What can the banking industry expect with the new regulations coming out of Basel?
2004 Basel II
2008 – 2009 The Financial Crisis!!!!!!
2014 Basel III (Better known as the Revised Securitization Framework)
Formalization of a series of reforms that were implemented after the financial crisis to determine the relevant amount of regulatory capital depending on the approach to credit risk used by banks for the type of underlying exposures which have been securitized.
2016 Basel IV (Really known as the Amended Securitization Framework)
Alternative regulatory capital treatment for securitization transactions which meet the criteria for identifying simple, transparent and comparable securitizations.
Regulators Rationale for Basel IV
Regulators claim that internal models have been used to “game” capital requirements and understate risks. Basel IV is trying to limit the extent to which banks’ internal models can differ from standardized approaches and capital floors that can’t be undercut by internal models. The U.S., represented by the Federal Reserve, is arguing that the proposals are vital to stop lenders from manipulating their models.
Bankers’ Response to Basel IV
“Right now it looks like the impact is humongously draconian and would essentially be a complete game changer for the banking industry on this planet,” said Marcus Schenck, Deutsche Bank AG’s chief financial officer. Banks’ understanding was that the refinements to Basel III was not meant to cause any significant additional capital needs. Europe and Japan feel the proposals could increase their capital requirements by as much as 70%.
What Needs to Happen
When Basel II standards were being developed in 2003 regulators issued advance notices of proposed rulemaking or ANPRs that outlined the scope of the regulatory requirements and asked for comments so they could “seek appropriate modifications” at the international level. Every bank knew whether the Basel process would affect them and could decide whether to participate in the comment process. It is essential that U.S. regulators engage the public, the Congress and industry in the discussion of these changes. Encouraging debate will be a great service to the successful process of bank regulation.