BASEL III – THE NEWREALITIESPresentation of Istvan Lengyel, Secretary General of the Banking Associationof Central and Eastern Europe at the International Banking ConferenceKiev, 7 June 2013
BASEL I AND II – EARLY ATTEMPTS TO CREATESTABILITY IN THE INTERNATIONAL FINANCIALSYSTEMl Basel I (1988)– reaction to the Latin American crisis. Simple(oversimplified?) minimum requirements, covering only capitaladequacy with focus on credit riskBasel II (2004)– reaction to the Asian and the Russiancrises.More sophisticated system, allowing banks to use models inassesment of risks, covering also operational risk, includingPillar II (supervisory tools) and III (market discipline)
WHY DID THE FIRST BASEL ACCORDS FAIL?- - Slow process of elaboration and implementation- - Basel II compliance replaces proper risk management- How can you regulate a quickly changing industry?- Lobbying force of the banking industry„Generals always prepare for the last war”Winston Churchill„Regulators always prepare for the last crisis”Istvan Lengyel (?)
A DEEPER ANALYSIS: LONG-TERM PERSPECTIVESOF BANKINGl Financial disintermediation– Growing share of non-bank financial assets in totalfinancial assets– Competition on assets and liabilities side (market-based funding of customers; market-relatedinvestments by savers)– Best (lowest risk) assets/liabilities leave banks
A DEEPER ANALYSIS: LONG-TERM PERSPECTIVESOF BANKINGl Short-termism– Growing pressure to reveal quarterly results– Investors’ profit expectations– Management remuneration systeml Transparency and accountancy– More information – a double edged sword– Mark-to-market accounting bringing market volatilityto banks’ balance sheet
A DEEPER ANALYSIS: LONG-TERM PERSPECTIVESOF BANKINGl Supervisory pressures– More capital, lower profitability – growing risk again?CONCLUSIONS:l If nothing changes, in the long term, banks will be able toenhance profitability only if they take more riskl Without the regulation of other market participants and thefinancial markets, banks will remain highly risky and will losemarket share
IS BASEL III GOING TO BE MORE SUCCESSFUL?l Some reasons for optimism- much stricter requirements regarding quality of capital,substantially higher CAR- issues of liquidity addressed- absolute limit of risk-taking (leverage) introduced- attempt of counter-cyclical regulation- largest banks are by definition riskier
IS BASEL III GOING TO BE MORE SUCCESSFUL?l Some major weaknesses- differences in regulators’ approaches in the EU, US- weakening political will to introduce the plannedmeasures in due time, in original form- Basel III does not address major issues like corporategovernance, remuneration systems- in most cases it still leaves assessment of risks at thediscretion of banks (use of models)AND (OF COURSE)- while imposing very strict rules on banks, providescompetitive advantage to unregulated or lightlyregulated competitors
IMPLEMENTATION OF BASEL III – WHEREARE WE?Report of the Basel Committee to the G – 20 Finance Ministersand Central Bank Governors on monitoring implementationof Basel III Regulatory Reforms(April 2013)
IMPLEMENTATION OF BASEL III – WHEREARE WE?l Scope of the report: situation in 27 members of the BaselCommitte. Planned date of introduction: 1 January 2013l Summary: 11 members introduced the regulations, 3members (incl. Russia) issued regulations and willintroduce them by end of 2013, 13 members missed thedeadline of 1 January 2013 and failed to issue finalnational regulation, but all of them have draft regulationl DISAPPOINTING?
IMPLEMENTATION OF BASEL III – WHEREARE WE?l Countries that have introduced Basel III as planned:Australia, Canada, China, Hong Kong, India, Japan,Mexico, Saudi Arabia, Singapore, South Africa,SwitzerlandCountries which will introduce Basel III in 2013:Argentina, Brazil, RussiaCountries that may introduce Basel III in 2014:9 EU members (Belgium, France, Germany, Italy,Luxembourg, the Netherlands, Spain, Sweden, UnitedKingdom), Indonesia, Korea, Turkey, USDISAPPOINTING?
BASEL III – WHAT NEXT?l Introduction of Liquidity Coverage Ratio, modified andfinalised in January 2012 (from 1 Jan 2015, startingwith 60%)l Finalisation of the Leverage Ratio (2013)l Finalisation of the Net Funding Ratio (possibly in 2014)l Regulation of the trading book, securitisation, largeexposures (2014?)THE BASEL III SET OF REGULATIONS HAS NOT BEENYET COMPLETED!
FURTHER PLANS OF THE BASEL COMMITTEl The Regulatory Consistency Assessment Programme (RCAP)- analysis of consistency of national regulations with Basel III- assessment of expected impact of introduction of Basel III- analysis of differences in measurement of RWApossible outcomes- larger disclosure on how banks assess RWA- limitation of choice of models- harmonisation of supervisory practices