Tuesday, October 18, 2016

What to Expect from the Final Cut of Basel III

Author: David Schwartz J.D. CPA

In an October 12, 2016 address before the European Parliament’s Committee on Economic and Monetary Affairs, William Coen, Secretary General of the Basel Committee (BIS) provided some insights into what BIS plans to do to finalize Basel III post-crisis reforms. Notably, Coen indicated that there may be some reexamination of certain aspects of the framework that may have missed their mark initially.  


While Basel III was focused primarily on addressing leverage, excessive credit growth and liquidity risk, and capital and liquidity buffers, all identified as playing a role in the financial crisis, Mr. Coen said that the Basel Committee has taken a more reflective view on these post-crisis reforms. Coen indicated that the Committee’s review of the package of reforms, coupled with empirical evidence, “suggests that more can be done toward achieving a better balance between risk sensitivity, simplicity, and comparability.  He noted that, in particular: 


  • some parts of the regulatory framework are unduly complex, challenging the ability of banks' boards and supervisors to adequately oversee the way in which banks manage their risks;


  • a number of studies have found material variation in the risk-weighted assets calculated by banks, which has eroded faith in the comparability, if not the accuracy, of banks' capital ratios; and


  • the blanket use of a single metric - in this case, the risk-weighted capital framework - does not allow for a sufficiently robust regulatory framework. 


Consequently, in the short-term, BIS will focus on clarity, certainty, and simplicity as it rounds out its post-crisis reforms. According to Coen, the Committee's outstanding work on Basel III can be grouped into three broad categories:


  • First, the Committee is working on enhancing the risk sensitivity and robustness of standardised approaches, which facilitate the comparability of banks' capital ratios.


  • Second, the Committee is considering additional constraints to the role of internally modelled approaches in the capital framework, particularly in areas for which the use of models may not be suitable for calculating regulatory capital.


  • Third, the Committee is finalising the design and calibration of the leverage ratio and a potential capital floor based on standardised approaches. These measures would complement the risk-weighted capital framework and help ensure that the regulatory framework is more robust to arbitrage and erosion over time.


Mr. Coen indicated that the Basel Committee intends to finalize all of these reforms by the end of the year. 


The full text of Mr. Coen’s address is available via:  http://www.bis.org/speeches/sp161012.htm