Parents of young adults might be familiar with this dilemma: there are certain ways you don’t want your kids to get in trouble, so you can either outright ban the behavior with a very high likelihood the young’uns are going to do it anyway but (try to) keep it from you, or you can loosen your grip a bit in the hope that they will come to you if and when it goes wonky.
Since the Global Financial Crisis in 2008, Team Regulator has faced the same kind of conundrum. They want Team Bank to be careful how much they lend to corporations, especially those that have little to no earnings. Therefore, the US Team Regulator issued guidance in 2013 indicating that loans of more than six times a company’s annual earnings were too risky and should be avoided.
However, some banks staged a teenage rebellion of “Who’s gonna make me?!?” and did it anyway. And many of the capital-hungry corporations went the private route and got equity and loans from financial institutions not under guidance.
As we have mentioned many times before, private equity and credit funds have grown almost exponentially in the past decade, and the good banks that abided by the curfew have seen many a lucrative deal pass them by and cried “NOT FAIR!”
So, now Team Regulator has had a little rethink. Last week, the FDIC and OCC issued a statement saying that they had been overly restrictive in their guidance, that banks need to leverage to be free, and they would rather that the risk stay within the regulated system than go outside. Thus, the guidance has been rolled back.
And in greater Europe, Team Regulators are concerned that they piled on the required capital buffers so high that it is cramping Team Banks’ style, sorry, stifling the banking sector with regulatory complexity.
This week, to stay mom-cool, the European Central Bank published the recommendations for simplifying the supervisory and regulatory framework while maintaining the resilience of the banks (obviously).
The recommendations include merging the many capital buffers into two: one non-releasable, one that Team Regulator can lower in bad times. They also call for reducing the number of elements in the risk-weighted assets and leverage ratio, and making the whole structure simpler for smaller banks.
In addition, the Bank of England’s Financial Policy Committee decided to lower the benchmark for tier 1 capital for the banks from 14 to 13 percent, and is further committed to tweaking the capital buffers to ensure they function correctly.
All this in the name of, “We might have been too harsh at first.”
FRG and The Risk Report find banking regulation interesting because we work with all kinds of financial institutions and enable them to meet their regulatory requirements.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.