10 Nov 2010
Rule Financial Risk Consultant, Diana Ouamar writes a
point of view on the latest thinking relating to Basel III, prior
to the G20 summit in Seoul, Korea
The Basel Committee on Banking Supervision (BCBS) and The
Financial Stability Board (FSB) met last month to prepare, discuss
and agree a road map for implementing Basel III. These meetings
covered the new bank capital and liquidity regulatory framework and
policy recommendations for the Systemically Important Financial
Institutions (SIFI) reform.
These proposals will be presented to the Group of 20 (G20)
nations when they meet in South Korea this week. If the G20
approves the proposals, it will be up to each nation to adopt its
own rules (it is noteworthy that the Dodd-Frank Act in the US and
the FSA in the UK have already pushed through legislation to
address some of these concerns). In the European Union, the
European Commission is likely to propose legislation to transpose
Basel III into European Law: Capital Requirement Directive 4
(CRD4).
The key elements of global financial reforms ahead will
focus on the following topics:
- New bank capital and liquidity standards. The BCBS
approved a "Basel III" package in on 12th September 2010 to toughen
up global capital and liquidity requirements for banks from 2013
with full effect by 2019.
- Systemically important financial institutions (SIFI):
"Too Big to Fail".
- Increasing the "intensity" of supervision:
Recommendations to increase supervisory intensity and
effectiveness. Strong supervision is a necessary complement to
stronger rules.
- "Loss absorption capacity": There is a broad agreement
that banks should hold additional "loss absorption"
capacity.
- Over-The-Counter (OTC) Derivatives market: Implementing
central clearing and trade reporting of OTC
derivatives.
- Credit Ratings Agency (CRA): Reducing the mechanical
reliance on CRAs.
- Accounting: Reaching a harmonised set of global
accounting standards.
- Commodities: Studying transparency and volatility in
commodity markets.
- Shadow Banking: Devising ways to improve oversight of the
"shadow banking" system.
The Seoul G20 summit should be the final step
before we enter in the "Basel III era". This set of regulations
will mark one of the most significant developments since the
original Basel accord in 1988.
The summit reforms will have fundamental implications for
the global financial system. Basel III will reinforce and
extend the scope of balance sheet strengthening measures already
initiated by many banks. The complexity of the transition process
could prove to be unmanageable for banks with weaker balance sheets
and may lead to asset disposals as banks alter their business
profiles, whilst a greater convergence in national regulatory
capital and liquidity ratios may also contribute to stronger market
discipline.
If the G20 get political agreement to ensure consistent
local implementation, an even playing field will be created.
Consistency will determine the success or failure of Basel III. If
international consensus fractures, it will raise fears that
European banks will be unable to compete with the riskier balance
sheets profiles of US and Asian Banks.
