18 November 2013

BCBS/Ingves: Strengthening bank capital – Basel III and beyond

"It is important that bank capital is seen to be of sufficient quantity, quality, consistency and reliability. These four characteristics are critical to the long-run credibility and success of the international capital adequacy framework."

Strengthening bank capital is not simply about asking banks to hold more capital. Rather, it is a broader objective that involves ensuring the functioning of the entire capital regime. The Basel Committee’s approach has therefore been to work extensively on the consistent implementation of the regulatory capital framework. The ultimate goal is to implement Basel III so that it strengthens the quantity, quality, consistency and reliability of bank capital ratios around the world.

It is important that bank capital is seen to be of sufficient quantity, quality, consistency and reliability - these four characteristics are critical to the long-run credibility and success of the international capital adequacy framework.

In Basel III itself, the Committee has made substantial enhancements to the quantity and quality of capital. By agreeing to be part of the Committee’s RCAP initiative, and by responding to it, national authorities have made clear their commitment to fulfilling the G20’s call for consistency in implementing the reforms. And we are now, for the first time, delving into the capital calculation practices of individual banks from an international perspective, to see what needs to be done so that the results are sufficiently comparable and reliable.

The Committee is well aware that any changes to bank and supervisory practices will have costs. The potential side effects of materially narrowing down modelling choices could include a reduction in risk-sensitivity and a corresponding increase in the potential for arbitrage. If not done well, it could also reduce banks’ incentives to invest in risk management models, especially their attempts to continuously broaden and deepen their understanding of risk. As always in regulation, we need to find the right balance: we need to reduce material practice-based differences in RWA variation, while limiting the adverse effects from doing so.

Resolving this issue will also take time: there is no quick fix. It will be a significant undertaking, and we need to carefully study the right mix of regulatory and supervisory responses. But given the importance of the issue, we have to move ahead because the consensus is building that the status quo cannot be maintained, as it helps neither banks nor supervisors.

The Basel III reforms themselves deliver two of the four characteristics that I said were essential – higher quantity and quality of capital. They are important, but not enough on their own. It is the Committee’s current and future work programme on implementation and consistency that will ensure that the full benefits of the regulatory reforms of bank capital can be achieved.

Full speech

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