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Saturday, June 23, 2012


June 18, 2012, the FDIC distributed a rule-making notice to member banks, telling them it intends to change collateral rules, among other things. The changes are not purely the work of the FDIC alone. Prior to the notice, the agency got the approval of all US federal bank regulatory agencies. These include the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board of Governors and the Office of the Comptroller of the Currency (OCC).
The purpose is to harmonize and address perceived shortcomings in the measurement of risk-weighted assets, in part by implementing changes made by the Basel Committee on Banking Supervision (BCBS) to international regulatory capital standards. It is also intended to implement aspects of the Dodd-Frank Act. The proposed rule would:
1) Revise risk weights for residential mortgages based on loan-to-value ratios and certain product and underwriting features;
2) Increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;
3) Expand the recognition of collateral and guarantors in determining risk-weighted assets;
4) Remove references to credit ratings; and
5) Establish due diligence requirements for securitization exposures.
One key provision significantly strengthens restrictions on the way banks estimate their exposure to derivative risks. Banks use these estimates, and disseminate them to regulators, for purposes of setting and/or justifying capital levels. Estimates of exposure using so-called "net current credit exposure" (the cost of canceling the contracts prior to the occurrence of a trigger event) and/or purely subjective mark-to-fantasy "models", concocted by the bank financial team, would no longer be acceptable. Notional exposure would become a mandatory part of calculating the "risk" of derivatives.
Under new rules, the following would be entitled to a zero percent risk weighting:
1. Cash;
2. Gold bullion;

3. Direct and unconditional claims on the U.S. government, its central bank, or a U.S. government agency;
4. Exposures unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency;
5. Claims on certain supranational entities (such as the International Monetary Fund) and certain multilateral development banking organizations
6. Claims on and exposures unconditionally guaranteed by sovereign entities that meet certain criteria, as listed in the notice.
Under this joint proposal, co-sponsored by FDIC, OCC and the Federal Reserve, gold will once again be a zero risk asset in the private banking world. It has been legally barred from that most important of positions for 80 years now.

1 comment:

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