Financial Agencies Want|Banks to Cover Their Hedges

     WASHINGTON (CN) – Banks whose consolidated trading activities equal 10 percent or more of their total assets or more than $1 billion annually would have to increase the amount of cash they keep in reserve to cover the market risk of their trading activities, under new rules proposed by financial regulators.




     Banks already are required to maintain risk-based capital ratios in reserve against capital they have lent to borrowers and against the value of capital they have invested.
     The proposed rule would require banks to change the model they use to determine their risk-based capital ratios by including not just the value of their trading portfolios or their “covered positions” but also the value of any trading assets or liabilities that hedge their covered positions. The net result is expected to raise the amount of cash banks need to keep on hand.
     The proposed rule also would require banks to develop clearly defined trading and hedging policies and strategies that are approved by senior management. The policies must detail how long a trading position is to be held and the level of market risk the bank is willing to take on while holding a particular position.The Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation are asking for public comment on the proposed rule.

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