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)
Previous ArticleESMA Seeks Volunteers for Field Tests of ESEF for Reporting
BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
PRA published a statement to insurers that clarifies the approach to application of the matching adjustment during COVID-19 crisis.
EBA published a report on the implementation of selected COVID-19 policies within the prudential framework for banking sector.
EC launched a consultation to revise the network and information systems (NIS) Directive (2016/1148), which was adopted in July 2016 and is the first horizontal internal market instrument aimed at improving the resilience of the EU against cybersecurity risks.
PRA published a statement that outlines its view on the implications of LIBOR transition for contracts in scope of the “Contractual Recognition of Bail-In” and “Stay in Resolution” parts of the PRA Rulebook.
PRA published the policy statement PS15/20 to reflect additional resilience associated with higher macro-prudential buffers in a standard risk environment with a reduction in Pillar 2A capital requirements.
BCBS published the eighteenth progress report on implementation of the Basel III regulatory framework in member jurisdictions.
FCA announced proposals that would provide continued support for certain consumer credit products to users, who are facing a financial impact because of the exceptional circumstances arising from the COVID-19 pandemic.
ACPR published a draft version of taxonomy RAN 1.4.0_PWD1, along with the related documentation, for Solvency II reporting.
BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).