Inflation and Basel III Endgame: Difference between pages

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1.  
''Bank regulation - capital requirements - Bank for International Settlements (BIS) - United States.''


The rate at which prices are rising.  
The Basel III Endgame is a proposal to amend the capital adequacy requirements for banks regulated in the United States.


Usually measured in the UK by the Consumer Prices Index (CPI).
The overall effect would be to increase the amounts of capital that the banks are required to hold.




2.  
The route to this overall increase would be a substantial decrease in the flexibility of banks to model their own risks for capital adequacy calculation purposes, with a corresponding increase in the requirement for them to use standardised approaches to risk modelling.


A situation in which prices generally are rising.
This initiative followed the failures of three large US banks (with over $100 billion in assets) in 2023: Silicon Valley Bank, Signature Bank and First Republic Bank.


This is the usual situation in most developed economies at most times. 


Contrasted with the less usual situation of Deflation, when prices generally are falling. However, very low - and negative - inflation has been more common in recent years.  For example, measured by the [[CPI]], UK inflation was negative in both September and October 2015.
:<span style="color:#4B0082">'''''Bank Capital Requirements: Basel III Endgame - Congressional Research Service'''''</span>


:"the proposal would implement some of the recommendations that Fed Vice Chair Michael Barr proposed in a previous holistic capital review and respond to issues that arose when three banks with over $100 billion in assets failed in 2023.


===Points to note===
:The proposal would apply to banks with over $100 billion in assets.


We have taken inflation and deflation above as changes in "prices" or "prices generally" as if they have a clear meaning. But they raise the questions of "What prices?" and "What does generally mean?"


Since the term was first used "inflations" have proliferated. Retail price inflation, consumer price inflation, services inflation, government sector inflation, health sector inflation, asset price inflation (house prices, vintage cars, industrial assets, etc.), wage inflation, and so on.
:According to the proposal, its purpose is to improve the consistency of capital requirements across banks, better match capital requirements to risk, reduce their complexity, and improve transparency of banks’ financial conditions for supervisors and the public.


And once we know what we are interested in, we need to define it more closely. What exact set of goods or services or assets precisely are we looking at? For each member of the set, how much weight do we give it in the basket - how do we weigh cream cakes against toothpaste? And if we include a device or a machine or a house, which precise type, model or design, and where bought?


And what if our selected type is no longer made, or even the whole product ceases to be relevant? For example in Europe, households no longer launder with wash-boards and mangles (relatively cheap, though requiring much manual labour) but with washing machines (relatively expensive, but with much less manual labour required). And bars of laundry soap have been replaced by "clever" detergents? Or consider a mega-byte memory - that industrial good that fitted on the back of a truck and was used only by the largest companies and governments against the litter of USB memory sticks in drawers in developed-country houses at the start of the 21st century. Adjusting for this effect is called hedonic adjustment - but any two people are likely to value changes differently: it has huge amounts of subjectivity.
:In the United States, the largest banks calculate their requirements using two methods: a standardized approach applicable to all banks and a specialized advanced approach that allows the banks to model many of their own risks.  


And how do we find out prices - read a catalogue, go to the village shop, look online, etc.?
:Although internal models can potentially be “gamed” (i.e., designed in a way to allow a bank to hold less capital rather than accurately measure risk), they can also model risk more sophisticatedly and be more tailored to a bank’s unique risk profile.  


So always have great suspicion of any calculated inflation index and ask yourself if it is the index best suited for what you have in mind - and don't apply it where it may be positively misleading.


And the most general measure of inflation in an economy - the implied GDP deflator - doesn't that include everything and so is most relevant to its society as a whole at the time? Well, it makes an effort, but it has its own problems. It is the (percentage) difference between nominal and real growth - this year's GDP ([[Gross domestic product]]) at actual prices and this year's GDP at last year's prices. But estimating GDP is very hard, different methods producing different results.
:Following the Basel III Endgame, the proposed rule would reduce the use of internal models through a new second standardized approach for advanced approaches banks called the expanded risk-based approach.  


Even what one should try to include in GDP is disputable. For example, if you employ a care-worker to look after a sick or infirm family member, the service provision is part of GDP. If one of the family does it, it is not. And what about the [[black economy]]? If you pay the just discussed care-worker in cash and don't tell the tax man, will that be included? So, for example, internationally in the early 21st century, GDP estimates are being changed to include the "value" of prostitution and illegal drug use as the discussion moves on.


Surveys of the prices in each year are hard too and raise a lot of the same questions as discussed above.
:Other banks with over $100 billion in assets would be required to calculate risk-weighted assets under two approaches for the first time.  


