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October 13, 2017

Mr. William Coen, Secretary General of the Basel Committee, spoke about the state of global financial regulation, at the 2017 IIF Annual Membership Meeting in Washington DC. He provided an update on the Basel Committee's work to finalize the global regulatory framework as well as its longer-term agenda. He said, “we are now close to finalizing these reforms, which will provide clarity and certainty to supervisors and market participants alike.” Global policy agenda is virtually complete and must be seen to its completion.

With regard to finalizing the post-crisis reforms, he highlighted the progress made toward completing Basel III revisions, including the capital output floor; addressing the step-in risk, and allowing national discretions for the net stable funding ratio’s (NSFR) treatment of derivative liabilities. At national discretion, the required stable funding treatment for derivative liabilities can be reduced from 20% to no lower than 5%. He said that the Committee will continue to work on this issue and will consult if a change to this treatment is proposed. However, the existing proposal should facilitate the implementation of NSFR, which is due to begin on January 01, 2018, given that most jurisdictions have already published their final or draft rules. In context of the capital floor, he opined “If we stop now, we will not have satisfactorily addressed the thorny issue of unwarranted variability in risk-weighted assets (RWA). Indeed, we see that RWA compression continues in some cases, even though risks have not really been scaled back. Also, all the other revisions to the global regulatory framework the Committee has worked on and agreed during the past two years would be discarded. These include updating the standardized approaches for credit and operational risks and adding restrictions to the use of internal ratings-based approaches. The floor is only one element among many that comprise this package of reforms.” He emphasized that “these revisions are real improvements to the framework used by the vast majority of banks around the world.”

Once finished, the next step is to assess the impact of individual standards and how they work in combination; the broader, macro impact of the revised framework; and the incentives arising from the new standards, including regulatory arbitrage. “We need to keep our focus on improving supervision. Better, more effective and forward-looking supervision is a never-ending quest. A combination of effective supervision and robust standards is absolutely necessary to enhance the safety and soundness of the banking system, ” said Mr. Coen. BCBS will continue to closely monitor the implementation of global Basel standards. Next week, BCBS will publish its 13th progress report on the adoption of the Basel regulatory framework, along with the final four assessment reports on implementation of the liquidity coverage ratio.

 

Related Link: Speech

Keywords: International, Banking, Basel III, Capital Floor, Step-in Risk, NSFR, Next Steps, BCBS

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