Transcript Presentazione di PowerPoint

From Basel 2 to Basel 3
Sergio Lugaresi, Public Affairs
Milan, October 26, 2012
The Agenda
Summary
Washington 2008: supervision, compensation, securitisation
London 2009: Basel III, taxes
Pittsburgh 2009: large global financial firms (then SIFIs)
Seoul 2010: shadow banking
The next step: Consumer Protection?
Conclusions
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Summary
 From Basel II, an “International cooperation based on home country control” (Kapstein
1994), to “international cooperation based on host country control and peer review” with a
central role played by the Financial Stability Board (FSB)
 The focus has shifted from the immediate culprits of the financial crisis (supervision,
compensation, securitisation) to repair and innovation of prudential regulation (Basel III). The
evaluation of its economic impact has been very controversial.
 Taxpayers concerns have played an important role.
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Introduction: Basel 1 (1988)
 The core prudential regulation is based on international Accords signed by major
financial regulators in Basel.
 The first Accord (Basel I) had been signed in 1988 and had introduced a common
minimum capital requirement of 8 percent of Risk Weighted Assets (RWA).
 RWA were to be calculated by applying pre-determined weights (ranging from 0 to
100% based on the nature and geography of the counterparty) to exposures. Offbalance sheet items were to be included using a conversion factor.
 Despite its success in halting the historical downtrend in bank capital ratio, Basel I was
soon object of criticism for neglecting interest and market risks and for the arbitrariness
of the weights that generated incentives to regulatory arbitrage (i.e. to bias lending to
counterparties with risk disproportionate to their weight).
Basel 2
 In 1996 Basel I was amended to include an explicit capital requirement for market risk to
be calculated, at least for larger banks, from banks’ internal models conditional to their
validation by supervisors. These internal models are based on the Value-at-Risk (VAR)
methodology which identifies risk with volatility (measured by its standard deviation) and
assumes a normal distribution of returns.
 Basel II (2004) introduced two main changes:
1. it substituted the fixed weights extending the possibility to use external ratings and
internal models;
2. it complemented minimum capital requirements with principles for supervision (Pillar 2)
and transparency to strengthen market discipline (Pillar 3).
 The internal credit risk models were to be based on the same approach, namely the
“asymptotic single risk factor” (ASRF) model developed by Gordy (2003), which
assumes normally distributed probability of defaults and an unique factor of
macroeconomic risk.
 Large banks are supposed to estimate all the relevant parameters, i.e. the probability of
default (PD), the loss given default (LDG), i.e. the percentage loss occurring after
default, and the correlation to the single macroeconomic factor.
 In 2007 Basel 2 was going to be fully implemented in the EU, but not yet in the US.
Global Committee Structure – A Regulator’s View
G20
(Finance Ministers and Central
Bank Governors )
Spain
OECD
IMF
World Bank
(Governments)
(Governments)
CGFS
IASB
US FASB
(Accounting)
(Accounting)
Financial Stability
Board
Bank for International
Settlement
(Central Banks)
CPSS
G10
(Central Banks)
Basel
Committee on
Banking
Supervision
IOSCO
(Securities)
Joint Forum
IAIS
(Insurance)
Abbreviations
 CGFS: Committee on the Global Financial System
 CPSS: Committee of Payment and Settlement Systems
 FASB: Financial Accounting Standards Board
 G10: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden,
Switzerland, UK, USA
 G20: Argentina, Australia, EU, Brazil, Canada, China, France, Germany, India,
Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Korea, Turkey,
UK, USA
 IAIS: International Association of Insurance Supervision
 IASB: International Accounting Standard Board
 IMF: International Monetary Fund
 IOSCO: International Organisation of Securities Commissions
 OECD: Organisation for Economic Cooperation and Development
 WTO: World Trade Organisation
Washington: November 2008
 The G20 initially focused on the need to improve supervision, both nationally and internationally, and
to address the issue of pro-cyclicality (including compensation practices) in financial market
regulation.
The Action Plan agreed by the G20 leaders (Washington, Nov 2008) reflected these priorities. An
emphasis was also given to enhancing transparency and promoting financial market integrity.
