Basel III Reform Gets a Tick…From the Basel Committee
Posted by Colin Lambert. Last updated: December 14, 2022
The Basel Committee has published its first holistic evaluation of the impact and efficacy of the Basel III reforms, and finds, perhaps unsurprisingly, that they have successfully helped increase bank resilience.
The committee says the report indicates the implemented reforms are “an important driver of the overall increase in bank resilience and shows that market-based measures of systemic risk have also improved”. It adds, “[There is] no considerable evidence of negative side effects of the reforms on banks’ lending and capital costs, nor does it identify redundancy among elements of the reforms, while acknowledging greater regulatory complexity.”
While it is uniformly accepted that capital rules needed reforming after the GFC, in recent years there has been a growing voice of concern in the financial markets industry about the robustness and resilience of markets, most notably US Treasuries, which was the subject of a report from US authorities recently. While Basel III is not a sole cause of the liquidity problems, the lack of risk warehousing in markets – a direct result of higher capital costs – does seem to be a contributing factor.
This does not seem to be accepted by the report, which states, “…the analyses show greater improvements for institutions that were more heavily impacted by the reforms, suggesting that the reforms were an important driver of this increased resilience. Greater resilience did not come at the expense of banks’ cost of capital, as banks more heavily impacted by the reforms also saw a greater decrease in their cost of capital.
“There is no robust evidence and only some indication that banks with lower initial CET1 ratios and LCRs had lower loan growth than their peers,” it continues. “As the overall intent of the reforms has been to strengthen the banking system and mitigate contagion to other parts of the financial system, the report also analyses market-based systemic risk measures, which showed improvement following implementation of the reforms.”
While the report does acknowledge “complexities” within the reform framework, it states, “[It] does not find considerable evidence of the examined potential negative side effects of the reforms.”
The report does not assess whether such complexity could be reduced while maintaining bank resilience.