December 21, 2016 | Harvard ILJ
Bank for International Settlements
[PDF]
By Luca Amorello*
I. The Basel III Framework Six Years Later
The formalization in 2010 of the Basel III regulatory framework,[1] aimed at strengthening the resilience of internationally active banks, was one of the major accomplishments of the Basel Committee on Banking Supervision (“BCBS”) and its national participants.[2] Basel III amply satisfied the promise of G20 leaders to catalyze their policy efforts in order to establish a multi-dimensional regulatory regime for global banks.[3]
For the first time, the microeconomic dimension of prudential rules came to be surrounded by a macro-prudential layer intended to target systemic risks,[4] while concerns over liquidity shortages in bad times led regulators to establish standards for liquidity coverage[5] and stable funding.[6] Moreover, the deployment of a leverage ratio,[7] along with the implementation of extended disclosure requirements,[8] set the stage for limiting risk-taking behaviors and empowering market discipline.
Over the last few years, G20 countries have sought to implement the whole banking reform at the national level and have hailed the structural changes of banks’ capital and liquidity as a great achievement.[9] The expansion of the regulatory boundaries pursued by Basel III has been regarded, in fact, as a decisive step toward establishing a well functioning, level playing field for banks,[10] which can now compete at the global level, having internalized the costs of their risk-related misbehaviors.
Certainly, the implementation of the Basel III framework came at a significant price. Compliance with the new prudential provisions required banks to sustain tremendous costs for recapitalization and risk management improvements. Some banks preferred to re-size their balance sheets, cutting billions of dollars of assets and rebalancing their portfolios.[11] Over time, this structural transformation has had an impact for the whole economy, resulting in a decline in credit availability for the real economy.[12]
One may wonder whether the overall benefits provided by Basel III in terms of stability of the financial system and resilience of its components outweigh these costs. Several studies sought to make this analysis by forecasting the overall impact of Basel III on the banking industry and the real economy.[13]The results of these studies have not always been consistent, and they have produced several different answers.
What is certain, however, is that today the Basel III framework is under international pressure. Only a few years after the enactment of Basel III, critics have highlighted concerns about the fundamental underpinnings of its prudential rules. And, more importantly, international policymakers are already at work to reframe some of its most significant components in response to these criticisms.
II. The Limits of Basel III
Despite general support from the global community, Basel III has not been free of criticism. Immediately after its introduction, a number of scholars and officers started questioning its effectiveness in addressing idiosyncratic and systemic risks.[14] The main arguments against the effectiveness of Basel III framework move along four lines: (a) the extreme complexity of the Basel III requirements; (b) the continuing reliance on internal model-based regulation to calculate capital requirements; (c) the failure to fully capture a number of off-balance sheet risks; and (d) the incompleteness of the disclosure requirements.
[PDF]
By Luca Amorello*
I. The Basel III Framework Six Years Later
The formalization in 2010 of the Basel III regulatory framework,[1] aimed at strengthening the resilience of internationally active banks, was one of the major accomplishments of the Basel Committee on Banking Supervision (“BCBS”) and its national participants.[2] Basel III amply satisfied the promise of G20 leaders to catalyze their policy efforts in order to establish a multi-dimensional regulatory regime for global banks.[3]
For the first time, the microeconomic dimension of prudential rules came to be surrounded by a macro-prudential layer intended to target systemic risks,[4] while concerns over liquidity shortages in bad times led regulators to establish standards for liquidity coverage[5] and stable funding.[6] Moreover, the deployment of a leverage ratio,[7] along with the implementation of extended disclosure requirements,[8] set the stage for limiting risk-taking behaviors and empowering market discipline.
Over the last few years, G20 countries have sought to implement the whole banking reform at the national level and have hailed the structural changes of banks’ capital and liquidity as a great achievement.[9] The expansion of the regulatory boundaries pursued by Basel III has been regarded, in fact, as a decisive step toward establishing a well functioning, level playing field for banks,[10] which can now compete at the global level, having internalized the costs of their risk-related misbehaviors.
Certainly, the implementation of the Basel III framework came at a significant price. Compliance with the new prudential provisions required banks to sustain tremendous costs for recapitalization and risk management improvements. Some banks preferred to re-size their balance sheets, cutting billions of dollars of assets and rebalancing their portfolios.[11] Over time, this structural transformation has had an impact for the whole economy, resulting in a decline in credit availability for the real economy.[12]
One may wonder whether the overall benefits provided by Basel III in terms of stability of the financial system and resilience of its components outweigh these costs. Several studies sought to make this analysis by forecasting the overall impact of Basel III on the banking industry and the real economy.[13]The results of these studies have not always been consistent, and they have produced several different answers.
What is certain, however, is that today the Basel III framework is under international pressure. Only a few years after the enactment of Basel III, critics have highlighted concerns about the fundamental underpinnings of its prudential rules. And, more importantly, international policymakers are already at work to reframe some of its most significant components in response to these criticisms.
II. The Limits of Basel III
Despite general support from the global community, Basel III has not been free of criticism. Immediately after its introduction, a number of scholars and officers started questioning its effectiveness in addressing idiosyncratic and systemic risks.[14] The main arguments against the effectiveness of Basel III framework move along four lines: (a) the extreme complexity of the Basel III requirements; (b) the continuing reliance on internal model-based regulation to calculate capital requirements; (c) the failure to fully capture a number of off-balance sheet risks; and (d) the incompleteness of the disclosure requirements.