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Supervision
 Main actions at the EU and US level
 The new European financial supervision architecture (following the De Larosiere Report):
 The Dodd-Frank Act
 Strengthened the supervisory role of the FED
 Financial Stability Oversight Council (FSCO), stronger than the ESRB
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Supervision: EU Reform
In November 2008, EU President Barroso appointed a High Level Group, chaired by Jacque de
Larosiere, with the aim of proposing a reform of the European financial supervision and regulation
 The Group, inspired by a strong Europeanism impulse, published its 30 recommendations in
February 2009. The recommendations addressed the three main issues:
 A new supervisory framework in Europe:
 A broad review of the Basel II prudential rules:
 A new crisis management and resolution framework:
 In September 2009, following a public consultation, the Commission issued its proposals: to establish
a macro-prudential European Systemic Risk Board (ESRB); and replace the existing consultative
Lamfalussy Committees with new European Supervisory Authorities (ESAs) for the banking
(European Banking Authority – EBA), insurance (European Insurance and Occupational Pensions
Authority - EIOPA) and securities sectors (European Securities and Markets Authority - ESMA).
 The political agreement reached by the three EU negotiators – Commission, Parliament and Council was approved by the ECOFIN Council on 7 September 2010 and by the EU Parliament on 22
September. The reform came into effect on 01/01/2011.
 The ESA’s powers are substantial. They will generally decide according to the majority rule and take
binding decisions.
 Specifically for the banking sector, the EBA will establish a single rulebook and interpretations and
have the power to directly address a bank in cases when the national authorities fail to implement
the rulebook. It will be a full participant in colleges of supervisors with the power to settle
differences between national supervisors. Furthermore, EBA will have a key role in crisis
management and in the development of cross-border banks’ Recovery and Resolution Plans.
 The reform was clearly a compromise. However, it is a good compromise, in part due to the role of
the European Parliament. It was the EP’s first test, under the Lisbon Treaty, and with a new
Commissioner for the Internal Market, Michel Barnier.
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Pro-cyclicality and Compensation
 On 2nd April 2009, the FSB published its “Principles for Sound Compensation Practices”.
 On July 2010, the European Parliament approved new remuneration rules in the Capital
Requirements Directive (so-called CRD III).
 The new regulation regards Var. vs Fixed, Annual vs deferred, cash vs equity, Deferral period,
Retention of equity or equity-linked instruments
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Credit Rating Agencies
 Ratings have proved to be backward-looking and procyclical.
 The reason for this procyclicality are:
 Flaws in the mathematical models designed to estimate default probabilities, in particular to
catch innovations and system breaks (common to other mathematical models);
 Conflicts of interests arising from the combination of oligopoly, the “issuer pay” model prevailing
since the 1970s and the huge size and concentration of investment banking since the 1990s
(oligopsony). As a consequence CRAs tend to maximize their market share (and thus their shortterm profits) at the expense of accuracy and long term reputation;
 CRAs do not have legal responsibilities.
 Credit rating agencies subjected to oversight (CRA EU Directive);
 The main objectives of the Commission proposed new regulation are to be supported, namely:
 Lower reliance on ratings;
 Lower conflict of interests
 More transparency;
 More accountability.
 However, some features of the Commission proposals are not satisfactory. In particular the
compulsory rotation, aimed at increasing competition, may be costly and ineffective.
 The commission proposals fail to lower regulatory reliance on ratings, which is however embedded in
risk-based prudential requirements. The CRAs sector should be carefully assessed by the European
Competition Authority and public policies aimed at favouring entrance of new players. Investment
banking concentration may be discouraged by SIFIs regulation, but encouraged by ring-fencing.
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Transparency and Financial Market Integrity: Securitisation
 The authorities’ interest focused on the financial markets during and after the crisis.
 After the markets froze in 2008, issuances were mainly retained as eligible collateral for
central banks. An important source of private bank funding has therefore ceased to function.
 Authorities’ attitude with respect to the securitisation market has been ambiguous: on the one
hand, authorities recognize that securitisation provides an innovative tool to reduce risk and diversify
portfolios; on the other hand, it is seen as one of the main culprits of the financial crisis - overlycomplex, a risk diffuser and distorting incentives to assess creditworthiness properly.
 The authorities have taken several measures to adjust regulation in the securitisation market.
 compulsory 5% retention rate on securitised risks (“skin in the game”);
 The European central bank launched the loan-by-loan initiative (a database with micro data on
securitised loans) to enhance transparency.
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London: April 2009
 As the financial crisis evolved, governments became increasingly more focused on the deteriorating
fiscal situation as a result of public intervention to support the financial sector.
