Stefan Ingves: Where to next? Priorities and themes for the Basel
Committee
Keynote address by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of
the Basel Committee on Banking Supervision to the Third BCBS-FSI High-Level Meeting for
Central and Eastern Europe on "Strengthening Financial Sector Supervision and Current
Regulatory Priorities", 12 March 2013.
As prepared for delivery
* * *
Good morning. It is my great pleasure to be with you again today. I would like to begin by
extending my appreciation to the Financial Stability Institute and the Banking Supervisors
from Central and Eastern Europe for their efforts in bringing us together again for another of
these High-Level Meetings. Last year, I was pleased to have been able to be a part of what
was a very interesting and enjoyable meeting in Warsaw hosted by our Polish colleagues. I
hope we can replicate the success of that event this year here in Basel.
I would like to take the opportunity today to reflect a little on what the Basel Committee has
been doing since we last met. Then I will outline work currently in train as well as our
longerterm strategic priorities. The Committee meets in this building tomorrow, and continues to
have a very full agenda. Indeed, the key message I would like to leave you with is that our
work, although changing in nature, shows no signs of easing off.
What have we done?
Before I discuss what's left to do, let me recap what has been done over the past year.
The key initiatives completed by the Committee in the past year include:
•
reaching agreement on a package of revisions to finalise Basel III's Liquidity
Coverage Ratio (LCR);
•
revising the Core Principles for Effective Banking Supervision;
•
developing a policy framework for dealing with domestic systemically important
banks;
•
establishing disclosure requirements for the new Basel III definition of capital; and
•
updating the supervisory guidance for assessing the effectiveness of a bank's
internal audit function.
In addition, the Committee established a sound operating framework within which to assess
its members' implementation of Basel III. As a result, the Committee produced:
•
two regular semiannual reports on Basel III implementation in all member countries
(along with two special reports to the G20 on implementation);
•
assessments of Basel III implementation in the European Union, Japan and the
United States; and
•
a report analysing the variability of risk-weighted asset calculations for market risk in
individual banks.
Further down the agenda, my colleagues from the Basel Committee Secretariat will provide
additional insights on our implementation work. I would like to make the point now, however,
that these efforts are critical to delivering on the benefits that Basel III offers. Rules written
have no effect if not implemented: we cannot fail on this front, and I will say more about our
efforts shortly.
What are we doing?
There is still a great deal of work being done to finish the Basel III framework. The capital
standards are now largely settled, with the exception of some technical work on issues like
exposures to central counterparties (CCPs). As I noted earlier, the LCR has also been
finalised - albeit again with some final technical details to be resolved. But there are other
parts of the Basel framework which we are currently working to flesh out and make
operational.
Major projects currently under way include:
•
finalising the specification of the leverage ratio, and associated disclosure
requirements;
•
reviewing the Net Stable Funding Ratio (NSFR), which addresses the longer-term
structure of bank debt and complements the short-term focus of the LCR;
•
completing the review of the trading book capital requirements. This entails an
evaluation of the design of the market risk regulatory regime as well as weaknesses
in risk measurement under the framework's internal models-based and standardised
approaches;
•
enhancing the treatment of securitisations to make capital requirements more
prudent and risk-sensitive. We are also reviewing ways to reduce mechanistic
reliance on external credit ratings and to reduce current cliff effects in capital
requirements;
•
strengthening standards to limit excessive and opaque risk-taking through
over-thecounter (OTC) derivatives and to reduce systemic risk posed by OTC derivatives
transactions, markets and practices. Work on margining requirements, counterparty
credit risk and capital for banks' exposures to central counterparties are examples of
our efforts related to derivatives; and
•
revising the supervisory framework for large exposures to complement the
Committee's risk-based capital standard and to help improve banks' measurement
and control of large exposures.
All of these projects are necessary to ensure that the regulatory framework adequately
factors in the lessons from the financial crisis. The challenge, almost five years on from the
height of the crisis, is to ensure that we bring closure to these projects and that they are in
place before the next stage of the financial cycle begins.
Underpinning the Committee's policy initiatives is an extensive framework for the collection
and analysis of data to help us assess the quantitative impact of a particular policy.
