The Basel Committee's work programme for 2015 and 2016
The work programme for 2015 and 2016 is structured around four themes:
- Policy development;
- Ensuring an adequate balance between simplicity, comparability and risk sensitivity across the regulatory framework;
- Monitoring and assessing implementation of the Basel framework; and
- Improving the effectiveness of supervision.
During 2014 the Basel Committee published a number of final standards and consultative documents.
The Committee will continue to pursue its post-crisis reform agenda, with a focus on restoring confidence in capital ratios. This includes revisions to existing methods of measuring risk-weighted assets. For example, revisions of the standardised approaches for credit, market and operational risk have been published for consultation. In addition, other policy development work is well advanced. This includes a capital floor based on standardised approaches, consideration of simple, transparent and comparable criteria for securitisations, the fundamental review of the trading book and interest rate risk in the banking book. There is also ongoing work with the Financial Stability Board related to the adequacy of loss-absorbing capacity of global systemically important banks (G-SIBs) in resolution.
In addition to existing policy initiatives, there are three policy-related issues which the Committee is undertaking:
- assessing the interaction, coherence and overall calibration of the reform policies;
- reviewing the regulatory treatment of sovereign risk; and
- assessing the role of stress testing in the regulatory framework, in light of national developments.
Interaction, coherence and overall calibration
Now that the major elements of the reform agenda have been agreed, the Committee will assess the interaction, coherence and overall calibration of the reform policies. The aim of the Committee's work on coherence is to consider how the various regulatory metrics interact and whether the calibration and design of the various elements of the framework are consistent with their intended objectives.
The regulatory framework that has emerged following the crisis is one with multiple metrics. Compared with the pre-crisis framework - which relied only on the risk-weighted capital ratio - the revised regulatory framework now includes a leverage ratio, large exposure limits, the liquidity coverage ratio, net stable funding ratio and forthcoming loss-absorbing capacity requirements for G-SIBs in resolution. In addition, as described in more detail below, stress testing has played an increasingly important role in a number of jurisdictions. The Committee will further assess the potential interactions among these metrics, including the extent to which the various measures bind across different banks and drive bank behaviour.
This shift to multiple metrics and greater reliance on stress testing reflects the importance of an eclectic regulatory framework, relying on a range of complementary regulatory measures and supervisory judgement. Such an approach is more robust to arbitrage and erosion over time, as each measure offsets the shortcomings and adverse incentives of the others. For example, the leverage ratio provides an absolute cap on leverage, but, by itself, could incentivise banks to increase their holdings of higher risk assets. The risk-weighted framework compensates for this as it constrains any bank that materially increases its risk profile without any commensurate regulatory capital to fund its balance sheet. The LCR requires banks to maintain a prudent buffer of high quality liquid assets.
The Committee is committed to finalising the calibration of the leverage ratio, revising the standardised approaches and implementing a capital floor. As part of this work, the Committee will also consider how the interaction of the various metrics should influence the calibration of these policy items.
The Committee has initiated a review of the existing regulatory treatment of sovereign risk and will consider potential policy options. The review will be conducted in a careful, holistic and gradual manner.
The Committee plans to further investigate current approaches to stress testing across jurisdictions and to discuss the role of stress testing in the Basel framework, particularly how stress testing relates to the existing Pillar 1 (minimum requirements) regulatory framework. This work follows the increasing importance of stress testing in many countries, both as a supervisory tool and as a method for determining bank capital requirements.
Work on simplicity, comparability and risk sensitivity combines the issues emerging from the Committee's top-down review of the framework along with the bottom up work on risk-weighted asset variability, which were detailed in the Committee's November 2014 report to the G20 Leaders. The G20 report sets out the measures the Committee is taking to simplify the regulatory framework, and to improve consistency and comparability in bank capital ratios, thereby restoring confidence in risk-weighted capital ratios.
The Committee is also working to improve the presentation of its web pages, including the consolidation of the Basel framework into a single volume.
The Committee will continue to monitor and assess its members' implementation of the Basel framework. The Regulatory Consistency Assessment Programme (RCAP) is the means by which the Committee evaluates member jurisdiction's adoption of its standards. The RCAP will be expanded to also cover Basel III's liquidity standards and the frameworks for global and domestic systemically important banks.
The Committee will continue its work on improving the effectiveness of supervision. In particular, the Committee will focus on supervisory practices related to stress testing, valuation practices and the role of Pillar 2 in the capital framework.
The following are among the standards finalised or published for consultation during 2014:
- Leverage ratio framework and disclosure requirements and FAQs;
- Liquidity coverage ratio disclosure standards, Liquidity coverage ratio and restricted-use committed liquidity facilities and FAQs;
- Proposed changes to the Pillar 3 disclosure requirements;
- Standardised approach for measuring counterparty credit risk exposures;
- Capital requirements for bank exposures to central counterparties;
- Supervisory framework for measuring and controlling large exposures;
- Proposed revisions to the simpler approaches for operational risk;
- G-SIB assessment methodology - score calculation;
- Net stable funding ratio;
- Proposed net stable funding ratio disclosure standards;
- Revisions to the securitisation framework;
- Proposed criteria for identifying simple, transparent and comparable securitisations;
- Proposed revisions to the market risk framework - outstanding issues;
- Proposed revisions to the standardised approach for credit risk; and
- Proposed capital floor based on the standardised approaches
Reflecting the Committee's focus on implementation, 2014 publications on this topic included:
- two regular semi-annual reports on Basel III implementation in all member countries (April and October);
- a special report to the G20 on implementation;
- four Regulatory Consistency Assessment Programme (RCAP) reports of implementation in individual jurisdictions (Australia, Canada, the EU and the US). This marks an important milestone as, with the completion of the EU and US reviews, RCAPs on risk-based capital for all G-SIB countries have been completed; and
- a report on Basel capital framework national discretions.
With respect to bank supervisory issues, the Committee issued:
- Sound management of risks related to money laundering and financing of terrorism;
- Principles for effective supervisory colleges;
- Fundamental elements of a sound capital planning process;
- Guidelines for external audit;
- Proposed revisions to supervisory guidelines for identifying and dealing with weak banks;
- Review of the principles for the sound management of operational risk; and
- Proposed revisions to the corporate governance principles for banks.
In addition, the Committee published a report prepared for the G20 Reducing excessive variability in banks' regulatory capital ratios. This set out the measures the Committee has taken or will take to address the issue of variability in risk-weighted assets.