Home' Trinidad and Tobago Guardian : January 17th 2016 Contents JANUARY 17 • 2016 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
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Saudi Arabia plans to create a
new sovereign fund to manage
part of its oil wealth and diver-
sify its investments, and has
asked investment banks and
consultancies to submit pro-
posals for the project, according to people
familiar with the matter.
Plunging oil prices have strained Saudi Ara-
bia s finances. The kingdom s state budget
deficit is at a record high and net foreign assets
dived more than US$100 billion in 15 months.
The new fund could change the way tens
of billions of dollars are invested and affect
some of the world s leading asset managers,
particularly in the United States, where the
bulk of Saudi Arabia s foreign assets are man-
"Keeping the foreign reserves at a good level
is necessary to maintain a solid financial posi-
tion and support the riyal," said one of the
Another source said the Saudi government
sent out a "request for proposal" to banks and
consultants late last year, seeking ideas on
how to structure a new fund.
The sources asked not to be identified
because the plans are confidential. They said
the Saudi government did not tell them the
size of the planned new fund.
One source said the fund would focus on
investing in businesses outside the energy
industry, such industrials, chemicals, maritime
and transportation. The sources stressed that
no final decisions had been made, and a range
of options were being studied.
The sources said managers of the planned
fund may be able to invest directly in com-
panies rather than channelling investments
through foreign asset managers. This could
The second source said he understood the
new fund would ideally be up and running
within 12 to 24 months, with an office in New
A spokesman for the Saudi Arabian Mon-
etary Agency (SAMA) could not be reached
for comment. SAMA, which currently manages
the vast bulk of petrodollars earned by Saudi
Arabia, has traditionally been secretive about
its management of the money.
Dealing with cheap oil
SAMA s net foreign assets totalled US$628
billion in November, down from a record high
of US$737 billion in August 2014, when the
government started drawing down assets to
pay its bills as falling oil prices saddled it with
a huge budget deficit.
The assets, some of which are handled by
global fund firms, are mainly securities such
as US Treasury bonds and deposits with banks
abroad. Equities are believed to account for
only a small fraction of securities holdings,
perhaps 20 per cent. The bulk of assets are
believed to be denominated in US dollars.
The conservative, low-risk instruments
SAMA favours have been criticised for yielding
modest returns, especially with global interest
rates as low as they are now. In 2014, Saudi
billionaire Prince Alwaleed bin Talal urged the
government to create a new fund to earn higher
At the time, Finance Minister Ibrahim Alassaf
insisted there was no need for a new fund.
But policy-making authority has shifted since
King Salman took the throne in January last
year and created a powerful Council of Eco-
nomic and Development Affairs chaired by
his son, Prince Mohammed bin Salman.
With the advice of Western consulting firms,
Prince Mohammed is pushing a range of
reforms for an era of cheap oil. Steps include
spending cuts, higher taxation and privatisa-
tion. The plan for a new sovereign fund is part
of this drive.
In drafting its reforms, Saudi Arabia has
examined the policies of other rich oil exporting
Part of the new Saudi fund would operate
much like a private equity investor, buying
major stakes in foreign companies as the sov-
ereign funds of Qatar and Abu Dhabi do, but
it would also use other forms of investment,
the sources said.
Some of the world s biggest banks will have to set aside a
combined US$77 billion in extra capital from 2019 under new
trading book rules unveiled on Thursday by global regulators
hoping to prevent another financial crisis.
In the latest sign of how regulators are being more accom-
modative as policymakers emphasise the need to help economies
grow, the Basel Committee of banking supervisors has eased
its initial proposal for a hike in capital requirements.
Banks had warned that overly burdensome demands would
make trading uneconomic, crimp lending and thin already
stressed liquidity in markets.
Basel did not name the banks likely to be affected, but major
US trading firms such as JP Morgan as well as European players
such as Deutsche Bank are likely to be in the frame.
Policymakers hope that publication of the rules will give
clarity on the final, post-crisis regulatory picture for banks
so they can forge sustainable businesses.
While the new rules won t represent a huge overall hike in
capital requirements, they could dampen ambitions to expand
trading. Some lenders are already scaling back on trading
Under its final, long-awaited rules on how much capital
banks must hold in case stocks, bonds and other markets turn
sour as they did in 2007-09, Basel has raised the trading book
assets of a bank s total risk-weighted assets to around 10 per
cent from 2019 from about 6.0 percent.
Each percentage point difference is equivalent to less than
20 billion euros in extra capital, and an impact study by Basel
study shows that for most lenders there will be little change,
if any, in capital requirements.
The bulk of the 70 billion euros in extra capital requirements
will fall on just a handful of big trading banks, though they
are unlikely to need fresh capital as they typically hold far
more than the overall minimum needed.
JPMorgan s chief financial officer, Marianne Lake, told
analysts on a conference call on Thursday that the final rules
mark the start of a race to understand the changes and make
The rules are exceptionally complex and earlier drafts and
proposals varied too much for the bank to spend a lot of time
and money preparing for different outcomes, Lake said.
Under the new rules, the amount of capital needed against
non-securitised assets, which make up the bulk of trading
books and include shares, foreign exchange, swaps and com-
modities, will rise by a median of 27 per cent, Basel said.
For securitised or pooled debt, the capital increase will be
a more modest 22 per cent as far heftier hikes were introduced
in the immediate aftermath of the financial crisis in a quick-
fix known as Basel 2.5.
The International Swaps and Derivatives Association wel-
comed "a more consistent and coherent market risk framework,"
but it is too early to comment on the overall capital impact,
said Mark Gheerbrant, head of risk and capital for the group,
in a statement.
"We note, however, that even the Basel Committee s own
estimate of a 40 percent average increase in total market risk
capital requirements would impose a considerable burden on
banks on top of the increases already introduced following
the crisis, as part of Basel 2.5," he added.
The association put out a statement with two other major
trade groups, the Global Financial Markets Association and
the Institute of International Finance, saying, "we worry that
the rules may have a negative effect on banks capital markets
activities and reduce market liquidity."
A core aim of the rules is to end incentives for banks to
shift assets between their banking and trading books to exploit
variations in capital charges. Regulators also want more con-
sistent capital calculations.
Larger banks use their own models for calculating capital,
which typically lead to lower requirements than under the
standard method set out by regulators and used by the vast
majority of lenders.
The new rules will still allow the use of models but within
a much stricter framework, with the vetting of models by
supervisors toughened up.
Approval for models will also be made more granular, with
regulators able to stop their use at individual trading desk level
Banks that use models will also have to run the same cal-
culations using the "standard" approach to act as a capital
floor, irrespective of what models come up with.
Draft versions of the rules sparked accusations from banks
of a Basel IV in the making, meaning a step change in capital
requirements on top of Basel III, the world s core regulatory
response to the financial crisis.
Central banks have dismissed this and the Basel Committee
said on Thursday the changes it has to earlier drafts of the
new rules "have led to an overall reduction in the capital
impact". (US$1 = 0.9144 euro)
Tougher rules on trading books target global banks
Saudi Arabia plans new
sovereign wealth fund
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