BIS Schedule for Regulatory Reform

The Bank for International Settlements issued a press release on January 11 (sorry I’m so late reporting!) titled Group of Central Bank Governors and Heads of Supervision reinforces Basel Committee reform package setting a road map for the next elements of bank regulatory reform:

Provisioning: It is essential that accounting standards setters and supervisors develop a truly robust provisioning approach based on expected losses (EL)….The Basel Committee should translate these principles into a practical proposal by its March 2010 meeting for subsequent consideration by both supervisors and accounting standards setters.

Introducing a framework of countercyclical capital buffers: Such a framework could contain two key elements that are complementary. First, it is intended to promote the build-up of appropriate buffers at individual banks and the banking sector that can be used in periods of stress. This would be achieved through a combination of capital conservation measures, including actions to limit excessive dividend payments, share buybacks and compensation. Second, it would achieve the broader macroprudential goal of protecting the banking sector from periods of excess credit growth through a countercyclical capital buffer linked to one or more credit variables.

Addressing the risk of systemic banking institutions: Supervisors are working to develop proposals to address the risk of systemically important banks (SIBs). To this end, the Basel Committee has established a Macroprudential Group. The Committee should develop a menu of approaches using continuous measures of systemic importance to address the risk for the financial system and the broader economy. This includes evaluating the pros and cons of a capital and liquidity surcharge and other supervisory tools as additional possible policy options such as resolution mechanisms and structural adjustments. This forms a key input to the Financial Stability Board’s initiatives to address the “too-big-to-fail” problem.

Contingent capital: The Basel Committee is reviewing the role that contingent capital and convertible capital instruments could play in the regulatory capital framework. This includes possible entry criteria for such instruments in Tier 1 and/or Tier 2 to ensure loss absorbency and the role of contingent and convertible capital more generally both within the regulatory capital minimum and as buffers.


Central Bank Governors and Heads of Supervision will review concrete proposals on each of these topics later this year.

The fully calibrated set of standards will be developed by the end of 2010 to be phased in as financial conditions improve and the economic recovery is assured with the aim of implementation by the end of 2012. This includes appropriate phase-in measures and grandfathering arrangements for a sufficiently long period to ensure a smooth transition to the new standards.

The practical effects of not paying your best producers top rates because other parts of the bank are losing money are even now being illustrated:

Bank of America, Merrill Lynch’s owner, raised London managing directors’ base pay to about 230,000 pounds, from 150,000 pounds in 2009, said the people, who declined to be identified because the terms are private.

“Some of these firms were hemorrhaging talent, and those gaps are being filled in a hurry,” said Simon Hayes, London- based head of financial services at Odgers Berndtson, a 45-year- old recruitment firm. “The likes of Merrill and UBS in London and elsewhere have been hiring very aggressively to deal with the losses of the previous 18 months.”

Both banks are no longer taxpayer owned, leaving them free to set pay themselves.

“In the world of investment banking, it’s a simple case of who pays wins,” said John Purcell, managing director of London- based executive search firm Purcell & Co. “Institutions that are fairly directly under political control are facing significant difficulties retaining staff.”

I am very pleased to see that BIS will officially be “evaluating the pros and cons of a capital and liquidity surcharge”. I have long advocated the imposition of surcharges on capital for size (although I feel this should be a surcharge on Risk Weighted Assets), rather than absolute caps or special regulatory regimes. This will allow the major banks to make decisions regarding asset growth to be made in a familiar business-like manner.

And finally, I’m very pleased to see contingent capital front-and-centre, although some indication of the committee’s thinking regarding triggers and conversion prices would have been very greatly appreciated. I can only suppose that this is a bone of contention.

One Response to “BIS Schedule for Regulatory Reform”

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