Friday, January 6, 2017

BIS Postpones Final Act of Basel III

Miss Otis regrets she's unable to lunch today.

Author: David Schwartz

In a sparsely worded press release on January 3, 2017, the Bank for International Settlements announced that the January 8 meeting of the group of central bank governors and heads of supervision (GHOS) has been postponed. At this meeting, the GHOS were to finalize long awaited rules that will determine how much capital lenders have to set aside against loans and other assets. Citing unfinished work necessary to calibrate banks' risk-weighted capital ratios, BIS chose to move finalization off for the present.  

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Monday, December 5, 2016

Basel Chair Calls for More Research into Bank Risk Models

Author: David Schwartz

In his December 2, 2016 keynote speech at the second Conference on Banking Development, Stability and Sustainability, Basel Committee Chairman Stefan Ingves invited the financial industry and academics to help better calibrate capital and liquidity standards. As the Committee finalizes Basel III, Ingves said that he welcomes research and rigorous analysis of how the Committee should think about the capital benefits of allowing banks to use internally modeled approaches to calibrate appropriate capital floors. While standardized modeling approaches have the benefit of being uniform and simple, they lack precision and may ignore real differences in risk among banks better addressed by internal models. Recognizing that “academic challenge…is an essential ingredient of a healthy financial and regulatory system,” Chairman Ingves says that the Basel Committee is eager to see research that answers questions like:

 

  • What are the pre-conditions for such models to produce better outcomes than, say, simpler standardized approaches? 
  • To whom do the benefits of improved modeling accrue?  For example, if a bank using a model can lower its capital requirements by, say, 30%, what are the financial stability and real economy benefits of such an approach? 
  • To what extent do the benefits of modeling accrue to lower-risk borrowers as opposed to the parties being compensated for developing and using the models?
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Monday, May 16, 2016

BIS Publishes Survey on Integration of Regulatory Capital and Liquidity Instruments

Author: David Schwartz

In March 2016, the Bank for International Settlements (BIS) published a paper reviewing the current knowledge and empirical data on the effects of new bank capital and liquidity requirements.  This literature review is comprised of three essays surveying the current body of research and empirical studies on liquidity and its interaction with capital and on other supervisory requirements.

 

Because the study is a literature review, BIS did not perform empirical analysis of its own. Rather, the authors carefully examined the available studies performed, assessed their scope, methodologies, and results, and drew conclusions regarding what has been learned thus far, noting gaps or areas still in development.  Overall, the literature review’s authors found that, because new capital requirements have been in place for quite awhile, a great deal of research has already been performed on their costs and benefits, as well as their effects on economic activity. In contrast, liquidity requirements and other supervisory tools like buffers and stress tests have only been implemented since the recent financial crisis. As a result, there has been far less time to study their efficacy or their knock-on effects, leaving gaps in the literature.

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Thursday, April 28, 2016

OFR Data Finds US Banks Still the Most Systemically Important

Author: David Schwartz

On April 13, 2016, the Office of Financial Research (OFR) published its annual systemic importance data for the world’s larges banks.  Based on data released in 2013 and 2014 by the Basel Committee, the OFR’s report examined data for the global 30 banks designated as G-SIBs, which included eight US bank holding companies.  The OFR’s data collection and analysis is particularly significant because, beginning this year, regulators will employ this systemic importance data in determining capital requirements for banks.

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Thursday, March 24, 2016

Basel Proposes Changes to Reduce Variation in Credit Risk Weighted Assets

Author: David Schwartz

The Basel Committee on Banking Supervision today released a consultative document proposing a set of changes to the Basel III framework’s approaches for determining Banks' regulatory capital requirements for credit risk.  The goals of these changes are to (i) reduce the complexity of the regulatory framework and improve comparability; and (ii) address excessive variability in the capital requirements for credit risk.

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