Quantitative impact studies (QIS) have become a central element of the Committee's work,
and we have a full slate of QIS exercises planned for this year. Alongside the semiannual
Basel III monitoring reports, almost all of the policy initiatives I have just mentioned have one
or more data collections or impact studies planned. While this can be a burden for banks and
supervisors, this hopefully makes for well informed policymaking - so is well worth the effort.
In addition to all of the policy and analytical work, the Committee intends to:
• continue to monitor members' commitments to the timely implementation of agreed
reforms. To date, this has focused on capital, but will be expanded over the next
year to encapsulate local implementation of the LCR, as well as the frameworks for
global and domestic systemically important banks (G-SIBs and D-SIBs), since these
come into effect over the next couple of years;
• undertake a full set of implementation assessments for 2013. We will conduct
reviews of Singapore, Switzerland, China, Australia, Brazil and Canada. Follow-up
reviews of the European Union and the United States are also planned once their
Basel III regulations are finalised; and
• publish a report on the initial, detailed review of risk-weighted asset calculations for
the banking book; we hope to publish the full results by the summer. Together with
the recently published results on the trading book, this analysis identifies the specific
drivers that lead to variations in risk weights for similar exposures. The Committee's
next step will then be to consider policy responses to reduce any unwarranted
variability and to therefore improve the comparability of banks' ratios.
A theme I will be returning to is the importance of this implementation monitoring work for the
Committee. While it is a relatively new component of the Committee's mandate, it should not
be seen as an adjunct to the Committee's standard-setting role. Rather, it is absolutely
critical to successfully delivering desired policy outcomes.
Where to next?
As you can see, the Committee is engaged in a variety of projects that require us to combine
the efforts and input of regulators and supervisors across a large number of countries. This is
a challenging task. An even greater challenge, however, is prioritising among competing
projects to achieve our most pressing objectives. The Committee's response to the financial
crisis has been strong, but there is still much to accomplish. So we have recently spent some
time identifying our key strategic priorities, to make sure we have a good means of deciding
what we really must do. As you may have seen, these priorities were endorsed by the Group
of Governors and Heads of Supervision (GHOS) at the same time they endorsed and
announced the revisions to the LCR.
The Committee's primary focus in the short and medium term is completing and
embedding the full suite of responses to issues that emerged from the financial crisis. With
that in mind, foremost consideration will be given to five priority areas:
1. completing the crisis-initiated reforms of the policy framework;
2. monitoring and reinforcing the implementation of Basel regulatory standards;
3. assessing the impact of, and industry response to, implementation of the regulatory
reforms;
4. examining the comparability of model-based internal risk weightings and considering
the appropriate balance between the simplicity, comparability and risk sensitivity of
the regulatory framework; and
5. enhancing the effectiveness of both micro- and macroprudential supervision.
Completion of the crisis-initiated reforms of the policy framework
As I have already highlighted, the policy reforms initiated in response to the financial crisis
are not yet complete. While the basic frameworks for risk-based capital and, more recently,
liquidity are now largely settled, many of the other reforms I noted earlier remain very much a
work in progress. To ensure that the weaknesses in the regulatory framework brought to light
by the financial crisis do not persist for any longer than necessary, the Committee is aiming
to have much of this work completed by the end of 2014. This is an ambitious target, but
given the importance of these reforms, there is no basis for unnecessary delay.
Our plan is for the leverage ratio work - which is largely devoted to the detailed specification
of the exposure measure (ie the denominator) of the ratio - to be largely completed this year,
while the NSFR, trading book, securitisation and large exposures policy work will be finalised
in 2014. The Committee also has two other major policy initiatives that it plans to launch
soon. While not obviously thought of as immediate and essential responses to the financial
crisis, they are nevertheless quite important for ensuring that the overall prudential
framework remains robust, and existing reforms are effective. These projects are:
• a review of the standardised (credit and operational risk) approaches to capital
adequacy, which need to be re-examined in light of calls for greater simplicity and
comparability in the regulatory framework as well as the desire to reduce the
reliance on credit rating agencies if possible; and
•
an examination of the need for a capital framework for interest rate risk in the
banking book, particularly given the desire to limit arbitrage opportunities between
the trading and banking books.
These last two projects are still at an embryonic stage, so I cannot say too much about what
they might entail at this point in time, but they will be the last pieces in what has essentially
been a complete overhaul of the regulatory framework since the financial crisis.
