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“Earlier this week, ISDA hosted a bank capital conference in Brussels and, based on what the keynote speakers and panelists said, we can expect a busy year with legislative proposals for the third Capital Requirements Regulation (CRR III) expected in June.” Scott O'Malia said.
It was said that prudential regulators have a challenging balancing act in implementing the final Basel III rules. On the one hand, their primary responsibility is to their own jurisdictions, and they must implement rules that take account of any local specificities. On the other, capital rules are based on a global framework agreed by the Basel Committee on Banking Supervision, and consistency in application is an important Basel principle.
This balance between global and local interests is about to rise up the agenda with publication of the CRR III proposals, which will implement key Basel III standards in the EU, including the Fundamental Review of the Trading Book (FRTB).
Consistency in the substance of the rules is important, but it applies equally to timing. When internationally active firms are required to comply with new rules at different points in time, this introduces unnecessary complexity to the regulatory framework, and can also create distortions in cost and risk management. International coordination on this point should continue to be a priority as national regulators plan for implementation in their markets.
One of the most significant changes in this next phase of Basel III will be the reduced use of internal models. A recent survey by the European Central Bank found that only 40% of banks currently using internal models intend to seek approval to continue to use them under the FRTB rules. A further 40% expect to rely entirely on the new standardized approach.
Moving to a world in which only four out of 10 banks in Europe persist in using internal models represents a significant change. It is critical that the new framework for internal model approval is implemented appropriately, but there is also need to be ready for the shift to greater use of standardized approaches. For a standardized model to be effective in calculating capital requirements, it needs to be implemented both accurately and comparably across the industry.