The latest revisions to the global capital adequacy regime for banks, known as Basel III, should improve the comparability and transparency of banks’ capital reporting, and may lead to further bank restructuring, says Moody’s Investors Service in a new report.
Last week, global banking regulators, the Basel Committee for Banking Supervision, released revisions to the market risk component of the capital rules, which includes changes to both the model-based and standardized approaches to setting banks’ capital requirements, along with changes designed to reduce the incentive for arbitrage between the banking and trading books.
See: Basel Committee issues revised framework for market risk capital requirements
According to a new report from Moody’s, those changes, which take effect in January 2019, will increase the transparency and consistency of banks’ reporting of risk-weighted assets (RWAs) and their capital positions. “Under the new standards, banks’ reported market risk capital measures will be more comparable because of consistent risk factor identification, a more rigorous model approval process, and an enhanced standardized capital calculation serving as a capital floor to the internal models-approach calculation,” the Moody’s report says.
As well, the revisions could lead to further industry restructuring, the Moody’s report suggests. While the specific impact of the changes is not yet known, Moody’s points out that the Basel Committee estimates that, overall, banks will have a 40% higher market risk capital requirement under the new regime, compared with the existing regime.
The impact of these changes will be felt most acutely by the global investment banks, which generally have significant trading operations, the Moody’s report says. And, as a result, it suggests that these firms will be even more motivated to reduce and/or exit trading activities that are more capital intensive.