Jim Brunsden
4:31 PM JST March 2015
Bank Of England Governor Mark Carney said on March 27 that the next move on rates by the BOE, for example, will probably be an increase, “because we will need some limited and gradual increases in interest rates to bring inflation back to target.” Photographer: Simon Dawson/Bloomberg
(Bloomberg) -- Banks face a push from international regulators for stiffer rules on the capital needed to handle an increase in interest rates.
The Basel Committee on Banking Supervision is weighing updating its standards for capturing interest-rate risk on assets banks plan to hold to maturity, Stefan Ingves, the regulator’s chairman, said in an interview.
“We are working on interest-rate risk in the banking book,” Ingves said on March 27 in Frankfurt. “We are looking into that presently and we hope to put out something in this field fairly soon.”
Global central banks have pushed interest rates to historic lows in a bid to counter the worst financial crisis since the Great Depression. The European Central Bank, as well as monetary policy chiefs in Denmark and Switzerland, are among those to have pushed some rates below zero in a bid to spur bank lending and stimulate economic growth.
Regulators are concerned that some banks may not be prepared for when the monetary policy tide turns and rates start to increase.
U.S. Federal Reserve Chair Janet Yellen said last week that interest rates will probably be raised in 2015 and made the case for a cautious approach to subsequent increases. Bank of England Governor Mark Carney said that the next move on rates by the BOE will probably be an increase, “because we will need some limited and gradual increases in interest rates to bring inflation back to target.”
Capital Requirements
One of the reasons for the Basel committee looking into this issue now is “the general level of interest rates in the world,” Ingves said. Rates “will go up,” and “not in a synchronized way,” he said.
The Basel committee brings together regulators from 30 nations to set bank capital requirements. Its members include the BOE and the U.S. Federal Reserve.
Capital requirements are a measure of banks’ financial strength. They set minimum rules on how far banks must fund themselves through equity and other sources that can absorb unforeseen losses.
Basel rules already include binding capital requirements for interest-rate risk on assets held in banks’ trading books.
For the banking book, international standards are currently limited to a system whereby banks regularly report to their national supervisors on risk levels. The supervisors then take decisions on whether more capital, or a reduction in the size of the position, is needed.
Binding Rules
This is known as a so-called Pillar 2 process, compared with the setting of binding rules, known as Pillar 1.
“The issue before the committee going forward will be whether to, and how to, move toward a Pillar 1, or whether we should move toward a more rigorous Pillar 2 treatment,” Ingves said.
Types of interest rate risk in the banking book include banks getting a relatively low interest rate on investments such as mortgages, while being under competitive pressure to offer higher rates to depositors. Others include banks being caught out by changes in the relationship between interest rates on short- and long-term debt.
“Interest rate risk in the banking sector is currently extremely high, so any specific capital charge would be high and costly for the banks,” Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., said in an interview. “Analysts would instantly price any new rule into their banking forecasts.”
Risk Measurement
A split has emerged in the Basel committee between European and U.S. regulators over how far to go beyond current measures, according to four people with knowledge of with the matter.
Many European Basel members are keen to move toward tighter global standards on risk measurement and on the amount of capital required. This has put them at loggerheads with the U.S., which wants to stay closer to the current approach.
The file was discussed at a meeting of the committee earlier this month in Basel. A range of possible solutions have been discussed, including designing a more constrained type of Pillar 2 approach, the people said.
The committee is set to publish a consultation paper in the next few weeks setting out both a Pillar 1 option and a more constrained Pillar 2, one of the people said.
The work on interest-rate risk in the banking book comes as the Basel committee seeks to finish off the remaining elements of a post-crisis rule overhaul that has been in full swing since 2009. The committee plans to complete work on many outstanding rule revisions by the end of 2016.
To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net
To contact the editors responsible for this story: Patrick Henry at phenry8@bloomberg.net Richard Bravo
Interest Rates Basel Banking Interest Rate Capital Requirements Markets Monetary Policy Federal Reserve Work Frankfurt
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Greek Markets Show All at Risk Should Mistake Trigger a Default
by Lukanyo Mnyanda
9:01 AM JST March 30, 2015
Greece’s Tsipras Meets Cabinet as Cash Needs Mount
(Bloomberg) -- In Athens, the unspeakable is at risk of becoming the inevitable.
Market metrics show Greece is in danger of sinking under the burden of its debt, putting repayments of about 500 billion euros ($542 billion) owed to European taxpayers, rescue funds, banks and bondholders in jeopardy.
Prime Minister Alexis Tsipras is locked in talks with creditors over measures attached to Greece’s bailout loans and a government official said on Friday the country won’t service its debt if creditors don’t release more funds. The government has also floated a restructuring that would link some future payments to economic growth, reduce interest rates and allow more time for repayments. While its intention is to exclude private bondholders, the danger is that talks collapse and Greece leaves the euro, saddling all parties with losses.