Monitoring and reinforcing implementation of Basel regulatory standards
As I have already said, the establishment of the implementation monitoring programme has
been a high priority for the Committee; it is critical to the successful delivery of the benefits of
the agreed reforms. Starting from scratch at the beginning of 2012, a comprehensive
assessment framework has been developed that is growing in its acceptance and credibility,
and I am pleased to report that the Committee now has dedicated capacity in the area of
implementation work.
The implementation framework is being continuously strengthened through a
lessonslearned process. Our goal is to take a more holistic view on the implementation process by
focusing not only on the existence of a regulatory framework but also on its functioning. The
implementation process is also envisaged to be closely linked to the ongoing policy
development process, creating a positive feedback loop that can help strengthen the
regulatory regime.
There is no doubt that this new monitoring and assessment initiative has already had a
positive impact. As a result of the regular monitoring of how countries are tracking against
agreed deadlines, as well as the forthcoming country assessments, member jurisdictions
regularly approach the Committee about specific aspects of the Basel framework, actively
seeking to ensure that their local adoption of the Basel rules would not be inadvertently out of
line with the spirit of the agreement. Jurisdictions have also brought forward the release of
their rules to ensure that their progress was captured in the periodic updates that the
Committee has provided to the G20 and made public. The self-assessment responses
undertaken for the assessment process are also benefiting the implementation process. In
addition, the assessments of drivers that lead to variation of banking and trading book
riskweighted assets are continuing and are to likely lead to both more consistent implementation
of existing rules, and the development of policy options to address identified areas of
weakness.
The priority for the Committee now is to build on these achievements in monitoring regulatory
compliance with Basel standards and to continue to enhance the rigour of all aspects of the
implementation monitoring and assessment process. There is a very full agenda planned for
2013 and beyond which will deliver quite a number of new monitoring requirements (such as
rules relating to liquidity, the leverage ratio and G-SIBs), as well as country and thematic
assessment reports. It is a credit to member jurisdictions, and evidence of their commitment
to the process, that this work can be undertaken: first, it requires the willingness of each
member to be subject to review by their peers, and then a continuing strong commitment,
including substantial resourcing of expert staff, from all involved. Nevertheless, the effort will
be well worth it if we achieve our objective of consistent implementation of the Basel
standards.
Assessing the impact of, and industry response to, the implementation of the
regulatory reforms
The major reforms that have been developed by the Committee, coupled with those being
introduced at the domestic level, are designed to fundamentally reshape banking. The
reforms are intended to generate a more resilient financial system, in which higher levels of
capital and liquidity are held, and in which risk is appropriately managed and priced. This will
obviously have consequences for the costs of financial intermediation, although studies
undertaken suggest that this cost is both relatively small, and considerably outweighed by
the benefits of increased financial stability.
Nevertheless, this is not a case of "set and forget". The Committee is mindful of two potential
consequences from the programme of reforms.
While a degree of deleveraging and increased risk premia are intended consequences of the
reforms, there is always a danger that some unintended consequences may arise. The
Committee needs to continue to undertake monitoring exercises to ensure that it responds
when truly unintended consequences materialise; we understand fully that, if left unattended,
they will serve to undermine support for the reform agenda. However, we also need to avoid
using this as an excuse to delay necessary reforms; to the extent there are unintended
consequences, we need to see how they can be addressed without losing the reform
benefits.
A second potential consequence relates to the incentives that may arise as the banking
sector adapts to the reforms by moving into those businesses where risk-adjusted
(regulatory) returns are greatest. This reshaping of banking (either within bank balance
sheets or outside the regulated banking system) needs to be monitored on an ongoing basis
for the Committee to maintain a robust regulatory framework in light of the evolving nature of
the banking industry. That does not mean that the regulatory framework should be in a
constant state of flux, as there are considerable benefits for financial firms being able to plan
in a stable environment. But, equally, we cannot have a regulatory regime that is set in stone,
and completely unresponsive to changes in the environment that it is tasked with regulating.
Creating greater simplicity and comparability in the regulatory framework
A vigorous public debate has developed recently as to whether the Basel regulatory
framework strikes an appropriate balance among different desirable characteristics:
simplicity, comparability and risk sensitivity. The policy development process must take these
and several other - often competing - factors into account, and finding the right balance
often involves a difficult set of trade-offs.
