Magazine article American Banker

Fed Floats Idea of Letting Banks Set Capital Cushion for Trading Activity

Magazine article American Banker

Fed Floats Idea of Letting Banks Set Capital Cushion for Trading Activity

Article excerpt

WASHINGTON-In what Fed Chairman Alan Greenspan described as a major step into the future of banking regulation, the Federal Reserve Board on Wednesday proposed letting banks decide for themselves how much capital they need to set aside for their trading operations.

Mr. Greenspan said that rapid changes in technology and communications were making old-style banking supervision obsolete, and that the proposed new approach "could be extraordinarily useful as our next 'Pentium chip.'"

The idea was presented in the form of a trial balloon - the board voted

unanimously to publish it in the Federal Register as a "request for comment" to see if banks and other interested parties think it is feasible.

It came up at Wednesday's meeting immediately after the board approved a

more concrete proposed regulation that would let banks judge market risks using their own internal models instead of regulatory formulas.

That rule, based on a proposal issued April 12 by the Basel Committee on

Banking Supervision, would still require regulatory review and approval of

banks' risk assessment models.

"The current proposal is clearly a major advance over where we've been,"

Mr. Greenspan said. But, he added, "like the Pentium chip and its predecessor, you develop a new technology before the previous technology is

even introduced."

How would the "new technology" proposed in the Fed's regulatory trial balloon work?

"The approach would require a bank to specify the amount of capital it chose to allocate to support market risks and to commit to manage its trading portfolio so as to limit any cumulative trading losses over some subsequent interval . …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.