Basel cracks down capital-protection ploy by banks

 Reuters/London

Global regulators have proposed hefty charges to cancel out capital relief banks enjoy when buying pricey insurance to cover risky loans without acknowledging the cost in a timely way.

The Basel Committee has published for consultation proposals to alter how banks recognise the high cost of buying credit protection to cover assets such as complex bonds.

The committee accepted that credit protection can be an effective risk-management tool, but the costs should be appropriately recognised in a bank’s capital buffer.

Under current rules, steps taken by a bank to cover risks help it to reduce how much capital it must hold.

It is the latest move by regulators to restore credibility to capital figures published by banks and to reassure investors that no hidden dangers lurk on or off balance sheets.

Under the proposals, banks would have to calculate “in an appropriately conservative manner” the current value of premiums paid on insurance that has not yet been recognised in earnings.

This figure would have to assigned a risk weighting of 1,250% to effectively cancel out any capital relief.

The aim is to prod banks into recognising the cost of insurance upfront rather than later.

The consultation considers some exemptions from the charge, which supervisory bodies would grant at their own discretion.

Basel will continue to monitor capital relief trades and would consider imposing a “globally harmonised minimum capital requirement if necessary”.

Regulators suspect that the insurance does not really transfer risk to the seller and is merely a ploy to cut capital requirements while the cost of the insurance is not recognised for a long period.

The US Federal Reserve and Britain’s Financial Services Authority (FSA) have also questioned the use of insurance in this way.

In 2010, the FSA told the Association for Financial Markets in Europe, a banking lobby, that companies should not be claiming capital relief where there is little or no risk transferred to the seller of insurance.

The regulators had earlier said that the world’s top banks had made big strides towards meeting tougher capital rules several years before full compliance is required.

The new rules known as Basel III were the world’s main regulatory response to the 2007-09 financial crisis that forced governments to rescue undercapitalised lenders.

The Basel Committee of banking supervisors from nearly 30 countries, which devised Basel III, said the world’s top 101 banks would have needed an extra €208.2bn ($270bn) had Basel III been in force in June 2012 — €176bn less than in its previous study in December 2011.

Eurogroup calls meet on Cyprus

The meeting is expected to coincide with direct talks at the same Brussels headquarters between EU heads Rompuy and Barroso, and Cyprus President Anastasiades

AFP/Brussels

Eurogroup head Jeroen Dijsselbloem announced that eurozone finance ministers will assemble in Brussels today, aiming to nail down a bailout for Cyprus and get the debt-ridden island’s banks back open.

“Eurogroup tomorrow 6pm (1700GMT) will be in Brussels,” the Dutch finance minister — who also chairs the group’s meetings — said on Twitter of face-to-face talks scheduled after a week of repeated conference calls over the crisis in Cyprus.

A key source said that confirmation of a physical meet indicated that negotiations in Nicosia between the Cypriot government and EU-IMF Troika representatives had narrowed outstanding differences over a revamped financial rescue.

The meeting is expected to coincide with direct talks at the same Brussels headquarters between EU heads Herman Van Rompuy and Jose Manuel Barroso, and Cyprus President Nicos Anastasiades.

As a condition for eurozone-IMF loans of up to €10bn, Cyprus is under massive European Central Bank pressure to find another nearly €6bn before Monday is out.

The government is considering imposing a levy of reportedly up to 25% on deposits of more than €100,000 held at the Bank of Cyprus, as well as restructuring Laiki Bank (Cyprus Popular Bank) into a “good” and “bad” bank.

In an indication of the unease in Cyprus, at least 1,000 bank workers fearing for their jobs marched on the presidency yesterday ahead of a planned protest outside parliament.

In Nicosia, Finance Minister Michalis Sarris said “significant progress” had been made in talks with officials from the EU and IMF, with legislation also covering capital controls set to be tabled in parliament.

But “several issues arose that need further working on” in the talks, which centred on a proposal to impose a one-time charge on savings held at the Bank of Cyprus, the island’s biggest lender.

The Cypriot authorities are scrambling to raise €5.8bn before a Monday deadline set by the European Central Bank or it will cut off emergency financial aid to the island.

Cyprus is considering imposing a tax of around 25% on deposits of more than €100,000 held at the Bank of Cyprus, as well as restructuring Laiki Bank (or Popular Bank) into a “good” and “bad” bank.

But a Laiki economist told AFP the government was trying to convince the troika such a rate was too high.

“They are trying to convince the troika to take a lower ‘haircut’ than 25% because parliament might not accept it,” said Yiannis Tirkides, adding the eurogroup might reject anything lower.

EU sources have said if no deal is reached, the 27-nation bloc is ready to eject Cyprus from the eurozone to prevent contagion of other debt-hit members such as Greece, Spain and Italy.

Sarris estimated the legislation would be tabled in parliament later last night, but an official cited by CNA state news agency played down the likelihood of that happening.

The talks came after parliament passed a raft of bills late on Friday including to create a solidarity fund, impose capital controls and restructure an outsized banking sector.

The session of parliament came as restive crowds, mostly bank workers anxious that their employers — and therefore their jobs — not be sacrificed in the deal, demonstrated outside.

Some 30 hooded youths burned an EU flag next to the parliament building in front of police barricades.

“The haircut is robbery,” they chanted, referring to the most onerous measure yet to be presented before parliament — the levy on bank deposits that is still on the table.

The streets of Nicosia were deserted yesterday, as anxious residents waited to see which way the crisis turns.

“People don’t know if they will have money tomorrow or the day after. We’ll try to live with what we have got now and we’ll see what happens next,” said Yiorgos Andoniou, a jobless 57-year-old.

“We are in this situation because ... we were living beyond our means for 25 years and now the bill has come,” said a woman identifying herself as Catherine.

“Eventually we’ll tighten our belts and go back to the practical and hard-working people that we were before.”

The contentious levy on bank deposits was already rejected by parliamentarians as “blackmail” on Tuesday, albeit in a different form.

But with the deadline looming and the option of securing funding from elsewhere, including from ally Russia, exhausted, MPs have been forced to revisit it as an option to help raise the €5.8bn.

Prior to yesterday’s meeting, commentators said the government wanted to hold further talks on its new plans for the “haircut” with the troika before putting it to parliament.

Acting ruling Disy party leader Averof Neophytou had appealed to MPs to back the measures, stressing all deposits of up to €100,000 would be guaranteed.