Nevertheless, it is important to keep this issue under review, and so the Committee
established a high-level task force last year with a view to looking at this concern from a
broader, strategic perspective. The Committee has already had some discussions on the
task force's findings, and will have more in the coming months (including at our meeting that
begins tomorrow). The way forward will also be guided by the findings of the reviews of
riskweighted assets that I mentioned earlier, since at the heart of that work is a concern about
comparability.
It is too early to say how we will take this work forward. Some issues, such as those in
relation to market risk modelling, can be taken up via our existing trading book review.
Others might require tweaks to the framework, or supervisory guidance, which can be
implemented in the near term. And others might necessitate a deeper, longer-term review
before we can decide on any solution. We will publish a discussion paper in the coming
months that deals with discusses some of the complex trade-offs that need to be made. But
one point I would stress is that whatever we decide upon, it will be designed to strengthen
the current framework, and there is nothing that is being proposed that should give reason to
hold off on the implementation of Basel III and other recently agreed reforms.
Enhancing the effectiveness of both micro- and macroprudential supervision
Not surprisingly, the Committee's agenda in the past few years has been dominated by
policymaking. In 2012, implementation also came to the fore. But it is perhaps stating the
obvious that effective supervision is the key to ensuring that regulation, once implemented,
continues to work as intended. Only if supervisors are given the tools they need to act can
they effectively perform their role. As the policy reform agenda moves towards completion,
and the new rules are rolled out by national regulators, the Committee will increasingly turn
its attention to enhancing supervisory practices.
Enhancing microprudential supervision
The Committee has a great deal of guidance on supervisory matters already on issue.
However, much of this was developed before the financial crisis and will benefit from being
updated to reflect lessons learned in recent years. Given the general applicability of much of
this material, the benefits of this work will also extend well beyond Basel Committee member
countries. As with all multi-year projects, this will require prioritisation. Near-term attention is
likely to be given to operational risks (internal controls and information technology),
governance, supervisory colleges, stress testing and dealing with weak banks.
Enhancing the practical implementation of macroprudential supervision
The systemically important bank - "SIB" - regimes will continue to be a priority area for the
Committee over the coming years. Although the regimes for global SIBs and domestic SIBs
have now been published, both will require a certain amount of ongoing maintenance and
monitoring. Furthermore, as noted in the G-SIB standard, the methodology, including the
indicator-based measurement approach itself and the cutoff/threshold scores, will be subject
to periodic review and refinement every three years.
Beyond this work, the Committee will now turn its attention to the practical implementation of
tools and techniques to deal with systemic risks. This will include two complementary areas
of work:
•
Regulatory consequences of SIB classification: Being a SIB means more than just
higher capital. In light of the risks they impose on the financial system, SIBs must be
held to a higher standard with respect to supervisory expectations for risk
management functions, data aggregation capabilities, risk governance and internal
controls, all of which are topics that feature prominently in the Committee's work
plan. In addition, given the principles-based nature of the D-SIB framework, the
Committee will monitor emerging practice as banking supervisors move towards
implementation so as to facilitate cross-border cooperation and mutual
understanding.
• Use of microprudential tools for macroprudential purposes: The Committee will
oversee preparations for the countercyclical buffer, as well as exchange information
on the wider range of microprudential tools that have been used for macroprudential
purposes (eg sectoral adjustments to risk weights, stress testing requirements,
loanto-value limits or varying margin requirements).
Concluding remarks
Since the financial crisis, the Basel Committee has accomplished a great deal. But we still
have work to do to complete the overhaul of the regulatory framework and fully factor in all of
the lessons learned. We also need to see whether we have the balance right when it comes
to simplicity and risk sensitivity. That work is going to keep the Committee busy for at least
the next two years.
But that is far from the end of it, because, as I have noted a number of times today, our
policy work will not generate its full benefits if not implemented in a full, timely and consistent
manner. So our implementation monitoring work is equally important. And then even when
the new standards are implemented, we will need effective supervisors to ensure that they
are adhered to. This is an area where the Committee has the potential to do much more,
particularly once the policy pipeline begins to slow. In other words, the Basel Committee will
continue to provide you with much to talk about - at this meeting and those in the future!