The Bank of International Settlements, or BIS, is known as the Central Banker’s bank. Its origins trace back to the earlier part of the 20th century. I actually read the book about its history, including an unflattering description of how the Bank operated during World War 2.
However, this issue we have with the BIS has less to do with past history of Nazi collaboration, but rather how pronouncement / proclamation / rule CRE 70 is currently worded.
The following is the current wording of CRE 70. that apply to failed trades and unsettled transactions on securities, commodities, and foreign exchange transactions. It’s structured in the passive form and we at Rembau Times are aggressively changing the world to communicate in the active form.
If five business days after the second contractual payment/delivery date the second leg has not yet effectively taken place, the bank that has made the first payment leg will risk weight the full amount of the value transferred plus replacement cost, if any, at 1250%. This treatment will apply until the second payment/delivery leg is effectively made.
70.12 A bank that has made the first payment leg will risk weight the full amount of the value transferred plus replacement cost, if any at 1250%, if the second leg has not effectively taken place five days after the second leg’s contractual payment/delivery date was due. This treatment will apply until the second payment/delivery leg is effectively made.
What do readers think?
The 1250% or 12.5x effectively means that the exposure is treated as a total loss. Say for example, if you are a broker and you delivered $100 of Apple shares to Mr. Magoo on 01 Jan 2020. 5 days later, Mr. Magoo has still failed to remit the $100 to settle his purchase. To make things worse, Apple shares suddenly went up to $180. What the rule means is that you will treat the $180 as a loan to Mr. Magoo and risk weight by 1250%, which means it carries a risk charge of $2,250. As a bank you need to set aside capital for your increased risk, which is say 8%. That means the additional capital required is $180. Effectively, the standard means that the bank’s capital is set aside for the entire value of the failed trade. Actually this is even worse than taking an expense of $180, because the capital impact is reduced by the tax shield, which may reduce capital by $135, assuming a 25% marginal tax rate.