Global Banking Committee Announces New Priorities

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Basel Committee on Banking Supervision publishes its agenda for 2015–2016.

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As banking activities become increasingly international, foreign regulators have a growing influence on the future of American financial activity both at home and abroad. The Basel Committee on Banking Supervision, one of the world’s most important institutions for setting banking standards, recently published its list of priorities for the coming two years. The announcement sheds light on what the Committee hopes to accomplish in the near future and how that might affect financial activity worldwide.

The Basel Committee announced its intention to focus on four goals for 2015 and 2016:

  • “Policy development;”
  • “Ensuring an adequate balance between simplicity, comparability, and risk sensitivity across the regulatory framework;”
  • “Monitoring and assessing implementation of the Basel framework;” and
  • “Improving the effectiveness of supervision.”

Because most banks are private institutions, they generally set their own standards and practices governing basic business decisions, such as what kinds of financing, interest rates, or lending terms to offer, or whether to engage in a particular deal at all. These practices become more varied and complex as transactions take place in different parts of the world, often involving parties from different countries. With that in mind, the Basel Committee stressed the importance of an “eclectic” regulatory framework to address the complexity of post-financial crisis challenges.

In terms of policy development, the Basel Committee stated that it intends to go forward with the reforms it first made in the wake of the financial crisis. These include guidelines requiring banks to increase the level of capital they hold to protect against global economic uncertainty. The Basel Committee plans to evaluate the success of the requirements with the intention of keeping them in place.

Additionally, the Basel Committee will review the standards banks use to measure their own performance and protect themselves from economic downturns. This includes an analysis of a common practice called stress testing—a method for determining the optimal level of capital that a bank is required to hold—which involves simulating stressors to determine how they will affect a bank. It also includes a review of how banks currently treat sovereign risk–the risk that a foreign central bank may unexpectedly change its own foreign-exchange regulations—which can devalue (or even nullify) some cross-border contracts.

The Basel Committee plans to require an enhanced regulatory approach, focusing on multiple metrics rather than the single measure most commonly monitored before the financial crisis: the amount of capital a bank holds. These new metrics will cover other indicators of financial health, such as the degree to which a bank has borrowed against its holdings and how that might affect the bank’s ability to meet its financial obligations (referred to as a leverage ratio), as well as its ability to absorb losses during bankruptcy or resolution, among other things.

Furthermore, the Basel Committee will continue to monitor bank compliance with the standards it set in the wake of the financial crisis. It made this announcement on the same day that it released a compliance review of institutions whose failure could impact the world’s economy—global systemically important banks, or “G-SIBs”—concerning standards the Committee set in 2013 relating to risk-management and reporting practices. The report found only minor improvements in compliance ratings over the past few years.

The Basel Committee also plans to improve its own oversight measures. The announcement contains links to its publications from last year, which include finalized standards, published reports, and other guidance and reviews.

In addition to these policy reforms, the Basel Committee intends to evaluate the global banking regulatory framework as a whole. The Committee plans to achieve greater simplicity and consistency in how bank regulation occurs in all parts of the world in order to promote investor confidence in more reliable outcomes worldwide.

Historically, many of the world’s most important banking institutions (and banking regulators) have been based in the United States. But because banking and finance are becoming increasingly cross-border and many of the rules that govern cross-border lending are “soft law,” meaning they are often not legally binding, standard-setters like the Basel Committee are increasingly becoming influential as banks look to them to set standards.

As large banks have grown, their global reach continues to increase. According to the Basel Committee, thirty financial institutions are so influential that they warrant elevated scrutiny and unique regulatory standards. Some analysts see hope in the Committee’s recent statement. To the extent global regulators can make rules simpler and predictable, that hope is that global regulators will contribute to the stability of cross-border lending and facilitate wealth generation in all parts of the world.