25 November 2012

FT: Banks face more regulation over risk

Several high-profile scandals for banks have sparked a new regulatory drive to force lenders to spend more time and probably hold more capital guarding against such operational risks. The FSB and the BCBS have recently announced plans to tackle the issue next year.

Regulators are particularly concerned that banks may not have enough capital to cover losses from operational risk and may not be doing enough to tackle potential problems when many are slashing back-office staff and technology expenditure. “Banks are trying to do more with less, so you can see that the risk is very much growing”, said Julie Dickson, the senior Canadian regulator who has helped lead the charge at the FSB.

Technology and infrastructure issues are critical, including business continuity, outsourcing and data protection, people and conduct problems as well as mis-selling and other product-related problems. As a rule of thumb, roughly 50 to 75 per cent of a big bank’s capital requirements stem from credit risk, 10 to 20 per cent from operational risk and the rest from trading. Regulators are already rethinking the capital rules for credit and trading, and operational risk is next on the agenda.

Stefan Ingves, the Swedish central banker who chairs the Basel group, said recently that his group’s 2013 agenda includes plans to “improve” the standard method for measuring operational risk. The committee will also discuss whether to set new minimum capital levels for banks that use their own models to make sure they do not understate their needs.

A spokesman said the Basel committee was also looking at “whether the calibration of the operational risk capital rules is consistent with the magnitude of operational losses incurred”.

Critics of the existing regime say some of the formulas are too closely linked to revenue, so capital requirements drop during downturns even though risks may be rising. The Basel group wants to have a new set of capital requirements by the end of 2014.

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