BCBS/Byres: Basel III - Necessary, but not sufficient
06 November 2012
In a keynote address to the Financial Stability Institute's 6th Biennial Conference on Risk Management and Supervision, Byres said that implementing Basel III was essential, but must be accompanied by other measures and reforms so that a truly healthy banking system is secured for the future.
Wayne Byres, Secretary General of the Basel Committee on Banking Supervision, listed three reasons why Basel III needs to be complemented by other measures to deliver the sort of financial stability outcomes that the community expects.
"First is that we have not yet completed the full set of policy reforms. The Basel Committee still has a very full policy agenda to be completed before we can say the overhaul of the regulatory framework has incorporated all the lessons of the crisis:
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We need to complete the work on liquidity... In addition, we need to complete the specifications of the leverage ratio, including associated reporting requirements, ahead of its introduction as a disclosure item in 2015.
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We have embarked on a fundamental review of the trading book rules, given that activity in this area was a major source of the problems that led to the financial crisis... We expect to issue more detailed proposals, and undertake an impact study, during 2013.
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For similar reasons, we are reviewing the treatment of securitisation within the Basel framework... Proposals in this area are due out before year-end.
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We are reviewing the large exposures regime, which has been largely untouched for more than a decade... The Committee is therefore examining the merits of a more consistent approach to large exposures, and will make public some proposals for comment during the course of 2013.
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Finally, the Basel Committee is considering the need to review the standardised approaches to capital adequacy. At the very least, we need to examine the reliance of the standardised approach on external ratings, and to see what can be done to reduce it.
These are all on the agenda because we think there are aspects that need improvement. Basel III helps lift the financial health of the banking system, but we need to make sure there are no remaining weaknesses in the prudential framework that will undermine the substantial improvements we are making elsewhere.
Second, we need to ensure robust implementation. That means more than just having a set of local rules titled ‘Basel III’.
At the urging of the G20 Leaders, the Basel Committee and the other standard setters have established implementation programmes to monitor the translation of internationally-agreed reforms into national actions. These initiatives are now beginning to produce their initial reports. For example, the Basel Committee has commenced regular reporting on each member country’s progress towards meeting the implementation schedule for Basel III, and has published the first reviews for three jurisdictions. We are also using international teams of supervisors to examine the consistency (or otherwise) of the application of the Basel rules in individual banks. As other Basel standards and policies are completed, the focus on implementation is also expected to rise.
To achieve the goals of policy reform, we need to make sure the reforms are implemented by national authorities in a full, timely and consistent manner. Only then will we see the full benefits of healthier banks and financial systems bear fruit. Alongside our work to finalise the remaining items on the reform agenda, we need everyone to commit to implement the agreed reforms in full and on time, and to use the results of the implementation assessments constructively to fill any identified gaps or deficiencies.
My third, and perhaps most important, reason why Basel III is necessary but not sufficient is that rules alone, no matter how well written and how consistently implemented, will not be enough to deliver the financial health and stability of the banking system that we desire. (If they were, many of you would not be here, since we would not need supervisors to monitor banks day-to-day.) We have designed the fitness regime, and are working to ensure it is correctly translated into local languages, but without supervisors encouraging, coaxing, and cajoling banks to stick to the programme, and occasionally reprimanding the laggards, we will not meet our goals. Indeed, without on-going vigilance, there is always a risk we will return to bad habits of the past.
Therefore, we also need to upgrade supervisory capabilities, demonstrating resolve to act in good times and not simply when faced by impending crisis. Supervisors do their most important work when they are seemingly valued the least. Their job is to be vigilant in monitoring risks when complacency is high and it is presumed nothing can go wrong. Basel III will not change that."
In conclusion, Byres said: "With Basel III, we have laid the foundation with a strong set of minimum standards. But they are exactly that – minimum standards. They are necessary, but not sufficient: Basel III cannot be relied upon to deliver stability on its own. So there is more to be done, and we must push on with the reform agenda to deliver full, timely and consistent implementation.
Of course, we need to be mindful of carefully managing the transition to the new regime so as to reap the benefits without imposing unnecessary costs. Basel III does this, for example, by introducing the new capital requirements gradually. Although they are due to begin in less than two months’ time, the new requirements that are meant to be in place next year are modest. Full implementation is still more than half a decade way – and more than a decade after the crisis began – so we cannot be accused of rushing things!
Ultimately, we must remember that to lend confidently, banks must be able to borrow confidently. Weak banks can do neither. Full, timely and consistent implementation of regulatory standards, designed to restore banks to financial health, is therefore essential for a return to a well-functioning financial system. The Basel Committee has designed a fitness regime for banks that is modest at the outset and increases in intensity over time. Like all fitness routines, this will be more difficult for some than others, but faithful adherence will yield positive results for all over the long run. And once we have a healthy banking system, we need to monitor it effectively to minimise the risk of a return to the bad habits of old."
© BIS - Bank for International Settlements
