Basel III completed: time to calibrate the policy toolbox

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Following the financial crisis the Basel Committee launched a comprehensive overhaul of the prudential standards known as Basel III. It was approved by the Group of Governors and Heads of Supervision (GHOS) in December 2010. Five years on, the European banking system has completed the ambitious recapitalisation target enshrined in Basel III. European banks have also met and recently exceeded, on average, the minimum level set for the liquidity and funding ratios. Likewise, the leverage ratio of EU banks has improved from less than 3% in 2011 to more than 4% at the end of 2014.

 

Despite having largely achieved the level of resilience projected, the Basel Committee is preparing a vast program of new policy measures for credit institutions. Some stakeholders call it Basel IV due to the sheer size of the increase in capital requirements. The main proposals in terms of impact are the following: A program for Total Loss-Absorbing Capacity (TLAC) that could significantly increase the minimum leverage ratio and capital requirement; a revision to the standardised approach for credit risk that is not meant to increase the overall capital requirement but that could push it up if a framework of capital floors is agreed; a revision to the operational risk standardised approach could also add more capital to the equation and technical fixes to internal risk models could lift the risk weights of banks’ loans thus inflating the denominator of the capital ratio.

 

Against this background it is imperative to assess the direction of the global standards, the impact that new measures could have on the banking industry and on the wider objectives of finance and growth as well as the appropriateness and timeline of every new standard. It is time to calibrate the complex policy toolbox in place before embarking on further regulatory undertakings.    

 

EBF Contact: Gonzalo Gasos (g.gasos@ebf-fbe.eu)