General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
July 04, 2018

BoE published a paper that examines risk sensitivity and risk shifting in banking regulation. The paper provides evidence that the more risk‐sensitive Basel II framework may have reduced banks’ incentives to engage in higher‐risk mortgage lending in the UK. The analysis suggests the need for a robust regulatory framework with several complementary standards interacting and reinforcing each other, even if subjecting banks to a number of regulatory constraints adds to complexity.

The paper reviews the history of risk sensitivity in capital standards and assesses whether a higher degree of risk sensitivity necessarily leads to a better measurement of risk. The paper provides a sketch of the history of risk‐weighted capital requirements, a history that reached its pinnacle with the introduction of the advanced internal ratings‐based approach of Basel II. The paper then reviews whether Basel II has improved the way risk is measured, in particular why ex‐ante risk sensitivity may not lead to greater ex‐post risk sensitivity. Finally, the paper assesses whether Basel II led to less regulatory arbitrage and less risk shifting, as was the intention, before offering a conclusion.

The financial crisis exposed enormous failures of risk management by financial institutions and of the authorities’ regulation and supervision of these institutions. Reforms introduced as part of Basel III have tackled some of the most important fault‐lines. As the focus now shifts toward the implementation and evaluation of these reforms, it will be essential to assess where the balance has been struck between the robustness and the risk sensitivity of the capital framework. This paper contributes to this assessment by stepping back from the details of the recent reforms and instead taking a bird’s eye view on the fundamental trade‐offs that may exist between robustness, complexity, and risk sensitivity.

 

Related Link: Financial Stability Paper No. 44

Keywords: Europe, UK, Banking, Risk Sensitivity, Risk Shifting, Banking Regulation, Basel III, Basel II, BoE

Related Insights
News

OSFI Proposes Changes to Guideline on Large Exposure Limits

OSFI proposed revisions to the Guideline B-2 on Large Exposure Limits, for implementation in the first quarter of 2020.

December 13, 2018 WebPage Regulatory News
News

BCBS Consults on Disclosure Rules for Leverage Ratio Window-Dressing

BCBS published a consultative document on revisions to the leverage ratio disclosure requirements to address the leverage ratio window-dressing behavior.

December 13, 2018 WebPage Regulatory News
News

PRA Updates the Policy on Approach to Systemic Risk Buffer

PRA published the final Statement of Policy on the PRA approach to the implementation of the systemic risk buffer (SRB), as proposed in the consultation paper CP29/18.

December 13, 2018 WebPage Regulatory News
News

EP Report Examines Financial Supervision and Regulation in US

European Parliament published a report that provides a concise overview of the Dodd-Frank Act, the challenges of its implementation, and efforts to roll back the Act, in large part due to what are viewed to be vague and impractical provisions.

December 12, 2018 WebPage Regulatory News
News

EBA Finalizes Guidelines on the STS Criteria in Securitization

EBA published the final guidelines that provide a harmonized interpretation of the criteria for a securitization to be eligible as simple, transparent, and standardized (STS) on a cross-sectoral basis throughout EU.

December 12, 2018 WebPage Regulatory News
News

OSFI Sets Domestic Stability Buffer for D-SIBs at 1.75%

OSFI set the level for the Domestic Stability Buffer at 1.75% of total risk-weighted assets, as calculated under the Capital Adequacy Requirements (CAR) Guideline.

December 12, 2018 WebPage Regulatory News
News

FSI Publishes Paper on Proportionality in Insurance Solvency Rules

FSI published a paper on proportionality in the application of insurance solvency requirements.

December 11, 2018 WebPage Regulatory News
News

BCBS Updates Framework for Pillar 3 Disclosure Requirements

BCBS published the updated framework for Pillar 3 disclosure requirements.

December 11, 2018 WebPage Regulatory News
News

EBA Issues Revised List of Validation Rules for Reporting

EBA revised the list of validation rules in its implementing technical standards on supervisory reporting.

December 11, 2018 WebPage Regulatory News
News

IMF Reports Assess the Stability of Financial System in Brazil

IMF published a report on the results of the Financial System Stability Assessment (FSSA) on Brazil.

December 11, 2018 WebPage Regulatory News
RESULTS 1 - 10 OF 2330