The new -year hangover throbbed agonisingly for investment bankers this year. Blame Basel 2.5, a new set of international rules which charges banks higher capital for the risks they run in their trading books (as opposed to their banking books, where they keep assets that they intend to hold to maturity). Those charges were too low before. And heaping higher costs on banks should please politicians and Joe Public. But they add another layer of complexity to banks' risk management. Basel 2.5 came into force on December 31st in most European and major world financial jurisdictions. Switzerland applied the rules a year early, and the costs are substantial. Third-quarter figures for Credit Suisse show a 28% increase in risk-weighted assets, and hence capital charges, for its investment-banking activities purely because of Basel 2.5. The most notable laggard is America, us financial regulators do not oppose Basel 2.5, but it clashes with the Dodd-Frank act, America's big wet blanket of a financial reform. Basel 2.5 uses credit ratings from recognised agencies such as Moody's and Standard & Poor's to calibrate capital charges. Dodd-Frank expressly forbids the use of such ratings agencies, whose poor judgments are held partly responsible for the crisis. Instead American regulators are working on their own cocktail of creditrisk calibrations for Basel 2.5, using market data and country-risk ratings from the oecd. Their solution is still months away from application (though not as distant as implementation by the Russians or Argentinians).
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