Analysts warn new bank rules increase risks
NEW regulations designed to make banking less risky could instead ferment a new crisis because they concentrate risk in clearing houses, JP Morgan analysts said yesterday.
The analysts warn that the Eurozone debt turmoil could cause these risks to come to a head and say that clearing houses – which ensure the smooth passage of trillions of pounds worth of trades in securities and derivatives – are ill-equipped to handle a systemic crisis.
“Bank regulation is likely transferring banking risk to highly leveraged and potentially under-resourced [clearing houses], which may not be able to sustain… correlated default events such as sovereign haircuts across the EU,” they write in a note.
By way of example, the analysts cite LCH.Clearnet, the UK’s biggest clearing house, which had just €333m of capital on standby last year, despite having exposure to €2.4 trillion of interest rate swaps.
Although clearing houses take collateral on transactions depending on how risky they deem the securities and the trading parties to be, JP Morgan warns that “bank collateral scarcity is increasing” even as regulators are forcing banks to put more and more of their trades through clearing houses.
In addition, as regulations are fleshed out, the cost of putting transactions through clearing houses appears to be rising for banks, JP Morgan says.
While investment banks had expected regulators to allow them to hold less capital against trades guaranteed by clearing houses – which are seen as safer – that no longer appears to be the case.
As a result, JP Morgan estimates that investment banks are going to have to slash their payrolls by 19 per cent to bring shareholder returns anywhere near the increasing cost of the capital they use to generate profits.
Although clearing houses do not gamble on price movements, they do guarantee trillions of pounds worth of transactions so if one of the counterparties in a trade fails, they step in to “clear” it.
Regulators have been forcing investment banks to put more of their trades through clearing houses, which are viewed as safer and easier to keep track of than transactions that happen only between a bank and a client.