Basel delay

Basel delay

The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, postponed its planned discussion (originally scheduled for 8 January) of the Basel Committee’s work on credit risk, operational risk, the capital floor and the G-SIB leverage ratio.

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The GHOS welcomed the progress made towards completing the Basel Committee's post-crisis regulatory reforms, but considered that more time is needed to finalise some of this work.

No date has been set for when the GHOS will discuss the Basel Committee’s proposals, but March now looks like a strong possibility.

It is not clear why the GHOS postponed its discussion. Until recently the main fault line in the Basel Committee discussions was the concern among EU banking supervisors that constraints on banks’ use of internal models to calculate capital requirements would have a disproportionately negative impact on European banks. European banks hold proportionately more assets – such as mortgage lending – on their balance sheets, for which the use of internal models produces a marked benefit compared with the application of standardised risk weightings. However, it is also possible that the US supervisors (previously the hawks on the Basel Committee) are seeking time to reassess their positions in the wake of the US presidential election.

We understand that towards the end of last year the Basel Committee had been close to a compromise position under which the earlier consultation proposals (in particular on credit risk and the capital floor) had been scaled back somewhat, including:

  • National discretion to allow a ‘loan-splitting’ approach to residential mortgage exposures, which would reduce the impact of high loan to value ratios;
  • Allowing the use of the Advanced IRB approach for specialised lending;
  • Applying a lower loss given default (LGD) input floor for residential mortgages, and a lower fixed LGD for unsecured corporate exposures (under the F-IRB approach); and
  • Phasing in an aggregate risk weighted assets output floor of 75 percent by 2025.

In addition, it seems that a 50 percent scaling factor for the leverage ratio surcharge buffer for G-SIBs was proposed (but without specifying what this scaling factor would apply to – a G-SIB’s CET1 capital surcharge, a G-SIB’s total capital buffers, or the 3 percent minimum leverage ratio).

It is reported that the Basel Committee is close to finalising a consultation paper on the capital treatment of banks’ sovereign exposures – but again, this would need to be approved by the GHOS and there will be heightened European sensitivities here.

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