BoE sets out next steps for prudential regulation of banks: present and future

Vicky Saporta, Executive Director for Prudential Policy at the Bank of England delivered a keynote speech on 4 July at The Westminster Business Forum.  The speech focused on the impact of Basel III, which was finalised on 7 December 2017, and discussed the achievements of the reforms, its finalisation and what lies ahead.

Achievements

The reforms started in 2009 and completed in December 2017. During that time the Basel Committee on Banking Supervision published 47 standards, compared to 21 standards that had been published between 1988 and the 2008.

The reforms are wide ranging and touch on different aspects of banking regulation. For example, there has been structural reform to protect retail payments and lending to households and businesses “from shocks to other parts of banking groups specialising in wholesale customers”.  Further structural reforms were said to be on track for delivery in January 2019, including higher capital buffers for ring fenced banks.  

Basel III finalisation

The aim of the reforms was to “reduce excessive variability of banks’ risk-weighted assets, and in doing so making banks’ risk-based capital ratios more transparent and comparable”. Excessive variability was said to be caused by banks’ internal models which can cause large differences in the risk weights for very similar assets, meaning that against the same portfolio of exposures, one bank might be holding £100 of capital whereas another might be holding £230.  As a consequence, risk weight variability could reduce the stability of the banking system as banks with similar portfolios would not be equally resilient.

Vicky Saporta acknowledged that there was a need for a balance between the need to allow for more risk sensitive and complex measures to discourage banks from taking on more risk and the need to “best trade off model bias and model variance, while being less vulnerable to arbitrage”. The final elements of Basel III should achieve this.

The future

Finalisation of Basel III indicates that the “wave of regulatory reform following the Global Financial Crisis is now over”.

Banks should not expect a lot of further reforms regarding banks’ capital and liquidity as the focus of regulators – UK and internationally – will look at:

  • completing the implementation of the post-crisis reforms – e.g. the Basel III finalisation package and the reforms contained in CRD V and CRR Il;
  • making adjustments to the framework in response to new risks; and
  • making adjustments to the framework in response to unintended consequences.

Implementation

Basel III is due to be implemented between 2022 and 2027.