IT'S A SUBTLE ISSUE ... BUT THE "FED" A PRIVATE COMPANY NOT A GOVERNMENT ENTITY ... WHICH LEADS TO QUESTIONS OF POLICY, VALUE AND WHO DEFINES AND CREATES VALUE. IT WOULD APPEAR THERE EXIST SEVERAL CURRENCY MODELS UPON WHICH WEALTH AND VALUE ARE DEFINED AND EXCHANGED. SO HOW AND WHERE DO DREAMS AND LABORS OF THE COMMON MAN FIGURE INTO THESE POLICIES? IN WHOSE HANDS BEHIND THE CURTAIN ARE THE STRINGS BEING MANIPULATED?
Goldman Sachs, JPMorgan andCitigroup are among the banks that have successfully completed trial runs using their own models to assess risk and capital requirements.
However, Citi said in a statement that the Fed allowed it to use its own models only after insisting it changed its capital calculation. Under the new calculation agreed with the Fed, Citi’s assets increased by $56bn and its main capital ratio fell from 10.5 per cent to 10.1 per cent.
The announcement by the Federal Reserve and the Office of the Comptroller of the Currency on Friday gives those banks clarity on what methods they can use to calculate their capital requirements.During the trial run, banks had to show they could comply with a more tailored approach to meeting capital requirements for four consecutive calendar quarters before they could officially rely on that method.
The Fed announced that eight bank holding companies, eight national banks, and four state member banks had satisfactory trials, ending a more than five-year limbo period for the largest US banks that had been waiting to hear the results.
Morgan Stanley, Bank of New York Mellon, State Street, Northern Trust Corporation and US Bancorp were also among the banks that successfully completed the trial.
Bank of America and Wells Fargo were among the largest banks that were not on the list, meaning they have not yet met the requirements. Bank of America started the trial run process later so the results announced on Friday were not surprising, a person familiar with the bank said. The tailored framework known as the advanced approach applies to banks with at least $250bn in total consolidated assets, or at least $10bn in total on-balance sheet foreign exposure.
Under this approach, a bank’s operational risk for capital is determined based on a bank’s internal models, which take into account internal loss data, external data and other factors. The standardised approach for smaller banks is based on a more simplified model based on their gross income and other factors.The trial runs began after US regulators approved final Basel II rules in 2007, leading to questions as to whether there were problems with the banks because regulators had not announced clearance for those companies for several years.
In the timeframe that the banks were in the trial run, the updated Basel III accord was approved and the Dodd-Frank financial reform bill was passed, and those standards had to be incorporated into the trial run. The US also had some of the most stringent requirements for the advanced capital approach, which took time for the banks to meet.
The banks that have been cleared will use the advanced approach framework to calculate their risk-based capital starting with the second quarter of this year.
The Fed gave bank holding companies another year to incorporate the advanced approach in capital planning and stress test exercises to October 2015, compared with the October 2014 date in earlier proposals.
Once the capital rules are fully implemented, the banks must have a minimum ratio of 4.5 per cent of common equity tier one capital to risk-weighted assets, with an additional buffer of 2.5 per cent. Tier one capital is the best quality and includes equity and reserves.The minimum ratio of tier one capital to risk-weighted assets is 6 per cent while there is a minimum leverage ratio of 4 per cent, compared to the 3 per cent requirement in Basel III.