Introductory remarks to the public hearing of the French Senate (Commission des finances du Sénat)
Introductory remarks by Mr William Coen, Secretary General of the Basel Committee, at the public hearing by the Commission des finances du Sénat, Paris, 22 February 2017.
- Video (William Coen at 06.14)
As prepared for delivery
Madame la présidente, Monsieur le rapporteur général, Mesdames et Messieurs les sénateurs,
I am pleased to have the opportunity to address you today on the work of the Basel Committee on Banking Supervision, in my capacity as its Secretary General.
I will focus my introductory remarks on three topics. First, I will provide you with some background information on the Basel Committee, and in particular its governance and operations. Second, I will outline the key elements of the Basel Committee's reforms following the global financial crisis and emphasise why these reforms have been developed. I will then say a few words about the Committee's outstanding post-crisis reforms.
The Basel Committee on Banking Supervision
Let me start with an overview of the Basel Committee.
The Basel Committee is the primary global standard setter for the prudential supervision and regulation of banks. It provides a forum for cooperation on bank supervisory matters for central banks and supervisory authorities. The Committee's mandate is to strengthen the regulation, supervision and practices of banks worldwide, with the purpose of enhancing global financial stability. Sound, global prudential standards are a public good. Combined with effective bank supervision, they are indispensable to promote the safety and soundness of banks as well as resilient banking systems.
I would like to emphasise the importance of strong global regulatory standards:
Strong standards enhance the resilience of internationally active banks and the financial stability of the individual jurisdictions in which they operate.
By creating a level playing field, sound global standards facilitate the efficient use of financial resources and efficient capital allocation.
A resilient banking system is better able to support the real economy and contribute positively to growth over the medium to long term.
Basel Committee standards are global minimum standards. Once agreements are reached at the Basel Committee, it is then the responsibility of jurisdictions to convert the standards into law or regulation.
In the absence of a global prudential standard, regulatory fragmentation results and large internationally active banks need to comply with a patchwork set of rules from multiple jurisdictions. This is both costly and inefficient.
The Basel Committee reports to the Group of Central Bank Governors and Heads of Supervision. This group includes Banque de France Governor François Villeroy de Galhau and is chaired by European Central Bank President Mario Draghi. Its role is to endorse the Basel Committee's major decisions and to set the Committee's strategic priorities. Representation at the Basel Committee is global: more than 30 jurisdictions participate in Basel Committee meetings with 53 members and observers. Our membership includes all of the G20 members, and we provide regular updates on our work to G20 Leaders. Approximately one third of the Committee's membership is from the European Union, including the ECB and the Single Supervisory Mechanism. The European Commission and the European Banking Authority are also active participants in the work of the Committee. France is represented on the Committee by the Banque de France and the Autorité de contrôle prudentiel et de résolution.
The Basel Committee has no legal personality, nor does it possess any formal enforcement authority. As articulated in our publicly available charter, the Committee relies on its members' commitments to implement agreed standards. Committee members are directly accountable to their national legislature. The manner in which the agreed standards are applied is at the discretion of jurisdictions. Some have chosen to apply the rules to just the largest, internationally active banks in their countries. This is the case for the United States and Japan, for example. Others, like the European Union, have chosen to apply the rules to all financial institutions.
In developing global standards and guidelines, the Basel Committee follows three principles:
an unyielding commitment to its mandate, which is to strengthen the regulation, supervision and practices of banks worldwide to enhance financial stability;
an extensive public consultation process. A wide range of stakeholders contribute to this process, including industry participants, academics, analysts, central banks and supervisory authorities, the public sector and the general public; and
a comprehensive and rigorous assessment of the impact of the Committee's policy proposals.
The results of the public consultations and the impact assessments are key inputs that help inform the design and calibration of the Committee's standards.
The Basel Committee's response to the global financial crisis
Let me now say a few words about the work of the Basel Committee since the global financial crisis. The deficiencies laid bare by the crisis are well known, as are the disastrous results, but memories are short. The context in which we developed our response to the crisis and the aftermath are therefore worth repeating.
The global financial crisis highlighted a number of weaknesses in the financial system and the global regulatory framework, including:
too much leverage (ie banks having significantly more debt than equity), and insufficient high-quality capital to fund banks' investments in assets;
excessive credit growth, fuelled in part by weak underwriting standards and an underpricing of credit and liquidity risk;
a high degree of systemic risk, measured by, among other things, the interconnectedness among financial institutions and common exposures to similar shocks;
inadequate capital buffers for banks to mitigate the inherent procyclicality of financial markets and to maintain lending to the real economy in times of stress; and
insufficient liquidity buffers and excessive exposure to liquidity risk, both direct and indirect (eg through the shadow banking system).
These weaknesses amplified the depth and severity of the global financial crisis. At the peak of the crisis, the market lost confidence in the reported solvency and liquidity positions of many banks. The weaknesses in the banking sector were transmitted to the rest of the financial system and the real economy, resulting in substantial costs. Almost a decade since the onset of the crisis, the global economy is still recovering from its effects. These costs include much higher public debt, increased unemployment and considerable output losses. The cumulative loss of output since the crisis is of the order of 25% of one year's world gross domestic product. Nominal growth is running at half of its pre-crisis rate.
In response, the Basel Committee introduced a comprehensive and wide-ranging strengthening of global banking standards, most notably through the Basel III framework. This framework has two complementary objectives: (i) ensuring minimum global standards of resilience so that financial firms are less likely to fail, and (ii) reducing the impact on the financial system and the economy in case they do.
In addition to strengthening the regulatory framework, the Committee has introduced a range of measures to align incentives and to strengthen banks' governance arrangements. It has continued to improve the effectiveness of supervision. In addition, to promote full, timely and consistent implementation of its post-crisis reforms, in 2011 the Committee put in place a rigorous framework to monitor and review its members' implementation of the Basel regulatory framework.
The Basel Committee's remaining post-crisis reforms
Let me now turn to the Committee's remaining regulatory reforms. One of our key objectives in conducting this work is to restore full confidence in the regulatory capital framework. The Committee is doing so by:
enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, in a way that will help facilitate the comparability of banks' capital ratios;
replacing the existing capital floor with a more robust floor based on the Committee's revised standardised approaches. Let me emphasise that an "output floor" is not new - it has been part of the capital framework ever since the Committee agreed to recognise internal models for purposes of calculating regulatory capital for credit risk. The output floor places an overall limit on the benefits derived from a bank's use of its internal models;
placing limits on certain inputs used to calculate capital requirements under the internally modelled approach for credit risk and removing the use of the internally modelled approach for operational risk; and
- revising the leverage ratio, to include a surcharge to further limit the leverage of global systemically important banks (G-SIBs).
Much of the technical work has been completed, and discussions are ongoing to finalise these remaining reforms. One of the elements still to be finalised is the output floor, which is a critical component of the framework. Given its importance, we are taking the appropriate amount of time to carefully consider a reasonable calibration that is suitable as a global standard and which will help ensure the integrity of the capital framework.
In conclusion, let me acknowledge the importance of regulatory stability. We know that banks, investors and other stakeholders need clarity and certainty when it comes to the global regulatory capital framework. The remaining revisions to the Basel framework have been usefully informed by extensive public consultations and equally extensive quantitative impact analyses. We are aware that some institutions will be affected more than others. As a result, it is likely that the final set of revisions will include transitional arrangements to provide time for banks to adjust to the changes. This was the approach we took in 2010 when we introduced the earlier Basel III changes. There are costs associated with regulation, but they pale in comparison with the costs of financial crises. The benefits of sound prudential regulations, such as reducing the frequency of financial crises or mitigating their effects, far outweigh the costs.
Thank you very much for your attention and for the opportunity to meet with you today. I would be very pleased to answer any questions you may have.
- Video (William Coen at 06.14)