November 16, 2017

Andreas Dombret of Deutsche Bundesbank spoke at the Bundesbank reception as part of the Euro Finance Week 2017 in Frankfurt. He discussed the recent compromises reached on Basel III, also reflecting on the finalization of Basel III regulations, the future challenges to be faced, and the ways to ease the burden on banks.

With regard to the Basel III compromises, he  highlighted that a successful outcome was achieved at two points in the negotiations. The first was last November, with what is known as the Santiago compromise. As a result of this compromise, the strict German methods for calculating real estate risks are now recognized as risk-reducing while the degrees of freedom for those calculating risk with internal models have been preserved to a considerable extent. "Compared with what was originally proposed, the capital increase for German banks has been halved—this was achieved through a tough negotiation stance on our part." The second, ongoing round of negotiations concerns the calibration of the output floor—the threshold below which calculations of capital requirements using internal models are not allowed to fall. However, he agreed that this standard will help to put banks' capital base on a sound and sustainable footing, thus helping to restore further confidence in the banking sector.

Mr. Dombret also examined the effects of regulations that msut be cushioned. He believes that the regulatory capital and liquidity requirements constitute one of many challenges that face German banks and savings banks. Other important topics are in connection with the changeover to International Financial Reporting Standard (IFRS) 9 and the increase in loss-absorbing capital. He suggested on transitioning to the new requirements gradually, to avoid overburdening the credit institutions in the short term. Supervisors must generally look for ways to ease the burden on banks and savings banks, without neglecting the goal. Therefore, he recommended further strengthening of the principle of proportionality in regulation to relieve small and medium-size institutions. He also recommending that the targeted review of internal models (TRIM) project, under the Single Supervisory Mechanism, should be conducted in a responsible and considered manner.

He said, "I am convinced that the current projects should be followed by a sort of regulatory break ... ." Even if regulators take a break, banks and savings banks need to continue implementing the decisions taken. He also added that supervisors ought to utilize this time to thoroughly review the impact of the reforms, with the aim of correcting the identified gaps, duplication of work or error. He mentioned that the potential challenges and opportunities are immense and explained: "The banking sector is already compelled to proactively address structural change. Now Brexit has come along, too. I see this as the greatest medium-term challenge facing the European economy and thus, not least, the financial sector as well." He then reiterated that, following the severe financial crisis, a new architecture has been successfully created for a resilient and high-performance financial system.

 

Related Link: Speech (PDF)

Keywords: International, Europe, Germany, Banking, Basel III, IFRS 9, Capital Floor, TRIM, Bundesbank, BIS

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