“The biggest fear now is that Greece exits by mistake,” said Padhraic Garvey, global head of rates strategy at ING Groep NV in London. “The only feasible solution in the absolute extreme would be to turn all the official debt into a perpetual bond so it never gets repaid.”
With the country running out of cash, credit-default swaps indicate a 74 percent chance of Greece reneging on its debt within five years compared with 67 percent at the start of the month, according to CMA.
Ratings Cut
Fitch Ratings lowered Greece’s local-currency issuer default grade to CCC from B on Friday, citing the country’s liquidity constraints and difficulties in reaching a financing deal with its creditors. The nation’s sovereign rating is scheduled for a review by Fitch on May 15.
Three-year note yields are almost 10 percentage points higher than 10-year rates. Typically investors get more to lend for a longer period to compensate for inflation. With Greece, the immediate worry is whether they get their cash back. The price of five-year securities has tumbled to 68 percent of face value, from almost 100 percent after they were sold a year ago.
Greece sold the current three-year notes in July 2014, its second tap of capital markets within three months, after a five-year debt offering in April that year had been hailed by German Chancellor Angela Merkel as a step toward normalcy.
Debt Sales
Sales of those securities, which totaled about 6 billion euros, increased the amount of Greek bonds outstanding to 67.5 billion euros, of which the European Central Bank and national central banks own about 40 percent, according to data compiled by Bloomberg. The market was reduced when Greece enacted the biggest-ever debt restructuring in 2012, which saw private bondholders write off about 100 billion euros.
Greece’s 10-year yield went as high as 44.21 percent in March 2012 as the country moved to restructure its debt. The rate rose 11 basis points, or 0.11 percentage point, to 11.12 percent as of 1:17 p.m. on Monday in London.
Euro-region governments and the crisis-fighting fund they set up in 2010 are owed almost 195 billion euros. Germany, the chief proponent of budget cuts and reforms in return for aid, stands to incur the biggest costs in any restructuring because it’s the largest contributor to Greece’s bailouts.
In all, public debt was 315.5 billion euros at the end of the third quarter last year, rising to about half a trillion euros when bank and company debt is taken into account.
Agreement Prospects
“There could be a hard-won agreement to disburse more cash into Greece within a framework covering subsequent years and then eventually some restructuring of the stock of liabilities, particularly on the official side,” Francesco Garzarelli, co-head of macro and markets research at Goldman Sachs Group Inc., said in an interview with Anna Edwards on Bloomberg Television’s “On The Move” program. “It’s really a matter of finding an agreement now covering the next couple of years and then letting things evolve from there.”
The risk is that Greece is force to quit the monetary union and investors suffer losses as their securities are redenominated into drachma.
“If there was going to be an exit from the euro zone or any sort of rearrangement of the currency agreements, that wave would fall back pretty quickly we suspect on other European members,” said Goldman Sachs’s Garzarelli.
Debt Reorganization
Suggestions made by Greece’s Syriza-led government as to how a debt reorganization may work include issuing securities indexed to nominal economic growth to replace European rescue loans, effectively giving creditors a share in the country’s future performance. That way, should growth slow, repayments diminish, helping reduce the debt burden and default risk.
Greek Finance Minister Yanis Varoufakis also proposed exchanging ECB-owned debt for perpetual bonds, removing the burden of heftier repayments as the securities come due. The ECB has always resisted a voluntary haircut on its debt because that may be considered monetary financing, which is banned under European Union law.
Prime Minister Tsipras has so far pledged to repay in full obligations to the International Monetary Fund and the ECB, as well as private bondholders. The promise has given confidence to investors such as Greylock Capital Management LLC, which have stuck with the securities.
Japonica Partners & Co., another backer of Greek bonds, says the longer-term debt picture is more positive for Greece. For debts including loans from the European Financial Stability Facility, repayments on the principal aren’t due for several years, giving the nation some breathing space.
Economic Measures
That may be of limited comfort in the face of more immediate discussions. Tsipras’s government needs to spell out economic measures it plans to undertake to free up aid payments that will keep the country afloat.
And political goodwill for Greece is waning. A poll by public broadcaster ZDF earlier this month found that a majority of Germans no longer wanted Greece to remain in the common currency. Another survey taken after Tsipras met with Merkel last week showed 49 percent in favor of Greece staying.
In a Focus magazine interview, Bundesbank President Jens Weidmann raised the possibility of “a disorderly insolvency” that happens when “a member country of a currency union decides not to meet its obligations and stops payment to creditors.”
Deposits of Greek households and businesses fell 5 percent in February to their lowest level since March 2005, according to Bank of Greece data released on March 26. Greeks pulled about 23.8 billion euros, or 15 percent of the total deposit base, in the past three months.
“A debt restructuring has been under discussion as long as Syriza has been in charge and every time this issue has been raised there’s been a great many people opposing it,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “The debt that Greece owes is already at extremely favorable conditions.”