Capital rules may be too risk-sensitive, Basel fears

Complexity is slowing roll-out of standards, says Basel Committee deputy

In the dark: complexity of some standards is delaying adoption, says Basel Committee's Tsuiki

Photo: Ulrich Roth

The complexity of certain bank regulations is slowing their adoption by members of the Basel Committee on Banking Supervision, according to the committee’s deputy secretary general, Toshio Tsuiki. Future standards may need to be simpler, he warned – a stance that will worry big-bank advocates of risk-sensitive rules.

“Unfortunately, there have been examples of some Basel standards not being implemented domestically and we are looking into those issues,” said Tsuiki. “One of the reasons behind this delay is still complexity of the standards.”

The committee will discuss the problem when it meets next week, Tsuiki said, adding the body is concerned a lack of progress on certain rules is interfering with a pledge made to the leaders of the G20 nations to ensure timely, consistent adoption of Basel standards.

Tsuiki was speaking during a panel discussion at Asia Risk Congress in Singapore this morning (September 26).

To illustrate, Tsuiki pointed to Basel’s standardised approach to counterparty credit risk (SA-CCR), which was finalised in 2014 with an implementation deadline of January 2017. A report on the roll-out of Basel standards in April this year found only five of 27 member states had implemented the new rule. Of the remainder, eight nations have not yet published draft proposals, including Japan and the US.

The SA-CCR was originally devised as a replacement for two existing methods of calculating counterparty exposure – the current exposure method and the standardised method, both of which were seen as too crude. Their mooted replacement is more risk-sensitive, but is proving more difficult to roll out.

We have a strong commitment to full, timely and consistent implementation of Basel standards

Toshio Tsuiki, Basel Committee on Banking Supervision

When the committee asked members to explain the delay in implementing SA-CCR, complexity was cited as a reason, Tsuiki said.

“We have a strong commitment to full, timely and consistent implementation of Basel standards – we have made that commitment to the G20 leaders. So, it’s very serious,” he said.

He added that patchy adoption of rules could become self-sustaining. Countries that are ready to implement may wait if they see other jurisdictions are postponing their plans – a “negative spiral” that also worries the committee, Tsuiki said.

The regulatory pendulum has swung dramatically in recent years from rules that attempt to finely measure exposure – on the basis that banks will make better choices if capital is tied to risk – to those that trade sensitivity for simplicity. That trend has generally been welcomed by smaller banks, but has generated fierce protests from bigger banks that have invested huge amounts of time and money in capital modelling efforts.

Shifting approach

Tsuiki pointed to the planned overhaul of op risk capital rules as one example of the shifting approach. The outgoing rules gave banks four different options; three standardised approaches of varying degrees of complexity, and one approach under which banks could build their own capital model. The replacement is a single standardised approach.

The slow roll-out of SA-CCR might mean the pendulum has further to swing, Tsuiki added: “It may be the case that there is still too much risk-sensitivity.”

Speaking as part of the same panel, Ephyro Luis B. Amatong, a commissioner at the Philippine Securities and Exchange Commission, applauded attempts to simplify the prudential framework and to apply it in a more proportionate way – meaning smaller banks and their regulators escape some of the burden.

“From the point of view of an emerging market with capital markets that are still in the development phase, the turn towards simplicity and proportionality are both very welcome,” he said. “It’s a challenge to implement the standards that have been introduced since 2008.”

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• Topics
• Advanced measurement approach (AMA)
• Basel Committee on Banking Supervision (BCBS)
• Basel III
• Capital requirements
• Group of 20 (G-20)
• Internal models
• Internal ratings-based (IRB) approach
• Risk-weighted assets (RWAs)
• Standardised approach to counterparty credit risk (SA-CCR)
• Standardised measurement approach (SMA)
• Regulation