The Bank of International Settlements (BIS) has in a speech by Chairman Fernando Restoy at the CIRSF annual international conference in Lisbon addressed the present and future state of the regulation and supervision after the financial crisis of 2009. In this post we highlight the parts we found the most interesting.

Achievements so far

There is no doubt that imperfections in regulatory and supervisory frameworks around the turn of the century had a clear impact on the magnitude of the crisis. As a response to this there have been a substantial amount of reforms of prudential standards, including the following examples;

  • On the capital front, there is a tighter definition of what constitutes regulatory capital, higher risk-weighted minimum requirements, a new minimum leverage ratio and a capital conservation buffer
  • The market risk framework has seen an increased granularity and the introduction of expected shortfall in the Standardised Approach
  • Liquidity Coverage Ratio (LCR) and Net Stable Funding Ration (NSFR) within the Basel framework
  • Minimum loss absorption requirements and a comprehensive set of principles for systemically important banks (SIBs)

Remaining steps of regulatory reforms

Some final details of the Basel III reforms still remain, e.g. a revised standardised approach for credit risk, a revised standardised approach for operational risk, the introduction of a leverage ratio surcharge for Global SIBs, and the exploration of options to limit the variability in risk-weighted assets for banks that use the internal ratings-based (IRB) approach for credit risk.

Beyond the aforementioned remaining Basel III reforms, the Committee will review the regulatory treatment of sovereign exposures and consider the longer-term regulatory treatment of loan loss provisions when an expected loss approach by accounting standard setters has been adopted.

Policy implementation

The completion of the reform package will allow the focus of the regulatory community to change into implementation and supervisory services. So far the implementation progress has been successful, but a future question at issue is that globally harmonised standards might not need to apply to less sophisticated banks, as a way of mitigating the compliance burden. At the same time it is of importance that any simpler rules applied to less sophisticated banks do not compromise the stringency of the regulation or lead to a poorly functioning market.

To summarise, the regulatory reforms implemented after the financial crisis have been extensive and now approach completion. The focus ahead will be on supervisory challenges and reaching a state wherein the implemented reforms work well with different actors and their needs of compliance.