The Basel Committee has produced an important package of capital-adequacy rules that are supposed to complete the process of minimizing the risk of a future financial crises. But will it succeed, or will it increase the cost and decrease the availability of credit?
LONDON – After long and sometimes painful negotiations, which stress-tested the personal relationships between many countries’ central bankers and regulators to the limit, the Basel Committee laid a long-expected egg in December. Described as a package that finalizes the post-2008 reforms to the global regime for bank capital, it brings to an end the process known as Basel 3.
Bankers have dubbed the result “Basel 4,” arguing that the final package contains many new and more burdensome requirements. But the Committee is adamant that the new rules should be regarded as part and parcel of the reform program begun in 2009, in the wake of the global financial crisis. Basel 4 may come one day, but this is not it, they insist.
What problem does the new package seek to resolve? In the preamble, the regulators refer to “a worrying degree of variability in banks’ calculations of [risk-weighted assets].” They have found that applying the major banks’ different internal models to the same portfolio of loans can produce very different numbers, meaning that some banks would be carrying significantly less capital than others for the same quantum of assumed risk.
LONDON – After long and sometimes painful negotiations, which stress-tested the personal relationships between many countries’ central bankers and regulators to the limit, the Basel Committee laid a long-expected egg in December. Described as a package that finalizes the post-2008 reforms to the global regime for bank capital, it brings to an end the process known as Basel 3.
Bankers have dubbed the result “Basel 4,” arguing that the final package contains many new and more burdensome requirements. But the Committee is adamant that the new rules should be regarded as part and parcel of the reform program begun in 2009, in the wake of the global financial crisis. Basel 4 may come one day, but this is not it, they insist.
What problem does the new package seek to resolve? In the preamble, the regulators refer to “a worrying degree of variability in banks’ calculations of [risk-weighted assets].” They have found that applying the major banks’ different internal models to the same portfolio of loans can produce very different numbers, meaning that some banks would be carrying significantly less capital than others for the same quantum of assumed risk.