Stefan Inges also presented the following key messages on Basel II:

·         Capital inadequate in terms of quantity and quality: According to the Basel II regulations the capital base consists of two parts: Tier 1 (or primary) capital and Tier 2 (or supplementary) capital. Together, these should correspond to at least eight per cent of the banks’ risk-weighted assets, of which Tier 1 capital must constitute at least four per cent. In addition, the regulations state that share capital and retained earnings, so-called Core Tier 1 capital, should make up the main part of the Tier 1 capital as it is these types of capital that can best cover losses. This vague ruling on how much Core Tier 1 capital a bank must have has led to a number of problems.

 

·         Basel II underestimates the risks in banking operations: Another weakness of the current Basel II regulations is that they do not sufficiently capture the banks’ risks. There are many examples of this. One is that the regulations and supervision have focused too much on risks in individual banks and too little on risks in the system as a whole. This is referred to as the lack of a macroprudential perspective.

 

·         Inadequate standards for liquidity management:  Another important lesson from the crisis is that the regulations have paid far too little attention to the banks’ liquidity management. In the present Basel regulations, there are no binding regulations on how banks should manage their liquidity risks.

 

·         The procyclical effects of Basel II contributed to the crisis: Finally, it has also been noted that the procyclical tendencies in Basel II contributed to the crisis. The explanation for this is the regulatory framework’s strong links to risk. During the upturn that preceded the crisis, when risks were low, banks were able to expand their balance sheets and present good capital adequacy figures, despite the fact that they held relatively little capital. When the downturn then began and the risks increased, more capital was required to reach the stipulated minimum level of capital. With the increase in risks and the loss of confidence between the banks, the markets’ capital adequacy requirements also increased. In order to meet these requirements, banks in many countries were forced to reduce their balance sheets. This led to a fall in lending to companies and private individuals. This in turn triggered a downward spiral with a fall in demand and in investment capacity, which reinforced the downturn in global economic activity.

He also said that Basel III is a step forward, but more may be needed. Mr Ingves concluded by saying there are a number of important areas that Basel III does not deal with. These include how it should handled banks that encounter problems, what approach it should be taken to systemically-important participants and how it should be solved the challenges set by cross-border banking.