The Basel Committee on Banking Supervision says that it must update the regulatory framework for banks to prevent a recurrence of the financial crisis in the future.

Speaking to the European Parliament’s Committee on Economic and Monetary Affairs on Monday, Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, noted that “supervisors must have a comprehensive strategy to deal with the crisis and the associated impact on banks. This is essential if we are to restore stability to our financial systems and economies.”

In his remarks, Wellink detailed the committee’s existing, and planned, initiatives that are intended to produce a more robust supervisory and regulatory framework for the banking sector, including:

> revising capital requirements to give better coverage of banks’ risk exposures, including for trading book, securitisation, and derivative activities;

> more and higher quality capital to back these exposures; countercyclical capital buffers;

> the introduction of a non-risk based measure to supplement Basel II and help contain leverage in the banking system;

> higher liquidity buffers;

> stronger risk management and governance standards;

> more regulatory focus on system-wide or “macroprudential” supervision; and

> greater transparency about the risk in banks’ portfolios.

In discussing the Basel Committee’s long-term strategy, Wellink stated that, “we need to establish a clear target for the future regulatory system that substantially reduces both the probability and severity of a crisis like the one we currently are working though.” He added that “by providing clarity about the future regulatory framework, we will help re-establish near term confidence, reduce the risk of competitive distortions and limit the degrees of uncertainty for the public and private sector.”

Wellink noted that, as the changes it is planning are far reaching and ambitious, they will need to be phased in. And, he added, that it is trying to extend the reach of its standards by inviting the the BRIC countries – Brazil, Russia, India and China – as well as Australia, Korea and Mexico, to join the committee. “The expansion of our membership will help enhance the global reach and acceptance of our standards,” he said.

He also stressed that these initiatives need to be complemented by efforts to bring more regulation to other parts of the financial sector. “The efforts of the Basel Committee need to occur in a broader context of achieving the right balance between the scope and depth of regulation. Failure to produce adequate regulation for other ‘bank like’ activities means that we in the banking sector will just be ‘pushing on a string’, and the activity will simply migrate elsewhere,” he cautioned, adding that he welcomes the activities of other bodies such as the G20, the Financial Stability Forum and the Joint Forum “to ensure that all sectors are subject to an appropriate degree of regulation, oversight or transparency commensurate with their systemic significance.”

IE