15 Nov 2010
Rule Financial Risk Consultant, Diana Ouamar responds to the outcome of the G20 summit Basel III discussions in Seoul, Korea.
At the Summit in Seoul last week, the G20 leaders signed
off the Basel Committee's new bank capital and liquidity framework
(known as "Basel III") and committed to adopt and fully implement
it by the end of 2012.
This framework was originally published for comment in two
papers by the Basel Committee on Banking Supervision (BCBS) in
December 2009 (BCBS09). For almost a year, extensive discussions
involving banking regulators and lobbying groups drove the
developments forward. Unlike previous Basel accords, political
pressure certainly contributed to its relatively swift progress.
However, this landmark reform to toughen up bank capital and
liquidity requirements still needs considerable clarification on
key issues before full implementation.
In addition, the G20 in Seoul also approved the Financial
Stability Board (FSB)'s agreed policy framework for reducing the
moral hazard posed by Systemically Important Financial Institutions
(SIFI), and required this process to be completed by the end of
2012.
Basel III: Politicians First and then Banking
Regulators...
Because of the need to bring urgent reform, BCBS published
BCBS09 without completing a comprehensive analysis of the
interactions between banking, the financial system and the
international economy. These limitations were partially addressed
by the Macroeconomic Assessment Group in their paper in August
2010. The behaviour of some countries throughout the discussion on
Basel III has demonstrated how nations tend to act in their own
national interest. For example, the efforts of France and Germany
to weaken the BCBS09 proposals were typical of the financial
crisis, whereby politicians and regulators have become more
insular.
There are also signs that the consensus among regulators
about what the regime should look like is not as strong as it had
appeared. The Swiss have pre-empted the introduction of the new
regime, which involves significantly higher capital and liquidity
requirements, by imposing far tougher requirements on their two
systemically important banks.
In addition, with Dodd-Frank, the United States have
introduced their own legislation to address some of the issues in
Basel III.
Even with these national efforts, is not yet known how
many countries will fully adopt Basel III and to what
timescale. This is important because the key success of Basel
III will only be realised if the different jurisdictions implement
the regulatory framework in a consistent manner.
The knock-on effect of these various distortions has
created market uncertainty as to the correct balance between
systemic safety and the promotion of economic growth, making an
emerging consensus harder to achieve.
The market is ready while the BCBS is still
thinking...
Following the G20 summit in Seoul, it is clear
that because of the diverse economic and regulatory environments in
the G20, there is no "one size fits all" guideline for institutions
trying to comply with Basel III. Rule Financial believes that
many of the G20 countries will not wait for more certainty and will
push forward independently with specific requirements. The
underlying assumption is that regulators are not waiting for the
starting gun to put pressure on the systemic key players, as
evidenced by the Swiss example, the Internal Liquidity Adequacy
Assessment (ILAA) in the UK, and the Dodd-Frank regulation in the
US.
Even if Basel III is still unclear in some areas and
requires further work from the regulators, banks will not use the
"wait and see" approach as commonly used for implementing Basel II.
They are adopting a proactive approach for complying efficiently
with the new regulatory requirements, despite the seemingly long
period until the final implementation deadline.
Today, there are three main areas where banks are
improving their risk management issues: improving the quality of
their enterprise-wide data, enhancing their risk management
policies, and embedding an appropriate awareness of risk culture
throughout their organisation.
Improving these processes is likely to result in a
stronger foundation and more financial transparency, ensuring banks
can successfully enter the Basel III era.
