Problems of Basel II remain under Basel III

New capital adequacy requirements under Basel III do not mean the end of all Basel II’s problems.

Problems of Basel II remain under Basel III


However, despite some improvements, Basel II’s problems in relation to comparability between regulatory national ratios will persist under Basel III.

Some banks have started to estimate their Basel III ratios. A sample of these banks reveals that the average risk adjust capital ratio after diversification is comparable to the common equity tier 1 (CET1) ratio estimated under Basel III. There is, however, significant volatility around this average. Higher levels of operational risk have the potential to translate into higher charges from regulators.

Increased costs

Banks in most mature markets, including the US, will have to increase their regulatory capital requirements with regard to the trading book at the end of this year. Overall, the average capital requirements for market risk in the trading book will triple with the implementation of these increased requirements (Basel II.5).

As the stress value at risk and the incremental risk charge metrics become publicly available, we expect the improved disclosure to help market participants’ analysis of trading-book market risks.

Furthermore, it is likely that comparability issues will persist under Basel III. The Basel recommendations are not planned to be implemented according to a single blueprint. Instead, each country will have the right to exercise its own national discretions when translating the recommendations from the Basel Committee on Banking Supervision (BCBS) into local regulation.

Even within the same jurisdiction, we expect differences in regulatory risk weights to remain as much driven by differences in banks’ risk profiles as by variation in the methodology and models they use to assess the risk weights.

The Basel formula and hence Basel risk-weighted assets assume infinite granularity of the exposures and do not make any adjustment for institution-specific concentration or diversification.

To conclude, while it is a move towards comparability in regulatory capital ratios, Basel III appears only to be a step. The statement made by the Basel Committee in 2005, in relation to Basel II, still holds true – “Basel is not a destination but a journey.”


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