Following the G20 London Summit, the Basel Committee on Banking Supervision (BCBS) started to
set out new prudential requirements (Basel III) for consultation at the end of that year.
However, as time was needed for consultation, impact assessments and to reach international
consensus, some governments became impatient to address taxpayer concerns of their immediately.
A new set of financial system contributions and taxes were put on the agenda .
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Basel III
 Under pressure from continental European governments, the G20 Leaders Summit set a target: to
“improve the quality, quantity and international consistency of capital in the banking sector”.
 On 17th December 2009 the Basel Committee published “Strengthening the resilience of the
banking sector” for consultation. It covered:
 a new capital definition;
 counterparty credit risk (CRR);
 a countercyclical buffer;
 liquidity ratios;
 a leverage ratio.
 The initial proposals were quite strong and raised concerns about the impact on the real economy,
particularly in Europe, where banks intermediate a large share of private savings.
 The Basel Committee announced a final set of standards on 12 September 2010. They were
endorsed by the G20 Leaders in November 2009. National implementation will begin in 2013. In
order to avoid a negative impact on economic recovery, transition periods lasting until 2019 were set
out.
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Basel III decision making
Financial Stability
IMF
Board
World Bank
2
(Governments)
report
1
Bank for International
Settlement
(Central Banks)
Macroeconomic
Assessment
Group (MAG)
1
August 2010
2
September 2010
3
4
October 2010
November 2010
G20 Leaders Summit
report
4
Proposals and
QIS
Basel
Committee on
Banking
Supervision
2
3
G20
(Finance Ministers and
Central Bank Governors )
CRD IV decision making
1
Basel
Committee on
Banking
Supervision
(includes EU)
European
Commission
4 By December 2011
5
By end 2012
Ecofin
2
3
Trialogue
CRD IV
codecision
1
Basell III approved
by G20 (which
includes EU and
BCE)
December 2010
2
4
National
Parliaments
5
1
QIS
2
Banca d’Italia
European Parliament
CEBS/EBA
BaFin
FSA…
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Guidelines/ Rule book
Basel 3 main changes on Core Tier 1 ratio
Basel 2
Core Tier 1
capital
Not explicitely
defined
Basel 3
Increase of the minimum
Higher deductiosn
Defined both
minimum
and target
Min 2%
(3,2% for Italy)
RWA
RWA based
on internal
model
Increase of requirements
for counterparty risk
(market risk already in
CRD III)
Min 4,5%
Target 7%
RWA based
on internal
model
Which capital targets beyond Basel 3?
Pillar 2
Pillar 1
Common Equity
ICAAP process
MInimum
4,5%
Minimum plus
conservation buffer
7%
Stress test
+
Common Equity?
Countercyclical
buffer
0% -2.5%
+
Additional loss
absorption capacity
Capital surcharge
for SIFIS
Additional common equity
requirement
Contingent capital
?
Debt bail-in
BIS 3 Implementation: Regulatory Timeline
Despite the lack of a definitive rule-book, the focus of attention has already shifted to implementation as
new and substantial reporting requirements take effect very soon (end of 2012)
December
2011
December
2012
December
2013
QIS
REGULATORY REPORTING
in June 2012 EBA is expected to issue
its Binding Technical Standards
REGULATORY
CAPITAL
LEVERAGE
CCR
LIQUIDITY
December
2014
to be promptly translated into Regulatory Reporting
requirements at national level (new segnalazioni di
vigilanza)
Introduction of
Common Equity
Start of Monitoring
Phase
New Rules in place
Start of Monitoring Phase
Introduction of New
Deductions (Minority, DTA,..)
The Economists’ Debate on Basel III
 The “bank” critique. (Jacques De Larosiere). Excessive capital requirements and the introduction
of liquidity ratios and a leverage ratio will increase banking costs and reduce bank profitability.
This will bust migration of certain financial activities into the unregulated shadow banking system
and encourage banks to seek for higher returns taking more risk and reduce activities with modest
margins such as lending to small and medium-sized enterprises. At the end the financial system
will be not more stable but economic growth will suffer. The European economy, which is more
bank dependent, will suffer the most. Effective regulation requires, instead, competent and
efficient on-the-ground supervision.
