Basel Committee of Bank for International Settlements in its document on “Strengthening the resilience of the banking sector” has identified the buildup of excessive on and off balance sheet leverage in the banking system as one of the underlying features of the recent financial crises. The Committee therefore is introducing a leverage ratio requirement that is intended to put a floor under the build-up of leverage in the banking sector and introduce additional safeguards against model risk and measurement error.
The leverage ratio will be calculated in a comparable manner across jurisdictions, adjusting for any remaining differences in accounting standards. Off-balance sheet items are expected to be included using a flat 100% credit conversion factor. This is expected to directly impact leveraging capabilities investment banking activities of banks in the areas of derivatives mainly as they may need to bring in more capital.
Proposals like sponsored access to exchanges, short selling by regulatory authorities (like USA’s Securities Exchange Commission, Germany’s Federal Financial Services Supervisory Authority) are also expected to slow down and impact investment banking activities. Proposals for Sponsored Access to Exchanges by SEC will increase trading costs for many market participants.
The document Key Issues for UK’s New Parliament 2010 released recently mentions that the new UK Parliament may take up and decide on the following in the next five years – consideration of global regulation of credit derivatives, possible death of cheque book, bankers’ bonuses, credit for the poor, regulation of too big to fail banks and too small to survive banks. Banks may also be subjected to higher taxation and controls on profits. Their lending could be more tightly controlled by restrictions on leverage.
In addition, the latest UK Coalition Program for Government has committed itself to Banking as Item 1. Some of the key highlights of this could mean: Introduction of a banking levy, robust action to tackle unacceptable bonuses, Separation of retail and investment banking and Ruling out joining European Single Currency System
Well. All these changes and proposals contemplated do not augur well for investment banks.
Who knows, our ‘street smart’ investment bankers may find more scope for their business even with these drastic (and draconian?) changes in the environment. The nature may facilitate them with more intelligence.
You may agree!