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30 November 2009

Trichet at DNB’s 2009 Financial Forum: shaping the future of global financial market regulation

When asked what impact the G20 has had on the work of the Basel Committee, Trichet said the G20 leadership, in determining the new financial regulatory framework, has led to a strengthening of the Basel Committee. This is a G20 success which will help to achieve financial stability.

When asked at De Nederlandsche Bank’s Financial Forum about the impact the G20 has had on the work of the Basel Committee, Trichet said that the G20’s leadership, in determining the new financial regulatory framework, has led to a strengthening of the Basel Committee . This is a major success for the G20 and will help to achieve financial stability.

Trichet explained in detail the Basel Committee function and outlined the following implications for financial institutions:
·         First, financial institutions will have to raise the quality, consistency and transparency of capital. Tier 1 capital should be predominantly composed of common shares and retained earnings to increase its loss-absorbing capacity. A common definition of capital and appropriate disclosure of its components will be internationally established. This will contribute to increased transparency and comparability.
·         Second, a framework of counter-cyclical capital buffers above the minimum requirement will be introduced. The Basel Committee will set up appropriate indicators for the build-up and release of these buffers. Measures for the conservation of capital will also be considered, such as constraints on its distribution.
·         Third, a non risk-based leverage ratio will supplement risk-based capital requirements and help to curb excessive balance sheet growth. To ensure the comparability of the leverage ratio at global level, necessary adjustments, for instance in accounting rules, will be made.
·         Fourth, banks will be subject to a minimum global standard for funding liquidity. This new standard will include a stressed liquidity coverage ratio underpinned by a longer-term structural liquidity ratio.
·         Finally, Trichet highlighted another very important issue: compensation. The G20 Leaders endorsed the Financial Stability Board’s implementation standards to align compensation with prudent risk-taking and long-term performance. The Basel Committee has set up a network of senior supervisors to monitor the implementation of these standards. As discussions around bank bonuses resurface, it is of the utmost importance that banks implement these standards immediately, and in time for the 2009 bonuses. Trichet urged supervisors to ensure timely and consistent implementation and for banks to behave responsibly and resist short-term temptation. We all have to be conscious that in the current episode, profit developments in individual institutions cannot be seen in isolation from the very large public support granted to the financial system as a whole.

Trichet said he was quite satisfied with current progress, but that the proof of the matter, of course, lay in the implementation. The far-reaching measures being developed by the Basel Committee under the presidency of Nout Wellink will result, over time, in higher capital and liquidity requirements, as well as in less leverage and procyclicality in the banking system. The proposals on these measures will be issued by year-end.





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