Finalising Basel III

After several years, Basel III has (almost) been finalised. Basel III is the third iteration of the Basel Accords, minimum international standards for prudential regulation of banks. It started after the financial crisis, when it was clear that Basel II was insufficient to ensure the solvency of the sector. Some bits of Basel III have already been implemented (buffers, liquidity regulation) but some others were still subject to discussion. This came to an end last December, one year later than promised. Now, apart from some details, the reforms have been agreed and there is a calendar for implementation. The document summarising these reforms can be found here. In the following weeks, I will go over some of them.

When I was at the Bank of England, I was involved in supporting the seniors in finalising Basel III, so this is also a small victory of mine. I am joking, it is not, and it certainly does not feel like it. The other policy work I was involved in was the regulatory treatment of sovereign exposures. The BCBS has also published a Discussion Paper on this (can be found here). They mention, however, that they are not consulting on it yet: there is no consensus regarding whether the existing treatment needs to be changed. This is disappointing in so many levels: after the European sovereign debt crisis, it should have been obvious that sovereign exposures are not risk-free. And I bet that, if the ECB had not stepped in (“whatever it takes”), we would already have changes in this. But it turns out that this ex-post interventions might also increase the moral hazard of policy-makers.

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