The implementation of Basel III: consistency and flexibility

“Ten years after the start of the regulatory reform, efforts are still needed to implement the agreed rules in a harmonized way,” he contended. BBVA’s Head of Global Economics, Regulation and Public Affairs and Executive Member of the Board participated in a high level meeting on global and regional supervision priorities, organized by the Association of Supervisors of Banks of the Americas (ASBA), the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS).

José Manuel González-Páramo began his presentation by identifying the factors influencing change in the banking sector, the so-called “4 Rs”: return, reputation, (digital) revolution and regulation. He focused on this final R to explain how the regulatory framework has changed since the financial crisis, with a real “regulatory tsunami” over the past ten years.

Basel III, a regulatory milestone

José Manuel González-Páramo analyzed the implementation of the Basel III agreement, central to regulation of the banking sector. “Regulatory reforms have been fundamental to making the financial system more resilient,” explained González-Páramo. And the Basel III framework, created between 2007 and 2017, marked a milestone among these reforms. One of its achievements includes increasing the CET1 capital ratio - used to measure banks’ solvency - by more than 70%.

The biggest banks and the G20 countries have successfully implemented Basel III. However, José Manuel González-Páramo called for a consistent, yet flexible, application of the agreement. To encourage consistency, he recommends addressing two pending issues:  the Basel Committee lacks supranational authority and its rules are minimum global standards, which can lead to inconsistencies among countries.

The Basel III reforms will help to mitigate the impact of future banking crisis. In this regard, the G20 countries have taken the lead and most now comply with Basel. However, the Basel Committee’s standards could be expanded to countries that do not belong to the G20.

BBVA’s Executive Member of the Board argued for a consistent implementation of Basel III in places like Latin America. This, he felt, could give local banks access to international capital and debt markets, as their capital ratios would be more comparable.

He also stressed that the implementation of Basel III standards should be carried out in a flexible way in order to meet the specific needs of the financial institutions in all places. “We can look at flexibility in three ways: proportionality in institutions, the idiosyncrasies of local markets and neutrality in banking models,” explained José Manuel González-Páramo.

The concept of proportionality is used in banking regulation to justify the application of simplified prudential requirements for smaller, less complex institutions, avoiding excessive compliance costs. In terms of idiosyncrasies, the Basel III rules give national regulators room to adapt the law through so-called “national discretions”. Finally, the regulatory framework must also be neutral to different business models, especially to multiple point of entry (MPE) banks, which proved to be have a great ability to recover during the crisis.

BBVA’s Executive Member of the Board recognized that: “Working in a changing regulatory environment has not been easy.” He called on international and national regulators to work together to strike the right balance between consistency and flexibility. “Only through cooperation among jurisdictions will we be able to reap the full benefits of this new regulatory framework,” he concluded.