09 October 2015

BIS: Speech by Stefan Ingves at the IIF Annual Membership Meeting

Speech by Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, at the 2015 IIF Annual Membership Meeting, Lima

Post-crisis regulatory framework

[...] Today's global framework is strikingly different to the one we had in place prior to the crisis as it is based on multiple metrics rather than a single one. The risk-weighted capital ratio - the cornerstone of the pre-crisis framework - has been fundamentally strengthened by raising the quality and quantity of capital and by improving risk capture. Moreover, the risk-based framework has been enhanced by adding a strong macroprudential focus. Most notable is the introduction of a capital surcharge for systemically important banks and the countercyclical capital buffer framework. A number of other metrics now reinforce the risk-based regime. [...]

The shape of the post-crisis regulatory architecture is now clear. Moreover, the various elements of the framework have either been finalised or are close to it. In terms of the various regulatory metrics, the LCR, NSFR and the large exposure regime have been completed. For the leverage ratio, the main piece of remaining work is final calibration. At present, Basel III's leverage ratio is set at 3% of Tier 1 capital. In terms of the risk-weighted capital ratio, the definition of capital and overall calibration were set when we finalised Basel III in 2010. [...]

Risk-weighted assets - balancing simplicity, comparability and risk sensitivity

[...] Let me give you a high-level overview of what has already been achieved or is close to finalisation. When it comes to addressing the weaknesses in the RWAs framework, we can distinguish between three broad areas.

The first of these is policy measures that directly limit the degree of RWA variability. This could be done by placing greater emphasis on standardised measurement approaches. Another way is by limiting the flexibility banks have in determining internal model-based estimates of RWAs.

• Around the end of this year, the Committee expects to consult on a package of proposals that will enhance the comparability of RWAs that are calculated using internal ratings-based (IRB) approaches for credit risk. [...]

• We have already consulted on proposed revisions to the standardised approaches for credit risk, market risk and operational risk. I expect that the Committee will issue the second and final consultative proposals on the standardised approaches for credit risk and operational risk by the end of this year;

• The Committee will also finalise the market risk standard (both the standardised and internal model-based approaches) by year-end.

• Consultation on the design of a capital floor was completed this year. Work on its calibration is ongoing and closely related to the finalisation of the overall package of reforms;

The second policy measure to address excessive RWA variability is enhanced disclosure. [...]

• In January 2015, revised Pillar 3 disclosure requirements were published. These requirements included the introduction of harmonised templates to improve comparability and consistency of banks' disclosures. Ongoing efforts are focused on consolidating all Basel disclosure requirements into a comprehensive, coherent and up-to-date Pillar 3 framework. To be completed by end-2016, this work will include the Total Loss Absorbing Capacity (TLAC) standard, market risk, operational risk and capital floors.

Finally, the Committee relies on its ongoing data monitoring exercises that help us to address RWA variability. These exercises quantify the magnitude of the variability, identify the drivers of excessive variability and facilitate supervisory follow-up actions with outlier banks.

• The Committee has completed analysis and monitoring of the drivers of variability of risk-weighted assets in the banking book and trading book. [...]

Trading book

[...] A lot has been achieved in revising the rules, and the time has now come to move to implementation. Most notably:

• The standardised approach for market risk has been completely revised and will serve as a credible fall-back and floor to the internal models approach.

• The revised standardised approach is more complex than the Basel II standardised approach, but is also considerably more risk-sensitive. In part, the complexity of the standard arises from the complexity of instruments in the trading book, and the need to account for short positions and hedging.

• To be frank, my personal preference would have been for something simpler. In part, this is related to my observation that, in aggregate, the market risk framework accounts for only around 6% of total risk-weighted assets. I recognise that this number is greater for trading-dominated banks. For the vast majority of banks, however, the significance of the changes (in terms of capital required) is likely to be quite limited.

Credit risk

[...] With that as the starting point, the Committee is now well advanced in revising the proposals. We will consult on revised policy proposals by year-end and conduct a quantitative impact study in early 2016. In this case, striking the right balance between simplicity and risk sensitivity involves fairly clear trade-offs. What we proposed last December aimed to introduce additional risk sensitivity. At the same time, we tried to avoid undue complexity. The general feedback we have received could be sorted into two categories:

• First, the proposals were viewed as too simple to accurately measure risk. That is, it was argued that additional risk drivers are needed to measure risk with a reasonable degree of accuracy.

• The second and opposite view was that the proposals were already too complex and burdensome relative to the existing Basel II standards. In other words, the costs of additional complexity outweighed the benefits of increased risk sensitivity. [...]

Operational risk

[...] By year-end, I expect that the Committee will publish for consultation a revised standardised approach as well as a proposal to remove from the regulatory framework the Advanced Measurement Approach for operational risk.

As we foreshadowed in our November 2014 report to the G20, in the Committee's judgement the benefits of the AMA are not proportionate to the related costs and complexity. The revised "Standardised Measurement Approach" to be proposed will significantly enhance the risk sensitivity of the current standardised treatments of operational risk, and would apply to banks of all sizes and complexity. In addition to public consultation, we expect to conduct a quantitative impact study of the standardised measurement approach in early 2016. [...]

Full speech

© BCBS (BIS)