Early December 2017, global financial regulatory authorities met within the Basel Committee. They gave their agreement to finalisation of the so-called “Basel III” prudential framework (see EUROPE 11921). Meeting at the Institute of Law and Finance in Frankfurt on Monday 29 January, stakeholders in the European banking sector took stock of these new prudential standards relating to the level of own funding to be held by banks for covering the risks to which they are exposed.
“It is done: Basel III has been finalised. I admit that it was a long journey but, in my view, it was worth the wait: Basel III will help to make banking safer”, said Sabine Lautenschläger, Vice-Chair of the Supervisory Board of the ECB. Andrea Enria, President of the European Banking Authority (EBA), took the same view, saying the agreement is a “major breakthrough”.
It was a difficult task, however. The Basel Committee was to reach a balance between the need to maintain sufficient sensitivity to the risk – a key priority for jurisdictions largely dependent on internal banking models – and the search for equitable rules at global level for jurisdictions that have decided not to use this kind of approach. It was considered that the agreement reached managed to achieve this.
“At different stages of the debate, I flagged some concerns on the proposals being put forward by the Basel Committee”, said Enria, going on to acknowledge that “the significant changes introduced allayed my concerns”.
Both speakers reconsidered the tricky matter of revising minimum thresholds of own fund requirements ("output floor") – the main stumbling block between Europeans and Americans (see EUROPE 11810). According to Enria, the final calibration struck “a good balance”. Lautenschläger said fixing the output floor at 72.5% calculated in an aggregate manner on all risks does not reduce risk sensitivity. “Banks can still apply individual risk weighting and benefit from less high own fund requirements for traditional banking activity with low risk”, she explained.
Nonetheless, all regulatory exercises are inevitably followed by just as great and difficult an effort of implementation.
At European level, in-depth analyses will still be necessary to ensure that the international standards are transposed in line with the principle of proportionality, taking into account the burden of conformity for smaller local banks and by considering the impact on specialised economic models, Enria explained. In addition, it will be necessary to ensure that there is greater market transparency for implementation of the new rules.
“The ball is now in the court of the authorities in charge of implementing the last chapter of the reform”, Enria said. She went on to add that, for this, they can count on the EBA for assistance in their work. (Original version in French by Marion Fontana)