With Stefan Ingves, Chairman of the Basel Committee on Banking Supervision, attending last week’s Institute of International Finance (IIF) Annual Membership Meeting in Lima, the Basel III topic made its way into the discussion.
Looking ahead to the next twelve to eighteen months, Mr Ingves highlighted that the Committee’s policy agenda would be focused on finalising the post-crisis regulatory reforms and revising the risk-based capital framework.
JWG have had a look at this and, as detailed below, we picked up the following main points.
- The post-crisis regulatory framework seems now to be clearly defined, with various elements having either been finalised or being close to it. In terms of various metrics, the Liquidity Coverage Ratio (LCR), the Net Stable Funding Ratio (NSFR) and the large exposure regimes have already been completed. However, the main piece of remaining work is the leverage ratio’s final calibration. At present, Basel III’s leverage ratio is set at 3% of Tier 1 capital – the core measure of a bank’s financial strength. In terms of risk-weighted capital ratio, the definition of capital and overall calibration were set when Basel III was finalised in 2010.
- The Committee continues to reflect on whether the calculation of Risk-Weighted-Assets (RWAs) strikes the appropriate balance between simplicity, comparability and risk sensitivity. Work over the next year will include:
- Finalising the standard for market risk
- Improving the comparability between RWAs using the bank’s internal model
- Drafting proposals for the final design of the standard methods for credit and operational risk.
Ingves concluded by reiterating the following message: “the Basel III policy response to the financial crisis is largely complete and the overall architecture of the regulatory framework is now clear. While some work will remain outstanding at the end of this year, its direction is well defined and the Committee has publicly consulted on the key policy issues. Additional time, however, may be needed to refine existing proposals in order to, among other things, take into account comments received during the public consultation process and the outcomes of quantitative impact studies. The review of the standardised approaches for credit and operational risk are examples of key policy proposals that fall into this category.”
The full speech can be accessed here.
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