LIBOR days are numbered

Libor alternatives it would be either OBFR, Overnight Bank Fund Rate, or GCRR,General Collateral Repo rate.

Orderly liquidation of bankcrupt Banks

FED is proposing new measures  to prevent the chaotic crash of banks and  orderly liquidation of financial institution can be done.

Introduction of GC(General Collateral) repo

GC Repos

Understanding the US Interbank GCF Repo® Market

Intrabank and Interbank GCF Repo-

The “intrabank GCF Repo” trades that use the same clearing bank can settle without the need for the clearing banks to communicate. In contrast, “interbank GCF Repo” involves both clearing banks and requires some communication between the two. This difference is important because intrabank trades mostly conform to the road map for repo settlement set forth by the Tri-party Repo Infrastructure Reform Task Force, but interbank trades don’t. Indeed, settling an interbank GCF Repo currently requires the clearing banks to extend large amounts of credit.

RBI released consultative document for the uncleared margin requirement

The Reserve Bank of India released a discussion paper on margining un-cleared OTC business, in the same framework as others. The RBI intend to mandate the schedule based approach to IM, unless they give approval for a VaR based approach. 

Will there be any benefit for Banks to create highly expensive infrastructure for IMM models

BCBS has recently released consultative document, Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches. It proposed that banks be barred from using internal models when they calculate how risky certain assets are. Lending to other financial institutions and large companies, and holding equities are the areas most affected.

The proposed changes to the IRB approaches set out in this consultative document include a number of complementary measures that aim to:
1.  Reduce the complexity of the regulatory framework and improve comparability
2. Address excessive variability in the capital requirements for credit risk.

Specifically, the Basel Committee proposes to:

• Remove the option to use the IRB approaches for certain exposures, where it is judged that the model parameters cannot be estimated sufficiently reliably for regulatory capital purposes 
• Adopt exposure-level, model-parameter floors to ensure a minimum level of conservatism for portfolios where the IRB approaches remain available 
• Provide greater specification of parameter estimation practices to reduce variability in risk weighted assets (RWA) for portfolios where the IRB approaches remain available.

Under the proposal, banks will have to use a standardised method of calculating the riskiness of loans to financial institutions and to large corporates with assets of more than €50bn. The Basel group believes there is so much publicly available information on the credit risk of such institutions, that banks are rarely able to provide a better estimate than an approach standardised by regulators.

These proposed regulation are already dubbed as BASEL IV by street. Banks have already spent billions of dollars to comply with the plethora of regulatory changes after the 2008 financial crisis.
Argument is if banks will not be able to use the IMM models for most of the derivative portfolio, as most of the derivative trades happens among financial firms, then how much benefit will banks have in developing highly complex IMM models.

The case for more capital

Good read on how banks focused only one half of the ratio by de leveraging their balance sheet instead of raising more capital as well.  
It’s a capital ratio of two halves..

The case for more capital

Why bank capital matters for monetary policy

Bail In - Total loss-absorbing capital (TLAC)

In November 2014, Financial Stability Board proposed a minimum total loss absorbing capacity requirement ,TLAC,to make sure that world's 30 most systemically important banks (G-Sibs), BCBS defined these banks as Too big to fails, can be stabilised and shut down in orderly way with out taxpayer bailouts. The TLAC rule would require banks to issue ordinary shares, subordinated debt and other potentially loss-absorbing securities equivalent to as much as 15-20% of their assets weights for risks. 

Basel III rules require banks to meet a minimum total capital ratio of 10.5% by 2019 – though in some jurisdictions the minimum ratio is far higher. The proposed minimum TLAC requirements for G-Sibs unveiled at the G20 Brisbane summit in November 2014 is 16% to 20% of a group's consolidated risk-weighted assets. This proposal was under consultation until February 2, 2015, when the requirement was finalised.The TLAC rule is set to take effect in 2019 at the earliest.

This the concept of 'bail in' spearheaded during the Lehman's collapse. Wilson Ervin, now credit suisse's vice chairman, explains how his Lehman experience led to the creation of bail-in, and describes some of the innovations by the Swiss regulators.

Initially FSB excluded all structured notes/securities from the TALT requirement,  now structured notes are being considered to the extent that the repayment of the principal at maturity is unconditional and not contingent on any derivative-linked feature, reported by Bloomberg. 

COCO bonds raised by many banks can be considered as bail-in type securities. Regulators needs to increase the oversight on COCO bonds as risk profile of these bonds are complex as suggested by FT.

