Updated: May 10, 2012 (Initial publication: May 5, 2012)
Breaking news
The Basel Committee opens on 3 may 2012 a consultation on the qualification of "trading", which calls a specific prudential regulation
http://thejournalofregulation.com/spip.php?article1437
The financial crisis and the banking technology shows that the "trading" is specific. This is why the Basel Committee estimates that it appropriate to regulate banks trading activity in a specific way. But it is difficult to characterize the activity of "trading" and actual banking activity itself. Trading is limited to negotiation; it justifies less equity as security, since it does not present credit risk. But this characterization even is questionable. This is why a consultation opened on May, 3 by the Basel Committee, and the qualification, and the classification of operations, and the measures of prevention of risks to be taken by specific prudential measures. Responses can be made until September 7, 2012.
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In the previous standards of Basel (Basel 2.5), the distinction of financial instruments to trading and financial instruments used to credit depended on the intention of the banker. Thus, it should be but it is sufficient that the Bank said that the instrument was designed to be used to make trading so that it appears as leading not potentially risk to the Bank, and justifying and little equity, compared to other banking activities. Here, it’s measured the difference between the "banking culture" and the "financial culture", the first, rather related to the credit and leading only to take risks sufficiently guaranteed while the other leading to take risks in a more reckless way.
No doubt the financial crisis revealed that the "financial culture" had invaded some banks and that there was a tendency on the part of these to declare their intention to use financial instruments to end of negotiations (trading) to end reduce corresponding own funds, while the object is not necessarily that. The Basel Committee, as instructed by the crisis, wants to renounce this subjective test, based on the intent and the statement in which they are placed.
But as soon as this abandonment is operated (based on a theory of suspicion, a clash over more violent between the values of the Bank and financial values, the first having appeared to be eaten by the seconds), is necessary to find an objective test to classify financial instruments of negotiation from the other financial instruments, the first requiring less capital.
The Basel Committee doesn’t want a subjective approach based on the declaration of intent by the banks any more but doesn’t’ want even a design objective simply internal to the banks.
In such an atmosphere of suspicion, the Committee rejecting what he refers to as a "private risk vision", it requires a method based on valuation which no longer refers to markets and a classification of instruments which no longer only refers to the intentions that the bankers would have to do but on the evidence that the Bank is in a position to negotiate on the market, in market value, on a daily basis.
Now, the burden of proof is based on the banks. It then moves to a simple declaration of intent to a heavy evidence system constantly renewed.
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