Create a single set of rules for banks Opinion editorial for Les Echos published
How important do we consider an internationally coordinated financial framework to be? Should banks adhere to uniform rules in international competition? And how accurately should those rules reflect the actual risks inherent to banking business? The answer given by the French and German supervisory authorities to these questions is, put simply, that an international set of rules is important to us, and it should impose high capital requirements for high risks and less stringent requirements for lower risks.
The reform of international banking regulation is at a crucial stage: early this week, a meeting of the Basel Committee will be held to decide on the rules, also known as Basel III. However, certain key objectives have not yet been met. Banks' capital requirements should match, as far as possible, the risks to which banks are actually exposed. This kind of risk-sensitivity is not only important for determining capital requirements, but also provides incentives for banks to act in a more risk-aware manner.
Excessive downgrading of risk or restriction of the risk calculations by banks has caused major anxiety among supervisors. As long as sufficient risk-sensitivity remains out of reach, the German side believes that there shouldn’t be an agreement at any price. We believe France supports us on this issue.
The Basel Committee's proposals, as they currently stand, will excessively weaken the application and design of internal models, in particular, which banks use to calculate their capital requirements with the aid of internal statistics. But if we crack down too hard on internal models, we will also be restricting risk-sensitivity.
Placing restrictions on banks' calculations certainly makes sense – the risk that models do not reflect reality has to be kept as low as possible. While these aims are important, they are currently already contained in the Basel regime in the shape of other instruments, such as the leverage ratio. Further constraints can, I would argue, provoke banks to develop a disproportionate risk propensity.
The close coordination between the French and German financial supervisors is proving to be a valuable support in the Basel Committee's negotiations. After all, a coordinated, joint approach is a boon to successful negotiations. The Banque de France and the Deutsche Bundesbank are closely aligned.
While there is still much to be done on the Basel Committee, the progress achieved in the most recent negotiations has nonetheless bolstered confidence. However, the Basel Committee's unequivocal aim to avoid significantly increasing banks' capital requirements overall through the reforms has not yet been achieved. On the final stretch, though, we must also seek to achieve balanced reform in terms of regional differences.
In the face of all these concerns, however, we should also keep in mind the status an international accord like Basel III enjoys. It sets the standard for effective international cooperation that benefits everyone. That is more important than ever. And yet, we are seeing many citizens calling our globalised world into question, with more and more looking for answers in isolationism or regionalisation. I very much hope that with the new administration in the United States, the cooperation on the Basel Committee will continue to be based on mutual trust. At any rate, France and Germany will continue to work hand-in-hand on Basel III.