Global banking regulators have issued a new discussion paper that aims to spark debate over whether to try and simplify the new Basel III capital adequacy regime.
The Basel Committee on Banking Supervision released a paper Monday that examines the regulatory challenge of balancing the conflicting goals of making the Basel capital standards more risk sensitive, with the goals of having standards that are relatively simple and comparable between banks and between countries.
The committee notes that it introduced a range of reforms in response to the financial crisis that aim to substantially raise the resilience of the banking system, and make the capital rules more risk sensitive. However, at the same time, the framework has also become more complicated. The paper, which was produced by a task force of its members that was formed to identify opportunities to remove undue complexity within the framework, and improve the comparability of its outcomes, discusses possiblw ways to further reform the framework in order to strike an appropriate balance between the goals of risk sensitivity, simplicity and comparability.
The ideas it proposes include: explicitly recognizing simplicity as an additional objective, enhancing disclosure, using a broader set of metrics to improve comparability, ensuring the effectiveness of the leverage ratio, reconsidering the linkage between internal and regulatory models, limiting national discretion and improving supervisory consistency, and possibly adopting fundamentally different approaches to capital adequacy.
The committee stresses that it’s not necessarily wedded to any of these ideas. “The purpose of the discussion paper is to seek views on this critical issue so as to help shape the committee’s thinking,” it says. “At this stage, the committee has not made a decision to pursue any of the ideas presented.”
While it’s seeking to start on a debate on ways to possibly simplify the capital rules, the committee stresses that it “remains firmly of the view that full, timely and consistent implementation of Basel III remains fundamental to building a resilient financial system, maintaining public confidence in regulatory ratios and providing a level playing field for internationally active banks.”
However, it also notes that the creation of the task force in 2012 acknowledges that the framework has steadily grown over time and become more complicated, as risk coverage has been expanded and more sophisticated risk measurement methodologies have been introduced.
“The committee is keenly aware of the current debate concerning the complexity of the current regulatory framework. For that reason, the committee set up a Task Force last year to look at this issue in some depth,” said Stefan Ingves, chairman of the Basel Committee and governor, Sveriges Riksbank.
“The committee believes that it would benefit from further input on this critical issue before deciding on the merits of any specific changes to the current framework. The paper being released today is designed to encourage discussion amongst, and solicit views from, a broad set of stakeholders,” he said.
Comments are due by October 11.