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21 April 2016

BIS: Andreas Dombret: Overshooting the mark? Banking regulation and its implications for banking business

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The Deutsche Bundesbank's Dombret explains the next steps in the Basel Committee's reform agenda and say the BCBS will make sure that the minimum capital requirements do not continue to rise above the level already reached.

Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, for Bankenverband Hamburg

[...] the reforms must be completed swiftly. This is the only way we can reduce the risk of future crises and ensure that those who are responsible for causing a financial crisis are the first to be held accountable for its costs.

With this in mind, the Basel Committee on Banking Supervision developed the new Basel III regulatory framework, which contains tougher capital requirements, a leverage ratio, new liquidity regulations and new macroprudential instruments. These rules were implemented in Europe as the CRD IV package and have been in force since 2014.

As I mentioned earlier, however, some major elements of the reform agenda are still missing. The Basel Committee is taking longer to consider how they will be completed. For instance, we plan to revise existing methods of measuring risk-weighted minimum capital ratios with a view to reducing the disparities in calculations for similar portfolios and the misuse of internal calculation methods. The regulations on market risk have already been established and the finalised version of the credit risk standardised approach will be published in the next few months.

At the moment, we are also discussing proposals relating to other areas, including the internal ratings-based approach for calculating credit risk, which we will continue to discuss with the banking industry until June. We plan to thoroughly overhaul this approach - portfolios that do not meet strict modelling requirements will be excluded from the IRB approach, the regulatory parameters will be fully revised and tightened in many cases, and capital floors will be introduced to ensure that minimum capital requirements do not fall below a certain level. These floors will be set according to the standardised approach.

In addition, the new standardised measurement approach for operational risk will be presented for consultation with the banking industry by the end of June. Among other things, it will replace the existing internal model-based method, meaning that, in future, there will no longer be an internal approach for measuring operational risk.

These revisions are far-reaching and necessary, and it is important that German banks and savings banks participate in the consultations by providing constructive suggestions. However, I would like to make one thing clear from the start: criticism of the fundamental concept will not achieve anything - the decision to limit the use of internal approaches has already been made.

At the same time, the final consultation on treating the leverage ratio as a Pillar 1 minimum capital requirement will continue until July. A key aspect here is that we want to introduce a surcharge for global systemically important institutions.

In addition to the Basel III reforms, the Basel Committee is also discussing the current practice of giving sovereign bonds privileged regulatory treatment. The Bundesbank is campaigning to require banks to hold sufficient capital against the risks of sovereign bonds and for exposures to sovereigns to be covered by the usual large exposure rules. However, these reforms will only be finalised after 2016. [...]


[...] The rest of the reforms are in the pipeline. They will be rigorous, but not excessively so. That's all there is to say. Credit institutions will have to get used to a new market environment and develop business models that are sustainable in the long term.

But we in the Basel Committee will make sure that, on average, the minimum capital requirements do not continue to rise above the level already reached. To do this, the Committee will insist that the overall burden of the reforms is analysed in advance and limited if necessary. Once the Basel III reforms have been finalised, it is also important to allow time for them to be implemented rather than immediately embarking on new reforms.

And I believe that we should check whether the rules could be simplified for smaller institutions. I therefore wholeheartedly back the proposals to review the EU framework by the German finance minister, Wolfgang Schäuble, and the British finance minister. [...]

Full speech

© BIS - Bank for International Settlements

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