Regulatory reforms of the financial system –Are we done yet?Pablo Hernández de Cos

Chairman of Basel Committee on Banking Supervision, and Governor of Banco de España

Fourth ESRB annual conference, 27 September 2019, Frankfurt

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• Higher minimum capital requirements

• Revised definition of capitalo Greater focus on truly-loss absorbing capital

• Introduction of macroprudential bufferso Capital conservation buffer, SIB buffers, countercyclical capital buffer

• Comprehensive revisions to risk-weighted frameworko Credit risk, counterparty credit risk, securitisation, market risk, operational risk

o Exposures to CCPs, equity investment in funds, ‘step-in’ risk and non-banks

• Leverage ratio requiremento Minimum and G-SIB buffer

• Large exposures framework

• Liquidity Coverage Ratio

• Net Stable Funding Ratio

• Enhanced disclosures requirement

• Total loss-absorbing capacity requirements (FSB)

• Key Attributes of Effective Resolution Regimes for Financial Institutions (FSB)

The Basel Committee’s post-crisis reforms (Basel III) and additional global bank reforms by the FSB are wide-ranging and comprehensive…

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Chart 1: Net marginal macroeconomic benefit of capital

Source: Basel Committee on Banking Supervision (2019): “The costs and benefits of bank capital – a review of the literature”, June.

…and the net macroeconomic benefits of Basel III are positive …

Net marginal benefits (discounted, annual GDP basis points)

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Source: Basel Committee on Banking Supervision.(a) The chart shows the normalised distribution of risk weights (with 100% representing the cross-bank median risk weight as the benchmark) reported by banks under the

Committee’s banking book RWA variability study.

Chart 2: Excessive variability in risk-weighted assets: internally-modelled capital requirements for hypothetical portfolios in the banking book(a)

…but the benefits of Basel III require implementation and continuous supervision of standards…

0%

50%

100%

150%

200%

250%

300%

350%

Bank Corporate

Median

Mean percentage deviations in risk weights (100% cross-bank

median risk weight)

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Table 1: Evaluations underway by Basel Committee

…and require a comprehensive evaluation of the impact and effectiveness of post-crisis reforms…

Evaluation of individual reforms

(1) Definition of capital

(2) Counterparty credit risk framework

(3) Securitisation framework

(4) Liquidity standards

(5) Leverage ratio framework

(6) Credit risk framework

(7) Credit valuation adjustment framework

(8) Market risk framework

(9) Operational risk framework

(10) Large exposures framework

(11) Output floor

Interactions and coherence

(12) Interactions between capital and liquidity metrics

Broader impact(13) Macroeconomic impact of capital and liquidity requirements

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Chart 3: Simple leverage ratios over time (normalised, base = 2008)

Source: FitchConnect and Secretariat calculations. Chart shows median simple leverage ratios for an unbalanced average sample of 38 large European and US internationally-active banks. Simple leverage ratio defined as equity divided by total assets.

…while avoiding the well-trodden ‘regulatory cycle’ and not forgetting the lessons of the crisis….

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

14.5% decrease

37% increase

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Chart 4: Share of banking system assets in total financial institution assets (%)

Source: Committee on the Global Financial System (2018): “Structural changes in banking after the crisis”, and Secretariat calculations.As a share of assets of financial corporations, excluding the central bank. Financial assets when available, otherwise total assets.

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Euro area

United States

China

93%

75%

53%

45%

19%21%

…and remaining vigilant about risks emanating from other parts of the financial system…

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Chart 5: Percentage of bank Chief Risk Officers highlighting cyber risk as a “top issue requiring the most attention”(a)

…and emerging risks and structural changes to the banking system such as cyber risk, financial technology and crypto-assets

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2013 2014 2015 2016 2017 2018

Source: EY annual global bank risk management surveys and Secretariat calculations (a) Sample size varies over time: in 2018, it comprised 74 financial institutions across 29 countries