"Banks have to hold the safest and most liquid paper which in Australia is government bonds. Unfortunately for them - there is not enough being issued to satisfy the requirements of Basel3 capital(1) ratios."
Capital adequacy rules are about capital required to support credit, market and operational risks. It is liquidity rules that determine liquid asset holdings and RMBS, semi governments and highly rated securities can also be used to meet liquidity requirements.
"a) - the global regulation has changed: all derivative products HAVE to be registered with authorities and traded VIA exchanges (over the counter)!"
Over the counter or OTC derivatives are counterparty to counterparty and are not exchange traded.
"b) - there are two distinct accounting standards of reporting derivative positions:1) netting out. 2) or gross (notional)."
Under USGAAP, the mark to market (not notional) can be reported net where there is a master netting agreement in place. Under AGAAP, netting of the mark to market is only available where more stringent netting criteria are met.
"a) If banks net out their positions - obviously the balance sheet shrinks with the effect of having to hold less capital (good looking capital ratios)."
"For derivative positions, the capital adequacy rules allow netting where a master netting agreement is in place irrespective of the accounting treatment applied."
"b) If banks report their gross positions - the balance sheet effect is that they need to hold more capital against derivatives (bad looking capital ratios)."
No as capital adequacy treatment is independent of accounting treatment
