02 November 2015

BIS: From the Vasa to the Basel framework - The dangers of instability

Speech by Mr Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, at Unique Lecture at the 2015 Annual Convention of the Asociación de Mercados Financieros, Madrid

The Basel Committee's policy reforms: what is left to do?

The post-crisis regulatory framework is now well established. We are clearly within reach of finalising the Basel III reform package. This is a significant achievement that will give much needed clarity to markets, banks and supervisors as they develop their work plans. But in order to do this, we need to finalise some outstanding reforms and also calibrate the whole package. Let me now say a few words about the Committee's ongoing reforms and what is left on our agenda. [...]

The main elements of the Committee's ongoing policy reform agenda addresses fault lines that emerge from these two dimensions. These reforms build on the Committee's strategic review of the risk-weighted capital framework to assess whether it strikes the right balance in terms of simplicity, comparability and risk sensitivity. The reforms can be grouped into three broad categories:

(i) enhancing the risk sensitivity and robustness of standardised approaches;

(ii) reviewing the role of internal models in the capital framework; and

(iii) finalising the design and calibration of the leverage ratio and capital floors.

Enhancing standardised approaches

[...] The Committee is working on revising the standardised approaches across the regulatory framework to enhance their robustness and risk sensitivity. This includes revisions to the following standardised approaches:

• Credit risk: The Committee consulted on proposals to revise the standardised approach for credit risk in December 2014, and will consult on revised proposals by the end of the year.

• Market risk: The Committee's fundamental review of the trading book, which will be finalised by the end of 2015, will include a revised standardised approach that is sufficiently risk sensitive to act as a credible fallback to the modelled approach.

• Operational risk: The Committee consulted last year on revising the standardised approach for operational risk. The Committee is considering changes to its proposal and will consult on a revised standardised approach by the end of the year.

Reviewing the role of internal models

[...] The Committee will publish proposals around the end of the year related to the use of models. In some cases, the proposals will remove internally modelled approaches for some risk categories. One example is operational risk, where most would agree that the benefits of the Advanced Measurement Approaches are not proportionate to the related costs and complexity. In other cases, the proposals will consist of introducing additional constraints to internally modelled approaches. More detail on the Committee's thinking in these areas will come in due course. 

Finalising the leverage ratio and capital floors

Finally, in parallel with the revisions outlined above, the Committee is working on finalising the design and calibration of a Pillar 1 leverage ratio and the use of capital floors based on standardised approaches. Such measures would reinforce the "multiple constraints" framework we now have, with each measure offsetting the shortcomings of the other.

Revisions to the risk-weighted framework

In addition to the revisions related to risk-weighted asset variability that I mentioned, the Committee is working on other key revisions to the risk-weighted framework. These include:

• Simple, transparent and comparable securitisations: The Basel Committee and the International Organization of Securities Commissions finalised the criteria for simple, transparent and comparable (STC) securitisations earlier this year.5Incorporation of these criteria in the revised securitisation framework is planned to be finalised in 2016.

• Interest rate risk in the banking book: The Committee is reviewing the regulatory treatment of interest rate risk in the banking book. This is particularly important in the light of the current exceptionally low interest rate environment in many jurisdictions. The aim of this review is twofold. First, to ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. Second, to limit capital arbitrage between the trading book and banking book, as well as between banking book portfolios subject to different accounting treatments. The Committee consulted on a set of measures earlier this year, and intends to finalise its approach in 2016.

• Sovereign risk: I mentioned at the start of my lecture that Sweden and Spain used to be fiscal-military states. As a result of high government spending and taxation to support their military conquests, both countries defaulted on their debt.6Thankfully, both countries have since scaled back their military ambitions, but we have continued to see episodes of sovereign risk. The Committee has initiated a review of the existing regulatory treatment of sovereign risk and will consider potential policy options. The review will be conducted in a careful, holistic and gradual manner.

Full speech

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