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This summer, a signicant number of Basel III rules were

nalized in the U.S. Numerous banks will be required to not
only have more capital, but also hold a higher-quality, more
loss-absorbing capital. Also in July, the Federal Deposit
Insurance Corp. proposed a leverage rule that has a larger
denominator because it covers off-balance-sheet items. This is
a much stricter leverage rule than what the Basel Committee
recommended this summer.

The market should expect the slew of Basel III guidelines
released this summer to be proposed and implemented by
member countries once they are nalized, probably by the end
of this year and next quarter.
Key developments in Dodd-Frank this year also have signicant
potential to make large banks safer. The Commodity Futures
Trading Commission has worked at record speed to nalize
derivatives rules, which are impacting banks risk management.
All major U.S. systemically important banks have been
designated as swap dealers. They now have to transition their
trillion-dollar portfolios of uncleared, opaque over-the-counter
derivatives to cleared derivatives, which are more transparent
and have less credit and operational risk.
Additionally, the FDIC took an important step this April by
improving requirements for the largest rms living wills. The
new requirements force bank management to understand
more about their rms risk management policies, what their
subsidiaries do, and how the bank would be resolved if it failed.
Mayra Rodriguez Valladares
November 15, 2013
This article was originally published for American Banker
Importantly, the Federal Reserve and FDIC have been having
numerous discussions with their foreign counterparts to nd
ways to cooperate if a globally systemically important bank fails.
Given the global interconnectedness of our top banks and the
fact that U.S. regulators do not have power over bankruptcies in
foreign countries, this international cooperation is key.
Despite these marked improvements, Yellen, should she be
conrmed, inherits GSIBs that are larger, more internationally
interconnected and more concentrated by counterparties in
their derivatives transactions than before the global nancial
crisis.
Even with its imperfections, the implementation of U.S. Basel
III rules only begins in January 2014 with capital improvements
implemented incrementally through the end of 2018.
Unfortunately, there is much from Basel III that the Basel
Committee has not proposed or nalized.
Firstly, rules to require solid capital requirements to sustain
unexpected losses due to failing derivatives counterparties have
not been nalized. Certainly, the crisis taught everyone that
sometimes your counterparty can be downgraded or even fail
before your derivatives contract matures.

Secondly, banks are still relying heavily on value-at-risk market
risk measurement frameworks. The inputs to these models are
highly subjective and not transparent to outsiders. Moreover,
In her prepared conrmation hearing remarks, Federal Reserve chairman nominee Janet Yellen mentioned that U.S. banks are
in much better shape than they were during the crisis. Indeed, this has been a banner year for new regulations that are already
changing U.S. banks forever.
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even when good, they cannot tell risk managers what the worst
possible outcome that could wipe out their banks capital is.
The Basel Committee is in discussions about other frameworks,
such as expected shortfall. Yet for the foreseeable future, GSIBs
will utilize the less than perfect VaR disproportionately to
measure their market risk.

Thirdly, many risk management practitioners continue to
ignore operational risk, and the Basel Committee has yet to
make any recommendations to its measurement component in
Basel III. Much of what led to the global nancial crisis lack of
due diligence, personnel errors, internal processes violations,
conicts of interest, weak governance and fraud are all
examples of breaches in operational risk.

Lastly, Basel II and Basel IIIs Pillar III, which features
requirements for transparency, remains neglected. It has not
even been implemented in the U.S. In continental Europe, there
is little uniformity in banks disclosures rendering them of little
use to market participants who want to know more about how
banks identify, measure, control and monitor risks.

Additionally, it remains to be seen whether U.S. regulators will
make good use of Dodd-Franks Title I, which empowers them
to curb bonuses and dividend payments if banks cannot comply
with new Basel III capital conservation buffers.

Based off the conversations Ive had with regulators, I am
convinced the living wills still have to be strengthened to be
credible. Unfortunately, only the executive summaries of living
wills are available to the public. As such, they are of little value
to anyone trying to glean anything meaningful about banks
risks. For example, banks need to give more details about the
purpose of their subsidiaries. Also, it is imperative that banks
explain more about the inputs that go into their risk models
and whether those models are really used to minimize risks.
Bank management needs to come clean to regulators about
where they house both derivatives and the collateral for those
transactions. These details are imperative if regulators have
any hope of successfully resolving a large, global bank should
it fail. As I have argued in these columns, we should focus on
improving Title I, so that Title II, an FDIC-led resolution of a GSIB
never has to be invoked.

Yellens conrmation as Fed chair is widely accepted. Assuming
she can encourage the Fed to keep up the pace, she can
continue to push for a safer, banking system. Under her
leadership, it is critical that the Fed work more closely with
prudential and relevant global regulators. It is far better for the
Fed to lead in preventing a bank resolution rather than to lament
what undoubtedly would have dire consequences to the global
nancial sector and the economy.
This information was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein
constitutes a solicitation of the purchase or sale of any futures or options contracts.
Mayra Rodrguez Valladares is Managing Principal at MRV Associates, a New York based capital markets and nancial regulatory
consulting and training rm.