Bankers are pressing for a flexible approach to calculating capital requirements for trading operations, but could soon face more rigid regulation on an interim basis.
The Federal Reserve is expected to propose two ways of calculating capital levels in the requirements for trading portfolios on Tuesday, one a virtual copy of the regulation proposed this year by the Bank for International Settlements and the other a more lenient rule developed by the Fed that allows banks to use their own models.
The collapse of the Barings investment bank and other crises attributed to trading in derivatives by banks and their clients have prompted the proposals to set risk-based capital levels.
The BIS plan is open for public comment for 90 days, and regulators are likely to act on it before the end of the year, according to a Federal regulator who spoke on condition of anonymity.
The Fed's proposal, called the "precommitment" approach, has a comment period of 120 days and won't likely result in any changes in the short term.
Though some bankers hope they can persuade the Fed through their comments to adopt the precommitment approach, it is possible the stricter rule could take effect even as the more lenient one is being debated.
"It's an awkward process," the regulator conceded.
The current BIS proposal includes two methods for calculating capital. The first, which was originally proposed in April 1993, suggests a standardized approach in which risk is measured the same way for all banks.
American bankers criticized it because it didn't take into consideration their own models, which vary from bank to bank. Bankers say the standardized approach will require them to perform needless calculations.
Recognizing these concerns, the committee added the second proposal, which advocates the use of bank's own internal calculations.
But this proposal would require banks to add parameters to their models. One example, the regulator said, is the value at risk category, which is derived from a combination of commodities, equities, interest rate products, and foreign exchange.
"The sense that we'd be using our own models turns out to be fiction," complained one banker.
The Fed suggests giving banks much more control than any other proposal, allowing them to set their own capital needs. If the capital falls below the bank's prescribed level, it would pay some kind of penalty or fine.
"The precommitment approach is really a concept paper that has not achieved a basis of common understanding among the BIS countries," said the regulator.
Some of these capital issues are expected to be discussed at an International Swaps and Derivatives Association Conference in New York this week, while the momentum for regulatory change should begin sometime in September, after the Fed receives comments on the most recent BIS proposal.