08 Sep BCBS – Secretary General spoke on finalization of Basel III
September 8, 2021 – European Community is due to release its proposal on transposing the final Basel III reforms into European Union law. It is a pivotal time for preserving and strengthening financial stability and for multilateralism. Spoke on connection between these two topics – multilateralism and financial stability. Responded to some arguments against the full implementation of Basel III in the EU.
Need for Global Cooperation: Protecting the health and financial stability of countries necessarily requires thinking of these values as global public goods, and therefore to think beyond national borders. Principle of financial stability as global public good, also underpins the Basel standards. An open, global financial system requires global standards for safety and soundness. In September 2010, Basel III was developed in response to great financial crisis of 2007-9. BCBS completed the last plank of Basel III reforms in 2017, with publication of new standards for credit risk, credit valuation adjustment risk, and operational risk. Final reforms also incorporate a leverage ratio and an output floor, two complementary measures to improve consistency and comparability by reducing opportunity for arbitrage. Noted the important role that Europe plays in BCBS’s ongoing cooperation. ECB, EBA and EU CMSN are all important and active contributors to the work of Basel.
Common Arguments Against Basel: The last step of implementation requires translation of BCBS’s work into its ultimate objective of enhancing global financial stability, and that step is only achieved when each of the member jurisdictions implements the agreed standards domestically. Expressed concern some stakeholders continue to lobby against full implementation.The Secretary General set out to address the most common arguments that have been given.
Measures Not Needed: First is the assertion related to the broadly positive state of the banking system thus far during the pandemic, proves that no additional measures are needed to strengthen its resilience. However, banking system benefited tremendously from the unprecedented scale and scope of public support measures, spanning fiscal, monetary, and regulatory actions. Such support measures have shielded banks from shocks and losses of the pandemic. Also, the pandemic is not a typical financial crisis, fueled by a credit boom, excessive leverage, and lapses in risk management; so, has not fully tested banking resilience.
Disproportionate Impact: Second argument is full implementation will disproportionately impact specific banks.This argument is often supported by the suggestion that the final set of Basel III reforms included a commitment not to increase overall capital requirements of sector. Rogers responded that domestically adjusting a global standard, to reduce the impact on outlier banks, is to lose sight of the purpose, and value of global standards. Reforms level global playing field and preserve trust/credibility in bank capital levels.Measures will not significantly increase overall capital requirements at the global level.Estimated to increase global banks Tier 1 capital requirements by less than 2%. There will be outlier banks that face higher requirements and changes designed to increase overall consistency of capital measurement will impact banks differentially. Banks that have benefited from aggressive modelling of their capital or have been subject to rules that were not in line with prior Basel standards will be impacted more. Highlighted that long transition arrangements allowed with full implementation by 2028.
Now is Not the Time: Third argument given is that banks should instead be supported during the pandemic.Rogers disagreed banks can either increase their resilience or support the economy. These are not mutually exclusive objectives – they are mutually reinforcing objectives. Healthy, well-capitalized banks lend to households and businesses, in good times and bad.
National Specificities: Fourth – some stakeholders have pointed to “national specificities”, or unique features to a banking system or jurisdiction, which demand a deviation from global standards. Basel is designed to create a global level playing field for internationally active banks.They are a common baseline that reflects structural differences across jurisdictions. Reforms designed through an extensive and transparent process of consensus building that includes a wide range of empirical analysis and extensive public consultation.
Conclusion: In the coming years, BCBS will tackle a range of challenges impacting global bank system including: the impact of low interest rates, digitization of finance, cyber threats, and climate change. BCBS will maintain a transparent and consultative approach and rely on its members to continue to work collaboratively and constructively toward enhancing financial stability. Implementing Basel III in a full, timely and consistent manner is an important and powerful demonstration of this commitment to global cooperation.
For more information, visit https://www.bis.org.