david clementi : risk sensitivity and the new basel accord speech by david clementi, deputy governor of the bank of england, at a financial services authority conference : “ reforming capital adequacy for banks, building societies and investment banks ”, london, 10 april 2001. * * * introduction it is a great pleasure for me to be adding my remarks today to those of bill mcdonough and howard davies. i would first like to congratulate bill, as chairman of the basel committee, on the very real achievement that this new capital framework represents. products that are'designed by committee'normally come in for some fairly trenchant criticism, but this one represents a new milestone in financial regulation, one which i believe will strongly influence how all financial firms, not just banks, come to be regulated in the future. i know it has been a lot of hard work, and i don't just mean the shoulder - strain involved in carrying the document onto airplanes! unfortunately the hard work is not over yet, both for the authorities and for the banking community - even looking beyond finalisation of these proposals, supervisors and banks will of course have to see through a long and complex implementation process. but this is not to underestimate the progress that has been made and it is certainly a good moment to take stock of the proposals as they stand. although underpinned by the straightforward proposition that capital requirements should be more sensitive to risk, the new basel proposals are frequently referred to as a'package '. i would describe the components as, first, some very difficult technical thinking, which has addressed questions regarding the purpose of capital that were barely even thought of back in 1988. the second component is, unsurprisingly, pragmatic compromise. the result is, i think, a reasonably coherent whole ; i know that those involved have tried to think about the sum of the parts as well as the individual parts. and it is this question of the overall, long - term impact of the new accord that i would like to focus on today. the bank of england has as two of its three core purposes maintaining the stability of the financial system and seeking to ensure the effectiveness of uk financial services. both are relevant to the discussion of capital adequacy. the bank, participating in the discussion of the new accord as a member of the basel supervisors committee, has looked at the proposals, not only from the perspective of financial stability but also with regard to the efficiency of the banking

left by the decline of the wholesale lenders, so that there has not been a material constraint on the quantity of housing credit available in australia throughout the crisis. there has, however, been some tightening in lending standards, with several banks reducing their maximum lvrs on prime, full - doc loans for new borrowers from 95 – 97 per cent to relative to equivalent maturity swap rates ( and by more relative to the cash rate because of the current slope of the yield curve ). about 90 per cent during 2009. banks have also raised their interest rate buffers and increased their “ genuine savings ” requirements. low - doc and non - conforming loans have become much harder to obtain. this has seen a decline in the share of new owner - occupier housing loans with a lvr above 90 per cent, from a peak of 27 per cent in the march quarter 2009 to 17 per cent by the end of the year. the share of low - doc loans has declined to about 7 per cent. there has been a decrease in the shares of new investor loans that are being written with higher loan - to - valuation ratios ( lvrs ) or lower documentation standards. there has also been a decline in the share of interest - only loans, though it is still the case that close to half of all new investor housing borrowers are opting to not make any principal repayments, reflecting the tax advantages of this funding strategy. the future looking forward, the competitive state of the current market is reflected in the fact that home lending rates have not risen by as much as funding costs. moreover, the outlook for the smaller lenders has improved since mid 2009. the securitisation market is starting to recover, with the volume of issuance to non - aofm investors picking up and secondary market spreads decreasing. securitisation is once again becoming a more viable funding source for lenders, with spreads on newly issued rmbs – around 130 to 135 basis points over one - month bank bills for nonaofm supported deals – a little below our estimated break - even spread of around 160 basis points. however, our estimate of the break - even spread, and hence the profitability of the issue, does not take into account different degrees of subordination across issues. to the extent that that the degree of subordination required by investors is greater than it was previously, the overall profitability of the issue will be lower. this is because a greater share of the security