The Collins Catalyst
The take-off of the US capital relief trades (CRT) market has been predicted for several years. But the increasingly onerous impact of the ramifications of the Collins Amendment could provide the tipping point.
This amendment to the 2010 Dodd-Frank Act, named after Senator Susan Collins of Maine, requires US banks that are entitled to use their own internal risk-based (IRB) models to determine risk weighted assets (RWAs) to also calculate RWAs according to the standardised methodology and to then apply whichever of the two is the toughest. Banks would thus be prevented from use of sleight of hand to reduce the value of assets and thus lessen capital require- ments, and in a post-financial crisis world this was deemed a primary objective.
The standardised approach to RWA calcula- tion had been initially unveiled as part of the capital adequacy standards of Basel 2, which were quickly superseded by the financial crisis and then Basel 3. According to Basel 3, the advanced or IRB-based approach could only apply to enti- ties that have consolidated assets greater than US$250bn or balance sheet foreign exposures greater than US$10bn.