Sunday, July 17, 2016

EU Urges a New Look at Basel Reforms

Have we traded growth for stability?

Author: David Schwartz J.D. CPA

In his final address on July 12, 2016 as the EU’s Commissioner for Financial Stability, Jonathan Hill announced that the European Commission would push the Bank for International Settlements (BIS) to rethink some of its Basel III reforms in light of their affects on capital, trade finance, market liquidity, and access to clearing.  While applauding the regulatory work done to ensure financial stability, Hill worries that global regulators have become too risk averse, missing the big picture and trading growth for stability.  


Commissioner Hill fears that when all macro- and micro-prudential regulators are taking risk-averse approaches, “then the cumulative impact of a series of micro-prudential judgments can itself become a source of macro-prudential risk.” 


"In short, I concluded that whereas after 2008 the greatest threat to financial stability had been the financial crisis, over time the greater threat had become the lack of growth itself. In other words, too little risk itself became a big stability risk. That is what led me to argue that in Europe, the regulator – me – must therefore be prepared to deviate from the advice given by the supervisors if macro-prudential considerations demand it."


Consequently, despite Commissioner Hill’s departure, the European Commission will be contacting the Basel Committee to reassess its one-size-fits-all approach to bank capital requirements, as well as liquidity and leverage standards.  In particular, according to Commissioner Hill, the EU would like BIS to consider granting smaller banks some breaks from capital requirements, consider easing constraints on banks’ leverage and derivatives clearing, and examine whether new regulations have negatively affected liquidity in corporate bond and other markets. 


Commissioner Hill's address is available at: