Carolyn Rogers interview in Börsen-Zeitung

Interview with Ms Carolyn Rogers, Secretary General of the Basel Committee on Banking Supervision, in Börsen-Zeitung, conducted by Mr Bernd Neubacher and Mr Tobias Fischer and published on 6 January 2021.

Ms. Rogers, The Group of Central Bank Governors and Heads of Supervision (GHOS) recently marked a "clear end" to the Basel III policy agenda following the global financial crisis. What does this reversal point mean for the future?

The recent GHOS meeting that you are referring to occurred almost three years after the GHOS meeting  in December 2017, when the finalization of the Basel III reforms was announced. And that was nearly a decade after the financial crisis started. At that time, in 2017, there were still a small number of outstanding details that required finalisation, for example targeted revisions to the market risk framework. Those have now been completed. And what GHOS is now saying  is that banks and legislators do not need to wait and anticipate further fine-tuning or recalibration of the Basel III reforms. Rather, GHOS intends to provide the certainty they are looking for so they can move forward with their implementation plans.

What is left for the Basel Committee to do?

The Committee's remaining Basel III-related work will focus on monitoring the implementation and consistency of the standards through our Regulatory Consistency Assessment Programme and also on completing an evidence-based evaluation of the effectiveness of these reforms, including what we are learning from the current crisis. And we`ve set up a dedicated task force focused on that work. Of course, we want to be clear that we will remain open minded as we complete our evaluation work. If we find compelling evidence of a need to make changes to the reforms, of course we will respond and we will, as we always do, consult widely as part of this evaluation work.

So do you think regulation has reached its peak?

The message the GHOS is sending is that we have concluded the work on the Basel III reforms. And that banks and the respective jurisdictions need to move forward to translate those Basel III reforms into their own policies, within their own legislative environments. The final set of reforms must be implemented fully and consistently and on the agreed timeline.

Can we assume as the corona-related regulatory relief is supposed to be only temporary in nature that banks will have to prepare for a return to normal regulation?

Yes, I think if you look at the announcements that regulators have made across the globe on adjustments, they have all characterized them as temporary.

But depending on the development of the pandemic, it might also be possible that the finalization of the Basel III reforms will be delayed one more year.

As I already said, the Committee of course will remain open minded as we complete our evaluation work. We also have a very structured approach to monitor the impact of the Covid crisis on the banking sector. The Committee meets regularly. So we have a regular conversation about how things are developing. To date the Committee has not determined that further actions or further delays are necessary. At this point, we don`t see the need for further delay.

When the post financial crisis regulation is over, what is the next topic - sustainability? So far the public did not hear too much of the Basel Committee on that topic.

We do actually have a task force on climate-related risks. This is one of the more important reasons why we have made the announcement we did about bringing an end to the work of the Basel III reforms. When Governor Hernández de Cos took over his role as Chair of the Committee in early 2019, he initiated a strategic review to look at how the Committee was organized and importantly, where it was placing its focus and intention. The results of that review were part of what GHOS endorsed and announced now. They include shifting the Committee`s focus to topics like structural trends in the banking sector, ongoing digitalization and the issue of climate-related financial risk. So on that topic, in particular on sustainability, the Committee established its Task Force on Climate-related Financial Risks.

What does it do?

We're taking a close look in particular at transmission channels, so how climate risk translates into financial risks and then more specifically how it translates into risks to banks. We're also looking at ways to measure these risks and at effective supervisory practices that support mitigating climate related financial risks for banks.

In Europe big banks are obliged to integrate ESG factors into their compensation policy already while the Basel Committee has only established a task force and seems to be a little bit behind the curve. Is this because the United States have damped such efforts in recent years and will this change after the election in the US?

I'm pleased to hear the US President elect talk about the value of global cooperation and his intention to focus on climate risk. That`s heartening for the world. I would point out that the Committee's current Task Force on Climate-related Financial Risks is chaired by Kevin Stiroh from the Federal Reserve Bank of New York, who has been a strong and very vocal advocate of the need to address climate-related risks. So I don't think that the Committee is being held back, necessarily. I think it's doing what it has always done, which is being careful and looking for quantitative evidence.

The US has probably not been a major driving force in the Basel Committee in recent years. What do you expect from the US under a President Joe Biden?

We worked very well with our US colleagues during the current administration, and we expect that to continue. I think all supervisors, regardless of where they come from, concentrate on preserving financial stability by performing their job in a professional and neutral manner through all cycles: that`s true for economic cycles, financial cycles and election cycles.

So it doesn't matter who is sitting in the White House?

Our US colleagues at the Basel table work very professionally and very cooperatively with us. Regardless of who's in the White House.

Do you think that supervisors and regulators should act ethically? For example, should they prefer green financing by lower capital requirements?

These seem to me to be two different questions. Of course I think supervisors should act ethically. I think we should all act ethically, but your second question relates to how supervisors respond to the risk of climate change. And the job of supervisors is really one to assess risk. I'm often asked why we don't simply solve the question of climate-related risk for banks by adjusting our risk weight regime to penalize brown assets and decreased capital requirements for green assets. In my view, it would be unfortunate to limit our response to the important issue of climate risk to simply adjusting risk weights.

Why?

There are two reasons for this. The first is that a solution like this would require a globally agreed definition of a green and brown asset, and we're not there yet. There is a lot of good work going on, including here in Europe, on this idea of a taxonomy and on disclosure, but it has a way to go before we've got a clear definition of what is a green asset and what is a brown asset. Secondly and more importantly, the reason why I think adjusting risk weights is not necessarily the way to pursue a solution to climate risk is that risk weights are derived by looking at historical losses. So they're by definition a backward looking risk indicator. And when we think about climate risk, it's more important to look ahead. Tools like stress testing are at least in the current environment more effective. And in fact that is the tool that most banks and supervisors are currently using, as it relates to climate risk.

The Committee is focused on understanding transmission channels and on how to measure climate risk as it relates to bank risk. Finding a common definition about what are green and what are brown assets is not a question ideally suited for the Basel Committee, but there are many other international groups that are focused on this, bringing a clear taxonomy to the issue of climate risk and assets. We would encourage that work. We think it's necessary not only for risk measurement, but more importantly for disclosure. So we're happy to see that work underway. But the Committee will remain focused in the areas that I set out.

During the corona pandemic, cyber risks have increased. Does that constitute the necessity to act for the Basel Committee?  

Cyber risk has been on top of the list of concerns for both banks and their supervisors for several years now, well before the pandemic. But it's true that we have seen a spike in cyber incidences during the pandemic. Cyber is a really good example where global and cross-sectoral coordination is vitally important. The potential contagion effects which can occur within or across borders highlight the importance of international coordination and cooperation.

There are a lot of developments in the banking sector like Cloud Services, Robotic Process Automation, Blockchain, Artificial Intellligence. Could you give us the priorities of your agenda? Which are more on your mind and which are less important from your perspective?

A lot of buzzwords are mentioned here. We are thinking a lot about these issues, about enhanced digitalisation and its impact on banks and financial stability. These are again topics that require a high level of global cooperation. We`re on record on many of these areas with publications. One important publication I would like to bring to your attention is our "Report on open banking and application programming interfaces (APIs)" published in November 2019.

Tell us more.

Open banking and the sharing and leveraging of customer-permissioned data from banks with third-party developers comes with many benefits both from a consumer and a competition perspective. But it also sets up quite a few interesting and emerging challenges, such as risks to business models, disintermediation of banking, reputation risk and issues regarding data privacy, cyber security and third-party risk management. These are the kind of risks the Committee intends to turn its attention to. An important part of the work is to focus on banks' operational resilience and the supervisory practices that will support that type of resilience.

Will these reports some day result in some framework or directives to supervisors?

A very good example of this are the Principles for operational resilience that we published for consultation earlier this year. That document incorporates some of the learnings we've had in other studies that are more focused on fintech or open banking or cyber. I would think of the Principles for operational resilience as really a capstone document that incorporates thinking on a variety of these areas.

Is there also a provision for capital requirements regarding cyber risks?

The existing Basel framework has a method for calculating capital that relates to operational risk.

Supervisors did not decide to put risk weight on sovereign bonds when they finalized the framework of Basel III in December 2017. As a result of state aids in the Covid-19 crisis the bank state nexus now is being reinforced. What is your guess: When will there be risk weights for sovereign exposures?

The Committee is of the view that all sovereign exposures entail some risk. There is a long history of sovereign defaults, and banking crises have often preceded, accompanied or followed sovereign distress. The Committee recognises the broader role played by sovereign exposure, as it relates to banks' liquidity management, monetary policy, fiscal policy. And again, the last several months showed just how important that role is. We have also to remember that in many jurisdictions banks are the primary investors in sovereign debt. So the question is how to balance the prudential risk against these more holistic considerations.

What do you intend to do?

Our discussion paper in 2017 set out a range of policy ideas, including setting positive risk weights for all sovereign exposures or introducing marginal risk-weight add-ons based on a bank's concentration of sovereign exposures. At that stage, there was no consensus to make changes to the existing regulatory treatment. But the Committee has agreed that it needs to continue to revisit this topic over time. We collect more information, and I expect the Covid 19 crisis will trigger another discussion. The Committee agreed that at the very latest this should be a topic that comes back in early 2022.

There is no need in the light of the pandemic to act before 2022?

We'll see. The Committee has committed to revisit this topic at the latest in early 2022. As with any topic, if important changes or information emerges that causes the Committee to reflect on it and decide that it needs to deal with it sooner, it will have the option to do that.