Global banking regulators proposed on Monday that banks should only have to set aside small amounts of capital when dealing with supervised central counterparties, in a consultative paper aimed at further stabilising the financial system. Transactions carried out via central counterparties are seen as more transparent than those made in the over-the-counter deals. There is also greater liquidity in centrally cleared markets.
The Basel Committee on Banking Supervision, however, also said in the paper that even the risk of dealing with regulated central counterparties (CCP) should not be set at zero.
"The Committee's intent is to provide incentives for banks to increase the use of CCPs," Mark White, chair of the Basel Committee's Risk Management and Modelling Group, said in a statement. "This is balanced, however, by the need to ensure that the risk arising from banks' exposures to CCPs is adequately capitalised," he added. Greater use of central counterparties was one of the goals set out by G20 leaders at their 2009 summit in Pittsburgh to reduce the risk of domino effect of large over the counter deals and to increase transparency.
The committee said that while the old Basel II framework allowed exposure to central counterparties to be zero, the committee now proposes a 2 percent risk weight for such trade exposures to highlight that business is never completely free of risk. The risk weighting of assets is important to determine how much capital banks must set aside under the new, stricter capital requirements known as Basel III. The capital standard proposed on Monday is low enough that it should not impede efforts to push banks to use clearing-houses, said Mary Frances Monroe of the American Bankers Association.
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