The leading member of the Basel Committee on Banking Supervision explains some of the key concepts of Basel III, and how it relates to Basel I and II. Writer Michael Imeson

Amid the publicity surrounding the Basel III capital and liquidity framework, which was signed off at last month's G-20 summit in South Korea, it is important not to overlook one vital fact: Basel II has not disappeared.

Basel III incorporates Basel II, it does not replace it. Basel III consists of the original Basel II capital framework, plus the revisions made to the Basel II framework since July 2009, plus some new standards, in particular the introduction of a leverage ratio and liquidity requirements.

Explaining the complexities of Basel III to financial institutions around the world is a new responsibility for José María Roldán, chairman of the Standards Implementation Group (SIG) at the Basel Committee on Banking Supervision. SIG's primary role has been to ensure that Basel II is implemented consistently around the world in the 112 countries that have signed up to it. SIG's emphasis now is on Basel III.

Speaking at a risk management conference in Frankfurt recently, organised by The Banker and business analytics company SAS, Mr Roldán said: "Basel III is more about Basel I than Basel II." What he means by this is that, in the capital adequacy equation, Basel I dealt mainly with the numerator (ie. the amount of capital banks need to hold, the "famous 8%", as Mr Roldán puts it), and Basel II dealt mainly with the denominator (ie. the risk-weighted assets that require the capital support). Under Basel III, the emphasis has switched back to the numerator, in that the level and quality of capital that banks will be required to hold has been raised.

"The message here is very clear - compared with Basel I and Basel II, we want a higher level of capital, but more important than that, a better quality of capital," said Mr Roldán, who is also director-general of banking regulation at the Bank of Spain.

Off the hook

Mr Roldán pointed out that Basel II was not to blame for the financial crisis. "Basel II is not perfect, but it was not in place in many countries, the US for instance, so it could not have prevented the crisis," he said.

"Basel III has to be seen in the context of a wider set of new measures that have been decided at the global level, by the FSB [Financial Stability Board] and the G-20. Financial regulatory reform is also about OTC derivatives, credit rating agencies, SIFIs [systemically important financial institutions], remuneration, incentives and the structure of the financial industry."

Although banks accept the need for tougher capital and liquidity requirements, and have been consulted during the Basel III drafting, many still have reservations. In particular, they are concerned that having to hold greater levels of capital and liquidity will reduce their ability to lend, harming not just the economy but also their profit.

In an interview with The Banker after the conference, Mr Roldán said he understood these concerns but there could be no further comprises on capital. On liquidity, however, the committee will be flexible because it is a new and untested area with "a lot of uncertainty". "We will look at the first years of parallel running for unintended consequences and will revisit the issue if we detect anything that was not expected when we designed it," he said.

Year of change

Mr Roldán's top priority in his home country, Spain, has been the restructuring of the savings bank sector. "We have had a hectic period of activity this year and have gone down from 45 to 18 institutions. We have seen a huge consolidation in the sector which will deal with the issue of excess capacity.

"We also went through the European-wide stress test exercise. We were very transparent and the market received it well. All the banks that failed the test were in the restructuring process and are now looking for more capital."

The regulations governing savings banks have been changed to allow them to raise more private capital to comply with Basel III. "Until now they could not raise core Tier 1 capital - the only way they could have core Tier 1 capital was through retained reserves," he said. "Now we have given them the opportunity to access this type of capital in several ways, including full demutualisation, the use of special systems of institutional protection and the issue of voting and non-voting shares."


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