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Risk Ratios

I thought let us talk about some of the rules and its impact on different regions

Basel liquidity rule

Covers : Banks worldwide

What it does : Requires banks to hold enough cash or assets which can meet all debt coming due within 30 days.

Impact : It ensures banks won’t run out of money even during any credit crisis. Thus forcing them to hold more cash or govt securities, which have lower returns than riskier assets. Compliance will be phased in over 5 years.


Leverage ratio

Covers : Banks worldwide

What it does : Requires banks keep capital defined level of capital—assets minus liabilities—as a percentage of all risk free assets on their books

Impact :  With this restructions it will prevent banks to go for low-risk assets such as corporate bonds


Volcker Rule

Covers : U.S. banks and U.S. operations of global banks

What it does Restricts banks from making investment bets with their own money, including through ownership of hedge funds or private equity firms.

Impact Will reduce banks’ vulnerability to market slumps, but it also eliminates a potential source of profits. Banks plan to ask regulators to delay the ban on fund ownership, arguing that they won’t get the best prices for their assets if they’re forced to sell quickly.


Banker pay limits

Covers: European Union

What it does: Caps bankers’ bonuses at twice their salary.

Impact : To get around the rule, banks have begun increasing the fixed portion of employees’ pay. That could lead to problems, because fixed pay is harder to reduce when times are bad.


Common resolution

Covers: European Union

What it does: Establishes a €55 billion ($69 billion) fund to cope with failing banks.

Impact: Money for the fund will be collected from banks over eight years. Critics say the amount is too small to bail out even a midsize European lender.


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Amit Agrawal

Amit Agrawal


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13 Mar 2010



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Financial Services Regulation

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