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ICFR/EBRD Workshop
Implementing Basel III in the CEE region –where is the Basel III process now?
Dr Richard ReidDirector of Research
21 March 2011, London
“optimal” financial size?
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Euro Area NMS CZ EE HU LT PL SI0
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FIR
(Financial Intermediation Ratio (FIR) = all financial assets(liabilities) to GDP, 2002)
Source: ECB, Occasional Papers No. 36 2005. NMS = new EU member states.
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Coming in from the cold
Source: ECB 2002 “Financial sectors in EU accession countries”
(domestic credit as % GDP)
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THE REGULATORY CYCLEPhase 1 ‐ crisis management and stabilisation (rescue packages, fiscal and monetary policy)
Phase 2 ‐ the “grand plan” emerges. International cooperation, G20, the Financial Stability Board. Turner/De Larosiere reports. Economies begin to steady – The hunt for who to blame gathers pace.
Phase 3 ‐ More detailed legislative proposals get tabled, economies start to recover, the blame game picks up, (enforce/punish), but the tension between international cooperation and domestic agendas become more apparent. Industry pushback becomes more manifest.
Phase 4 ‐ the detail of legislative proposals is tested. Behaviour, culture, moral hazard – be seen to punish! Industry pushback grows, political commitment wanes? G20 wilts ‐ reassesses? Long implementation phase begins. Regulatory capture?
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Thirty years of the Basel process
Source: BIS January 2011, Hannoun
01‐2019Full
implement’n of Basel III
12‐2009Basel III
consultative document issued
07‐2009Revised
securitisation & trading book rules
06‐2004Basel II issued
12‐1996Market risk amendment
issued
07‐1988Basel I issued
01‐2013Implement’n of Basel III begins
12‐2011Trading book
rules implemented
12‐2007Basel II advanced approaches implemented
12‐2006Basel II
implemented
12‐1997Market risk amendment implemented
07‐1992Basel I fully implemented
11‐2010G20 endorsement of Basel III
1990 2000 2010 2020
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Protracted implementation timeline
7Source: BIS 2010 (adapted)
Leverage Ratio
Supervisory monitoringParallel run
1 Jan 2013 – 1 Jan 2017Disclosure starts 1 Jan 2015
Migration to Pillar 1
Basel III: outstanding issues
• A full review of the trading book (end 2011?)• Counterparty risk, liquidity, leverage• Use of external ratings• Dealing with SIFI’s (rules by mid 2011?)• Cross border resolution (June 2011?)• Review of core principles ( 2011)• Standards implementation • Perimeter of regulation/shadow banking
The “implementation” or “fudge” phase
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Basel III: broader questions
• When is a bank Basel III compliant (end 2012?)• Effective supervision and surveillance• How much discretion will there be? (e.g. buffers)• International cooperation? Beyond the G7• Disillusionment with the process:
industry resistance, elapsed time since crisis, front running reforms, the “not‐my‐crisis” countries
• Liability management – more innovation• Impact on credit,GDP, biz models, competition• Macro prudential tools & data – the last war ?
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End notesOn Basel III
"It still doesn't require as much equity capital as all the major banks that required intervention had in the reporting period before they failed. And the lengthy phase‐in period means it will only get weaker before it's actually put in place.“ Prof Richard Herring, Nov. 2010.
On regulators“..., regulatory bodies, like the people who comprise them,
have amarked life cycle. In youth they are vigorous, aggressive,evangelistic, and even intolerant. Later they mellow, and in
old age‐ after a matter of ten or fifteen years ‐ they become, with some exceptions, either an arm of the industry they are regulating or
senile.” JK Galbraith, 1954 “The Great Crash 1929” 10
Basel III: Responses
• Microprudential‐ Risk coverage‐ Definition of capital‐ Leverage ratio‐ liquidity standards‐ Pillar 2 & 3 enhancements
• Macroprudential‐ leverage ratio‐ conservation and countercyclical buffers‐measures to reduce systemic risk
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International Financial Standards
Key standards are still evolving – for instance, insolvency, safety nets, crisis management; and key pieces of existing standards need more coherence
The coordination problem
15Source: IMF 2010 et al
Wholesale funding reliance
Source: Citi Investment research & analysis
(wholesale funding as % of total funding)
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Banks’ net funding
Source: Citi Investment research & analysis
(net funding balances by category, Euros bn.)
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Hitting a moving target
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Bank Tier 1 capital ratios 2007‐09 with sponsors Large bank capital ratios, 2009 & BIS Dec QIS
Sources: IMF GFSR and Citigroup research
Managing Global Capital Flows
Source: IMF 2011, GFSR Update
(net liabilities, percent of aggregate GDP, 4‐quarter moving average)
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