New capital rules, agreed upon in the wake of the global financial crisis, begin to take effect for the Canadian banks in 2013. These rules are just one aspect of the sweeping regulatory reforms that are on tap for the financial sector in the year ahead.
In response to the crisis, global policy-makers agreed to toughen banks’ capital requirements by increasing the amount of capital that banks are obliged to hold and tightening the definition of what qualifies to meet those requirements.
This new capital regime for global banks, known as Basel III, officially took effect in Canada as of Jan. 1 this year and various other countries also have finalized the rules for their banking sectors, including Japan, China and Switzerland. But the U.S. and the European Union (EU) have yet to finalize their own rules to implement the new regime, although it’s expected that both countries will firm up their rules in 2013.
The new capital regime is to be phased in over time and its various provisions aren’t due to be fully implemented until 2019. And certain details, such as new liquidity and leverage limits, are still being worked out. Although Canada and other countries may have adopted the initial rules on time, these countries aren’t likely to be stuck on an uneven playing field for long.
Regulators are conscious of the challenges posed by introducing global reforms through national authorities. In Canada, the Office of the Superintendent of Financial Institutions (OSFI) is delaying the implementation of one aspect of its new capital rules until Jan. 1, 2014, in order to co-ordinate with the expected timelines in the U.S. and EU; OSFI has noted that unilaterally imposing a specific new capital charge could disrupt markets.
The new global capital rules for banks aren’t the only reforms that haven’t been implemented by their intended deadlines. Here’s a look at what’s happening in other areas:
– OVER-THE-COUNTER (OTC) DERIVATIVES. It was hoped that new rules and oversight for the OTC market would be in place by the end of 2012, which hasn’t happened. It wasn’t until late 2012 that the Canadian Securities Administrators (CSA) proposed a couple of model rules that aim to set requirements for reporting OTC derivatives trades. This represents the CSA’s first set of actual rule proposals for OTC derivatives market oversight, but the CSA is still far from completing comprehensive reforms.
@page_break@Comments on those proposals are due in February, then the rules still have to be finalized. Plus, the CSA’s initial consultation papers on a couple of other aspects of its proposed reforms are scheduled to be released just this month.
Other jurisdictions are much further along than Canada in their efforts to overhaul the trading, clearing, reporting and capital rules for global OTC derivatives. Nevertheless, the initial goal of instituting reforms by 2012 has not been met.
The Switzerland-based Financial Stability Board (FSB), which is charged with overseeing the reform process, said late last year that regulatory uncertainty is the biggest impediment to many of these reforms. In other words, it’s not inadequate market infrastructure that’s preventing more exchange trading, central clearing and trade reporting; rather, it’s the rule-making process itself that’s standing in the way.
Various regulators and policy-makers around the world have reiterated their intention to work toward the implementation of harmonized reforms in the months ahead. Yet, it seems likely that those efforts will remain a work in progress in 2013. Financial services firms and markets will still be left to grapple with disparate reform efforts in various countries.
– SHADOW BANKING. The other major area slated for regulatory attention in 2013 is the so-called “shadow banking” sector, which includes money market funds, hedge funds and structured investment vehicles that facilitate banking activities but don’t reside on regulated banks’ balance sheets.
As regulators have moved ahead with tougher capital rules and other reforms for the traditional banks, there has been some fear that this increased regulation will drive more activity into the relatively less regulated “shadow” part of the industry. Thus, policy-makers are focusing on that as well.
In November 2012, the FSB published its initial set of policy recommendations for shadow banking, which aim to enhance transparency and reduce systemic risks, among other things. Comments are due in mid-January.
The Basel Committee on Banking Supervision also is expected to produce recommendations for shadow banking regulation by mid-year. The hope is that these will be finalized in time for the next G20 summit in September.
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