Is it imperative for Basel III to be implemented?

In a recent speech (“Basel III: the implementation imperative”) the Chairman of the Basel Committee on Banking Supervision, Pablo Hernandez de Cos, made an impassioned plea for regulators to push ahead with implementation of the remaining Basel III reforms. His rationale was that the package needs to be implemented in full for the sake of global financial stability and to avoid market fragmentation.

But has the tide turned against implementation of yet more international standards? As he notes in his speech, we may now be entering the later stages of the “regulatory cycle”, “whereby memories of banking crises fade over time, vested interests start to gain momentum, the fallacy of this time is different recurs… and we convince ourselves that some reforms may no longer be needed or warranted, or even that rolling back reforms may be the key to achieving other short-term economic objectives”.

So, what to do? As a former regulator myself, I certainly have sympathy with the arguments being put forward for continuing to press ahead with implementation. It is noted in the speech that some jurisdictions are falling behind on implementing some elements that others have already implemented, such as the Net Stable Funding Ratio, large exposures, and counterparty credit risk. It would seem to make sense for all member jurisdictions to come into line on these elements.

But what about the major element that no-one has really started implementing yet, the significant reforms to the calculation of risk weighted assets, slated for implementation by 2022? Is there a case for delaying (or even dropping) implementation?

In my view, yes. First, I’m not convinced that these changes are really “imperative”. Since the GFC, major banks have significantly increased their core capital ratios – something like a doubling in many cases – and, against a change of this magnitude, the effect of changing how they calculate RWAs will, in most cases, be minimal. Yet the cost of implementation – in terms of system and reporting changes and time and effort – is far from minimal.

Moreover, now is not the time for management to be pre-occupied with regulatory requirements. Much better for their full attention to be focused on the very real risks in the current environment – the economic/trade environment, geopolitical risks, environmental risks, responding to the situation on the virus, and supporting customers.

So, my proposal? Announce a two-year push-back on the implementation of Basel III (at least the RWA elements). Ensure that financial institutions - and regulators - focus on the more pressing and immediate risks, without the distraction of less pressing and less “imperative” regulatory requirements. Let’s focus not just on financial stability but on what’s best for the global economy, and what’s best for the public.

[I should add that these are my own personal views...]