 The “academic” critique, which has been summarised in an FT article signed by several
outstanding financial economists (including Frank Allen, John Cochrane, Charles Goodhart,
Eugene Fama, Markus Brunnermeier, Martin Hellwig, William Sharpe, Anjan Thakor). Basel III is
far from sufficient. According to this view higher capital requirements will not increase funding
costs: higher cost of equity will be compensated by lower cost of debt (the abused ModiglianiMiller theorem). The substitution may be not perfect because of the tax bias in favour of debt.
This bias should be removed. Taxes to pay for guarantees are not a solution, as they increase
moral hazard. The system of determining required equity levels through a system of risk weights
(Basel 2 and 3) encourages “innovations” to economise on equity, which undermine capital
regulation and often add to systemic risk. Therefore, a better solution would be to impose a
leverage ratio (defined as equity over non-risk-weighted assets ) not lower than 15% (Basel
introduce for observation a Tier 1 leverage ratio of 3%).
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Taxes and Contributions
 As the BCBS’ work on Basel III was proceeding (consultations and impact assessments), US
government could not delay addressing taxpayer concerns.
 At G20 request, possible financial sector contributions were presented in an IMF report to the G20
Summit (Toronto, June 2010). The IMF proposed two sets of measures:
 a Financial Stability Contribution (FSC) to reach a level approximately 2%-4% GDP. The tax
base should be liabilities excluding equity and insured deposits. The proceeds of a levy could
finance a resolution fund or feed into the general government budget. If the option was for a
fund, the IMF supports a pan-European Fund.
 a Financial Activities Tax (FAT) on banking rents (i.e. the sum of profits above “normal” levels
and high remuneration) to offset favourable treatment under existing VAT and mitigate
excessive risk-taking.
 The authorities try to justify more financial sector contributions with four main arguments in:
 ensure the financial sector pays for expected net fiscal costs of direct support;
 possible, indirect contribution to financial sector stability by dissuading certain risky activates
while, at the same time, being a revenue source;
 the financial sector is seen as the main culprit for the crisis and its negative effects on
government debt;
 most financial services are exempt from VAT and this generates incentives to over-consume
financial services and depress tax revenue.
 Taxes have been introduced in several countries (UK, Germany, Austria etc., not in USA) and the EU
Commission is working on harmonising at the highest level the deposit insurance contributions.
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Issues for Discussion
 What could have been the alternatives?: simple rules (leverage ratio, ring fencing, international
Treaty on cross-border banks)
 The financial reform is a mix of innovation (leverage ratio, liquidity, resolution, macro-supervision)
and tentative repairs (prudential supervision, capital requirements based on risk weights).
 A common framework for the impact assessment is still missing: Behavioral responses, biases,
interaction with policies are topics to be addressed.
 Implementation over the next eight years at the national level with peer review: will it work?
How to solve conflicts between national authorities? The EU is a laboratory. Will the FSB gain more
power?
 Basel III set minimum standards. Will it be overcome by national rules (China 10,5%, Vickers)?
 Different accounting rules remain the main source of regulatory disparities
 Bank size remains an issue and the development of global players is jeopardized. Will this lead to
Macro-jurisdictions?
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References
 Carmassi, Jacopo – Micossi. Stefano, Time to Set Banking Regulation Right, CEPS, 2012
 Veron, Nicolas, Financial Reform after the Crisis: and Early Assessment, Bruegel, 2012
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Next
 Th. 11 Oct. h 10.30-12.15, aula 3
1. Introduction. Cross-border banking and regulation
 Wed. 17 Oct. from 14.30 to 16.15, aula seminari
2. Prudential Regulation: Lessons from the Crisis
 Fri. 26 Oct. h 10.30-12.15, aula 3
3. From Basel 2 to Basel 3
 Thu. 8 Nov. h 10.30-12.15, aula 3
4. Moral hazard
 Thu. 15 Nov. h 10.30-12.15, aula 3
5. Shadow Banking
 Thu. 22 Nov. h 10.30-12.15, aula 3
6. Rules and supervision
 Thu. 29 Nov. h 10.30-12.15, aula 3
7. Crisis Management and Resolution
 Thu. 6 Dec. h 10.30-12.15, aula 3
8. Overall assessment of the regulatory reform
 Thu.13 Dec. h 14.30-16.30, aula 20
9. The Euro debt crisis and the Banking Union
 Mon.17 Dec. 10.30-12.15, aula seminari
10. Wrap-up and conclusion
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