The final piece of the ongoing post-crisis Basel III banking reform has been laid out today in a speech by Bill Coen, secretary general of the Basel Committee on Banking Supervision (BCBS).
After reviewing and consulting on various types of “output floor” – a way to align a bank's own measure of risk-weighted assets with standardised calculations – the BCBS has settled on an “aggregate” output floor.
This means that a bank's overall measure of its risk-weighted assets must be relatively similar to the results that a standardised approach would have produced.
However, the calibration of the floor – exactly how similar the results must be – is yet to be decided.
“As estimating regulatory capital for unexpected losses is imprecise, a floor serves to guard against excessively optimistic assessments of risk,” said Coen.
The floor is an important development as it should even the playing field between banks. Since an institution's minimum capital requirements depend on assessments of risk, closing the gap between banks using their own models and those using standardised models should increase fairness.
Read more: Basel III rules at a glance
The BCBS chose the simpler form of output floor, rejecting other models including “exposure class”, which weighs up the type of exposures such as mortgages, and “risk types”, which take into account credit risk and market risk.
Speaking at the International Financial Services Forum in London, Coen also laid out what Basel III had already achieved.
He referred to the improved standardised approach for calculating credit risk, added safeguards for banks who use their own internal models for estimating regulatory capital and a leverage ratio surcharge for particularly important global banks.
Coen added that he expected the Basel III reforms to be fully agreed upon in the “near future”, and that the BCBS would continue to monitor and analyse their impact.