With the body that oversees the Basel Committee on Banking Supervision calling time on any more fundamental changes to the Basel framework, bankers could be forgiven for thinking that 2021 should be a quieter year on the regulatory front – but they would be mistaken. 

What is happening?

Not many headlines were generated on November 30 when the Group of Central Bank Governors and Heads of Supervision, which oversees the Basel Committee, called time on any more fundamental changes to the Basel framework. Following a decade of tough reforms, which have yet to be fully implemented, this should come as a relief to bankers, though not a surprise. 

Reg rage anxiety

Despite this welcome news, bankers still face a heavy workload in terms of bringing in new regulations. Not only do the Basel reforms have to be fully implemented at a national level, but a raft of new measures is in the pipeline. These relate to environmental, social and governance (ESG) factors, the fragmentation of the European regulatory landscape following Brexit, the EU’s own regulatory review, and the regulatory priorities of the new administration of incoming US president Joe Biden, which are very different to those of outgoing president Donald Trump.  

Why is it happening? 

Social issues and efforts to arrest human-generated climate change have risen to the top of the agenda across the world, and banks, as capital allocators, are expected to play their part. 

The ESG agenda will mean new reporting requirements and risk models, and will influence prudential regulation, for example through stress tests and maybe even capital requirements and the calculation of risk-weighted assets for some asset classes. 

Amid the Covid-19 pandemic, the Europeans in particular seem to be doubling down on their green agenda and are likely to be joined by the US once Mr Biden assumes office. 

But that is not all. The Basel Committee will not be dormant. As a result of Covid-19, which led to most banks’ workforces working from home and increased cyber risks, the committee is going to dedicate more time to operational risk issues. 

Meanwhile, the EU will push on with its reviews of various regulatory texts, such as the Markets in Financial Instruments Directive, and though it is unlikely to result in any major changes, it will generate more work for over-burdened bank compliance departments. 

With Brexit, the UK is prioritising taking back control of its financial services rules, rather than mirroring EU rules in exchange for more access to the bloc’s single market. So far nothing radical has come from the UK in terms of regulatory divergence with the EU, but 2021 could see some announcements that suggest more fundamental long-term changes. The devil is quite literally in the detail on that one.

And then there is the US. Mr Biden has not said much about his financial regulatory aims. Indeed, it does not appear to be a top priority for him given that the regulatory regime has withstood the economic impact of the Covid-19 pandemic. However, depending on who eventually runs the agencies, there are likely to be some changes, such as an ESG agenda – which the Federal Reserve has already started talking about – and stress tests and living wills requirements, which could be made tougher. That spells heavier capital requirements for US banks, probably once the economy has recovered. 

What do the bankers say? 

Bankers have been left exhausted by the relentless pace, volume and complexity of new regulatory initiatives since the 2007-9 global financial crisis (GFC). They worry about Brexit and are wary of the EU’s regulatory review because of the possible unintended consequences from changes. Although they see ESG as a big business opportunity, they are aware that it will generate a whole new regulatory regime which will sit on top of existing ones. 

Will it provide the incentives?  

It is good news that the Basel framework has so far withstood the Covid-19 pandemic, which produced an economic outcome that went well beyond many of the most severe scenarios in the stress tests. That means that it may only need some small adjustments as a result of lessons learned during the pandemic. 

However, the world has moved on since the GFC, and new priorities have emerged around climate change and an escalating number of threats emanating from cyberspace. 

Supervisors will be hoping that the next tranche of rules will protect the financial system from these newer threats, which are in some ways far more serious than the GFC and its causes. 

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