02 Jul 2009, Joel Clark, Operational Risk & Regulation
"Basel II is the best way forward to build banks' capital requirements on, but I would be mistaken if I were not to acknowledge there is room for improvement," he said. "The crisis has revealed a number of areas where the framework could be strengthened to enhance the resilience of individual banks, the banking sector and the broader financial system."
Roldán outlined the most important changes being developed by the Basel Committee, including an increase of minimum capital requirements to better reflect trading book activities; enhanced supervision, risk management, and disclosure of securitisations and off-balance-sheet instruments; and improvements to valuation and stress-testing practices.
He also stressed the importance of efforts to change the definitions of capital, the need to ensure banks build up counter-cyclical capital buffers for use in economic downturns, and the possibility of supplementing the current risk weights with a non-risk-based leverage ratio. "The idea is certainly not to replace Basel II, but rather to add another layer of safety. You don't give up using the seatbelt just because you have an airbag," he said.
Several regulators have suggested the concept of a capital buffer in recent months, as supervisors try to find ways of easing the pro-cyclical effects of Basel II, which can cause banks to stop lending during a recession as their capital runs down. They see mandating banks to build up a capital buffer during the boom as a potential solution, though it would conflict with accounting standards that prohibit provisioning for loan losses not yet realised. Yet since 2000, the Bank of Spain, which acts as regulator as well as central bank, has enforced 'dynamic provisioning', mandating Spanish banks to build up a capital cushion during favourable economic times.
Asked about the possibility of extending that model beyond Spain, Roldán was positive: "I have never been so optimistic about solving this issue as I am now. From my perspective, there is no contradiction between accounting and solvency. Dynamic provisioning can be seen as a way to perfect fair-value accounting."
In a separate presentation, António Horta-Osório, chief executive of Abbey and executive vice-president of the Santander group, praised Spain's regulatory framework and the dynamic provisioning rules in particular. "In the expansionary phase of the economic cycle, Spanish banks make up a general provision according to credit growth and credit exposure," he said. "This provision is used as a buffer, thereby introducing an automatic stabiliser - something that is particularly helpful in an economy such as Spain that does not have autonomy over monetary policy. As a result, Santander has more than €6 billion of generic provisions in the balance sheet - a substantial capital cushion."
In other sessions at the conference, there was much discussion of emerging regulatory changes in the UK and Europe. Peter Sands, chief executive of Standard Chartered, stressed the need for simplicity in regulation. "Overly complex, opaquely priced products that no-one really understood got many banks into trouble; overly complex, opaque regulations surely can't be the answer," he said. "Burying bankers under regulation doesn't necessarily make them better bankers."
Sands' caution on regulation was echoed by Paul Myners, financial services secretary to the UK Treasury: "Regulation cannot be the sole load-bearing instrument in ensuring our financial system is sound and able to fulfil its role in the wider economy. The greater component of strain has to be taken by governance and investor stewardship."
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