Financial Reforms, Obama style.

This is the ninth in a series of articles on the financial reforms sought to be implemented by the Obama Adminstration in U.S.A.

C.  Strengthen capital and other prudential standards applicable to all Banks and BHCs:   The Treasury is expected to play a key role in the reassessment of the extant regulatory capital requirements, for Banks as well as BHCs including new Tier I FHCs by leading a working group with federal financial regulatory agencies and outside experts.   December 31st, 2009 is the deadline for submission of it’s report by the working group.

What the working group will review:

1. The present capital requirements and their adequacy.
2. To assess and evaluate capital requirements in relation to the multifarious activities of the firms including trading assets, and structured credit products.
3. To make a comprehensive review of the capital requirements, including the composition of the capital, scope of risk coverage in relation to the firms’ activities, exposures, etc.
4. To make it incumbent on Banks and BHCs to hold a higher level of capital in favorable economic times, in order to take care of capital requirements during stressed times.
5. The working group will study the feasibility of Banks and BHCs issuing contingent capital instruments that would take care of at least a part of their capital requirements by automatic conversion of the underlying instruments into common equity under stressful economic conditions.
6. Purchase of tail insurance by Banks and BHCs against macroeconomic risks is another idea to be examined.
7. Investments and exposures that expose the Banks and the BHCs to a higher level of risk like trading positions, equity investments, credit exposures to low quality firms and persons, and other such exposures to be subject to higher capital requirements.
8. A simpler and more transparent system of leverage for Banks and BHCs would be considered to support risk based capital measures.

Banks and BHCs would, in general, be subject to a risk-based capital rule covering the entire gamut of their businesses, and subject to assessment of their capital adequacy relative to their various exposures and applicable across the firms.   The idea behind this is to ensure that the changes that are sought to be brought about in the supervison and regulation of financial firms is better than the extant ones, that could not prevent the present crisis.

                                                                                  To be concluded.