOSCO committee that developed the standards.
The securities regulators' accord is likely to set the tone for discussions with their banking counterparts, and could give them the upper hand in determining the outcome of the talks.
"There is a tremendous advantage to being first with a detailed proposal," said Paul Giordano, a banking and securities lawyer with Cleary, Gottlieb, Steen & Hamilton in New York.
Securities regulators sent the proposal to their banking counterparts at the Basel Committee, which meets under the aegis of the Bank for International Settlements in Switzerland.
They said common standards are needed because traditional distinctions between banks and securities firms are eroding fast.
"As banks become increasingly active in the traditional core business of securities firms, market risk requirements will need to become a central part of the capital adequacy framework for major international banks," the securities regulators said in a memo to the Basel Committee.
A Way to Measure Risks
The agreement establishes a framework for measuring the effects of so-called market risks - such as shifts in foreign exchange and interest rates - on the value of portfolios of debt and equity securities.
To cushion brokerages against these risks, the securities regulators proposed minimum capital requirements ranging from 4% to 12% of an asset's market value. The precise requirement would depend on how a portfolio of securities is matched.
At a minimum, the regulations would apply to the so-called Section 20 securities affiliates of banking companies like J.P. Morgan Bankers Trust.
If the banking regulators sign onto the accord, it would also apply to the high-grade debt securities that banks are now permitted to invest in.
And if banks were permitted to establish separate securities affiliates, as the Bush administration has proposed, the guidelines would dictate the capital requirements of those affiliates.
Although it could take years for bank and securities regulators to come to a final agreement, the plan has increased momentum for developing better measures of market risks in banks' securities portfolios.
The guidelines would establish a "much more sophisticated and accurate measure of the risks banks are exposed to, even in their permissible investment portfolios," Mr. Giordano said.
While the globalization of financial markets makes common standards desirable, if not imperative, banking and securities regulators have frequently differed over the best approach.
Mr. Breeden told fellow securities regulators that their principles are "much tougher than similar proposals of banking regulators in some particular areas," though they are comparable in other respects.
"Depending on how you engineer your portfolio, under the building block approach you could achieve a lower capital requirement," he later explained in comments to reporters.
Under the banking regulators' approach, an institution could offset a long position in a six-month Treasury security with a short position in a 30-year bond. "We think that is too simplistic," Mr. Breeden said.
For now, the plan's main impact on banks is that it addresses the effect of market risk factors on capital standards, said Karen Shaw, president of the Institute for Strategy Development.
But down the road, that means banks will have to set aside more capital against different types of activities, and adopt more sophisticated approaches to asset-liability management.