1st June 2017

Regulators: better together

Written by Simon Hills, Executive Director, Prudential Regulation and Risk

Speaking in London last week Bill Coen, the Secretary General of the Basel Committee on Banking Supervision (BCBS), hinted that the Basel III framework could be finalised in the new future – and yesterday saw reports that the BCBS have agreed a 75% output floor.

These changes to the standardised approaches to credit and operational risk, as well as the possible introduction of an aggregate output floor, have been in the planning for some while. Agreement on their completion, along with a suitable transitional and phase in timetable will enable banks and their investors to understand and plan for the new end-state capital requirements with certainty.

Mr Coen also spoke about the BCBS’s 2017-18 work programme. One element of this will   examine whether Basel standards are being adopted fully in a timely and consistent manner which is critical to improving the resilience of the global banking system.

This is a helpful intervention at a time when it appears, to me at least, that there is a heightened risk of fragmentation of approaches to banking regulation and supervision, reflecting a mistrust of globalisation and the rebuilding of the diminishing borders of the last few decades that have allowed exchange of goods, services, people and capital, bringing us cheaper food, iPhones and clothes.

This fragmentation is evident in the requirements for foreign G-SIBs to form a US intermediate holding company and the European Commission’s proposals that third country banks should set up an EU intermediate parent undertaking.

Initiatives such as these, perhaps arising from mutual mistrust amongst supervisors, risk balkanising banking structures – legal, financial and operational – along national or regional lines. This will inevitably increase banks’ cost base and drive retrenchment from cross-border business with a knock-on effect on trade and investment flows and the price of lending to customers in the real economy.

The BBA supports an approach based on supervisors working together, with transparent, consistent implementation of international standards and collaborative cross-border cooperation in supervisory colleges and crisis management groups. This will increase the mutual trust that is so important in supervising large internationally active banks if their ‘balkanisation’, via locally set prudential requirements, with all the attendant economic predicaments, is to be avoided.

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