Swiss regulators pushed for 5% leverage ratio for TBTF banks

• As per Bloomberg, Swiss regulators will require that country's biggest banks to have capital of 5% of total assets - this will be in line with the rule for U.S. too-big-to-fail lenders, and significantly above the 3% minimum set by Basel.

• UBS and Credit Suisse have argued the Swiss financial system isn't comparable to the U.S. with its far deeper capital markets.

• Leverage ratios have gained favor among regulators as the most effective way to evaluate a bank’s robustness because the method doesn’t involve estimates of risks on their activities.

• Switzerland imposed some the world’s strictest too-big-to-fail requirements in 2011 after the government came to UBS’s rescue during the 2008 financial crisis. UBS and Credit Suisse have assets of 1.83 trillion francs combined, about three times the size of the Swiss gross domestic product, making the two banking behemoths a disproportionately bigger danger to their country’s economy if they fail than their peers elsewhere. Both are compliant with all Swiss capital rules.

Growth of shadow banking

A good read on Growth of shadow banking from IMF blog.

Contingent convertible capital instruments (CoCos)

CoCo, Contingent convertible capital instruments are the hybrid debt instruments that absorb the losses of the issuing bank when the capital of the bank falls below certain level. These instruments have come into existence since 2009, after the financial crisis.

Though banks have issues closed to $70 bn worth of CoCos, still a lot less than issued subordinate or senior unsecured debt in same time period.

The main features of CoCo instruments are how they absorb losses and what are the triggers for them.CoCo absorb losses either by getting converted into equity or by write downs. Triggers can be based on mechanical rules or these can be supervisors’ discretion. In the former case, the loss absorption mechanism is activated when the capital of the CoCo-issuing bank falls below a pre-specified fraction of its risk-weighted assets. The capital measure, in turn, can be based on book values or market values.

Discretionary triggers, or point of non-viability (PONV) triggers, are activated based on supervisors’ judgment about the issuing bank’s solvency prospects. In particular, supervisors can activate the loss absorption mechanism if they believe that such action is necessary to prevent the issuing bank’s insolvency.
As per BCBS guidelines, CoCo can be part of the tier 1 capital if minimum trigger level for the instrument is 5.125%. Lower triggered CoCos can be part of the tier 2 capital.

As discussed in FT, CoCo instruments are highly complex and they can behave as death spiral risk (losses accelerates as things gets worse). In normal markets these instruments behave as HY bond but in distress markets they expose investors to equity like risk and volatility. Currently Both banks and regulators are smiling at the success of bail-in bonds. For regulators, cocos help to plug the capital gap of European banks. For bankers preparing for the upcoming European Central Bank stress tests, cocos are a cheap way to boost capital: they cost roughly half the return on equity demanded by shareholders, and interest is tax-deductible. It seems like a win-win.

The yields on CoCos are consistent with their place in the bank’s capital structure. CoCos are subordinated to other debt instruments as they incur losses first. Accordingly, the average CoCo yield to maturity (YTM) at issuance tends to be greater than that of other debt instruments (eg other subordinated debt and senior unsecured debt). The YTM of newly issued CoCos is on average 2.8% higher than that of non-CoCo subordinated debt and 4.7% higher than that of senior unsecured debt of the same issuer.

Bilateral and tri-party repo haircut differences duering the Financial Crisis

The Odd Behavior of Repo Haircuts during the Financial Crisis & Blog on bilateral and tri-party repo haircut differences: they can’t explain it.

Tri-Party Repo Market

Good reads on Tri party repo market,
Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market.

Fire sales are one of the three systemic risk concerns highlighted in a May 2010 whitepaper by the Federal Reserve Bank of New York on tri-party repo infrastructure reform These three risks are 1) the market’s excessive reliance on clearing-bank provision of intraday credit to complete settlement, 2) poor liquidity and credit risk management practices on the part of various classes of tri-party repo market participants, and 3) the absence of any mechanism to mitigate the risk of fire sales of collateral in the aftermath of a large-dealer default.

The first two these are being addressed or have been addressed but management of fire sale of collateral of defaulted dealer is still challenge, The Risk of Fire Sales in the Tri-Party Repo Market.

The Changing Landscape for Derivatives

OTC derivative market has changed and continue changing after the 2008 banking crisis. Big banks are facing heat from regulators and they are forcing banks to standardize the OTC derivatives. A good read on this , The Changing Landscape for Derivatives.