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As Basel III gets ready to turn five years old this summer, recently appointed Basel Committee secretary general William Coen is taking the necessary step of ensuring that new capital ratio, liquidity standard and leverage ratio rules work well together.
April 13 -
Big banks are making critical risk management decisions with data that is old, incomplete or even inaccurate. This endangers the safety of the global financial system in more ways than one.
February 27 -
Banks and industry groups worry that the Financial Stability Board's "total loss absorbing capacity" proposal could disrupt capital formation while reform advocates say the rules could be strengthened even further.
February 17 -
Nearly four years after the Basel Committee published its guide and three years after JPMorgan's "London Whale," banks and the Fed still have a long way to go before operational risk can be reliably measured and mitigated.
February 11
This article is the
Now that Basel III rules are largely in place, the Basel Committee has entered the important phase of analyzing their effects. Based on my conversations with the committees secretary general William Coen, I believe the industry can expect the Basel Committee to engage with three crucial issues: performing quantitative impact studies, standardizing banks' risk models and strengthening banks' operational risk requirements.
Quantitative impact studies are a very important way to analyze periodically how committee members are implementing different bank regulations and how effective the rules are. Some of the questions that quantitative studies can answer, for example, are if recent requirements are effective in reducing banks' leverage and making them more liquid with high-quality assets, and if banks are better capitalized than before the crisis.
All the work related to these studies is undertaken at the Bank for International Settlements. "It is a massive job. Supervisors from different jurisdiction cleanse data and then send it to Basel. The information is anonymous," says Coen.
Coen works with a modest staff of twenty-four people.Yet when I am at consulting or training assignments, I often hear bankers describe the Basel Committee as "a gargantuan bureaucracy with hundreds of economists and regulators."
In fact, nothing could be further from the truth. "We draw heavily on the member countries and representatives of central banks," Coen explained to me. "We have more than 40 working groups which are chaired by representatives from our members, which include the Bank of England, the European Central Bank and the Federal Reserve Board. The professionals at the Basel Committee focus a lot on ensuring strong coordination of all the tremendous amount of activity that takes place in these committees."
Another very important theme for Coen and one near and dear to my heart is the variability in the models that large banks use to set regulatory capital. As I have argued in previous columns, reducing banks'
"This is a regular topic at our meetings," Coen assured me. "It is troubling to see such wide variances in banks' risk-weighted assets."
Fortunately, the Basel Committee seems to be moving toward a solution. In December, it released a
One way that the Basel Committee can address concerns from risk-weighted asset critics is by updating an important
I also look forward to the Basel Committee strengthening its operational risk requirements in Basel III's Pillar I.It was the one part of Basel II that until recently was left untouched in Basel III.Further updates are crucial to the stability of the financial system. For the past two decades, I have observed that the vast majority of banks' problems lie in
Coen has assured me that "operational risk is also a focus of the Basel Committee." He pointed to a proposed
The Basel Committee is lucky to have a leader who is not only familiar with the nuts and bolts of banking, but also knows the intricacies of being a bank examiner and is experienced in crafting policies. In over two decades of working both with bankers and regulators, I know that it is extremely rare to find a professional who has been in all these different roles.
Mayra Rodríguez Valladares is managing principal at