We are dividing an uncertain numerator by an uncertain denominator. So while the implied GDP deflator may be the best "general inflation" measure we have readily available, it should still be treated circumspectly.
:Despite the regulators’ intentions, many within the industry have criticized this dual approach to capital requirements as unduly burdensome.


Added to which, if we don't quite know what inflation is, we certainly have little idea of what the underlying causes of inflation are, though there are a lot of theories. The choice of underlying cause assumed in any article, speech or policy decision being perhaps as much an exercise in politics and wishful thinking as in economics.


For these reasons it is normally better to undertake forecasting in money terms, rather than in 'real' (inflation-adjusted) terms.
:The proposal would also require banks with over $100 billion in assets to include unrealized capital gains and losses on certain securities in their capital levels.
 
:Unrealized capital losses were one of the primary causes of Silicon Valley Bank’s failure.
 
 
:The proposal would also extend two capital requirements — the supplementary leverage ratio and countercyclical capital buffer — to all banks with over $100 billion in assets."
 
:''(Bank Capital Requirements: Basel III Endgame - Congressional Research Service - November 2023.)''




== See also ==
== See also ==
* [[Consumer Prices Index]]
* [[Bank for International Settlements]] (BIS)
* [[Cost-push inflation]]
* [[Basel III]]
* [[Crawling peg system]]
* [[Capital]]
* [[Deflation]]
* [[Capital adequacy]]
* [[Demand-pull inflation]]
* [[Capital Requirements Directive]]  (CRD)
* [[Hyperinflation]]
* [[Capital Requirements Regulation]]  (CRR)
* [[Inflation risk]]
* [[Central bank]]
* [[Real]]
* [[Countercyclical buffer]]
* [[Stagflation]]
* [[First Republic Bank]]
* [[Trade union policy]]
* [[Game]]
* [[Transmission mechanism]]
* [[Internal Models Approach]]
* [[Treasury inflation-indexed securities]]
* [[Regulatory capital]]
* [[Risk Weighted Assets]] (RWAs)
* [[Security]]
* [[Signature Bank]]
* [[Silicon Valley Bank]]
* [[Standardised Approach]]
* [[Supervision]]
* [[Supplementary leverage ratio]] (SLR)
* [[Transparency]]
* [[Unrealised loss]]
 
 
==Other resource==
*[https://crsreports.congress.gov/product/pdf/R/R47855 Bank Capital Requirements: Basel III Endgame - Congressional Research Service - November 2023]
 
[[Category:Accounting,_tax_and_regulation]]
[[Category:Investment]]
[[Category:The_business_context]]

Revision as of 06:24, 1 February 2024

Bank regulation - capital requirements - Bank for International Settlements (BIS) - United States.

The Basel III Endgame is a proposal to amend the capital adequacy requirements for banks regulated in the United States.

The overall effect would be to increase the amounts of capital that the banks are required to hold.


The route to this overall increase would be a substantial decrease in the flexibility of banks to model their own risks for capital adequacy calculation purposes, with a corresponding increase in the requirement for them to use standardised approaches to risk modelling.

This initiative followed the failures of three large US banks (with over $100 billion in assets) in 2023: Silicon Valley Bank, Signature Bank and First Republic Bank.


Bank Capital Requirements: Basel III Endgame - Congressional Research Service
"the proposal would implement some of the recommendations that Fed Vice Chair Michael Barr proposed in a previous holistic capital review and respond to issues that arose when three banks with over $100 billion in assets failed in 2023.
The proposal would apply to banks with over $100 billion in assets.


According to the proposal, its purpose is to improve the consistency of capital requirements across banks, better match capital requirements to risk, reduce their complexity, and improve transparency of banks’ financial conditions for supervisors and the public.


In the United States, the largest banks calculate their requirements using two methods: a standardized approach applicable to all banks and a specialized advanced approach that allows the banks to model many of their own risks.
Although internal models can potentially be “gamed” (i.e., designed in a way to allow a bank to hold less capital rather than accurately measure risk), they can also model risk more sophisticatedly and be more tailored to a bank’s unique risk profile.


Following the Basel III Endgame, the proposed rule would reduce the use of internal models through a new second standardized approach for advanced approaches banks called the expanded risk-based approach.


Other banks with over $100 billion in assets would be required to calculate risk-weighted assets under two approaches for the first time.
Despite the regulators’ intentions, many within the industry have criticized this dual approach to capital requirements as unduly burdensome.


The proposal would also require banks with over $100 billion in assets to include unrealized capital gains and losses on certain securities in their capital levels.
Unrealized capital losses were one of the primary causes of Silicon Valley Bank’s failure.


The proposal would also extend two capital requirements — the supplementary leverage ratio and countercyclical capital buffer — to all banks with over $100 billion in assets."
(Bank Capital Requirements: Basel III Endgame - Congressional Research Service - November 2023.)


See also


Other resource

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