Implementation of the Basel III requirements - an international regulatory framework - will start from 2015 in an effort to improve regulation, supervision and risk management, in the banking sector
New banking regulations, effective from 2015, have been the centre of much debate recently, as banks struggle to meet the requirements proposed by the Basel Committee on Banking Supervision (BCBS).
In December 2009, the BCBS set out its concrete proposals, named Basel III, in response to the financial crisis of the preceding few years.
“The objective of the Basel Committee's reform package is to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy,” the BCBS said.
As part of the Basel III rules, the minimum requirement for banks’ tier-one capital ratio (ratio of equity capital to risk-weighted assets [RWA]) has been raised from 2% to 4.5%.
Effective as of 2019, lenders will also need to add a “conservation buffer” of 2.5%, meaning banks must hold a total core capital equal to 7% of their RWA.
BCBS secretary general Stefan Walter spoke at a conference recently about the motivation behind the reforms, highlighting that in the most recent phase of the crisis there has been a significant “spillover of risk” between the banking sector and sovereigns, as governments increased their debt in an effort to stabilise their banking systems and economies.
“As a result, debt-to-gross domestic product (GDP) ratios in a number of economies increased by as much as 10-25 percentage points. It therefore is clear that the economic benefits of raising the resilience of the banking sector to shocks are immense,” Walter said.
While some believe that these new rules will be too harsh, others – such as Lord Turner, the chief of the Financial Services Authority – have said that they do not go far enough to protect the system. In a speech last month, he said that raising tier-one capital ratios to between 15% and 20% would be more appropriate.
“Have we got it right? Are we being radical enough? And do we understand the root of this financial crisis?” Turner said.
“Today’s regulators are the inheritors of a half century long policy error, in which we have allowed private sector banks to pursue their private interest in maximising leverage levels, at times influenced by a deep intellectual confusion between private costs and social optimality,” he said.
www.londonstockexchange.com
New banking regulations, effective from 2015, have been the centre of much debate recently, as banks struggle to meet the requirements proposed by the Basel Committee on Banking Supervision (BCBS).
In December 2009, the BCBS set out its concrete proposals, named Basel III, in response to the financial crisis of the preceding few years.
“The objective of the Basel Committee's reform package is to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy,” the BCBS said.
As part of the Basel III rules, the minimum requirement for banks’ tier-one capital ratio (ratio of equity capital to risk-weighted assets [RWA]) has been raised from 2% to 4.5%.
Effective as of 2019, lenders will also need to add a “conservation buffer” of 2.5%, meaning banks must hold a total core capital equal to 7% of their RWA.
BCBS secretary general Stefan Walter spoke at a conference recently about the motivation behind the reforms, highlighting that in the most recent phase of the crisis there has been a significant “spillover of risk” between the banking sector and sovereigns, as governments increased their debt in an effort to stabilise their banking systems and economies.
“As a result, debt-to-gross domestic product (GDP) ratios in a number of economies increased by as much as 10-25 percentage points. It therefore is clear that the economic benefits of raising the resilience of the banking sector to shocks are immense,” Walter said.
While some believe that these new rules will be too harsh, others – such as Lord Turner, the chief of the Financial Services Authority – have said that they do not go far enough to protect the system. In a speech last month, he said that raising tier-one capital ratios to between 15% and 20% would be more appropriate.
“Have we got it right? Are we being radical enough? And do we understand the root of this financial crisis?” Turner said.
“Today’s regulators are the inheritors of a half century long policy error, in which we have allowed private sector banks to pursue their private interest in maximising leverage levels, at times influenced by a deep intellectual confusion between private costs and social optimality,” he said.
www.londonstockexchange.com
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