Comments on Impact on Economic and Financial Stability

1
Comments on Impact on Economic and Financial
Stability

• Basel II- The International Banking System at the
  Crossroads
• The World Bank/IMF/US Federal Reserve Board 4th
  Annual International Seminar on Policy Challenges
  for the Financial Sector
• By Kostas Tsatsaronis
• Head of Financial Institutions and Infrastructure
• Bank for International Settlements

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2
Basel II capital adequacy framework

• Framework
• A backbone of principles and standards
• Consistent across three pillars
• Some room for adaptation to local conditions
• Capital adequacy
• A minimum standard
• Closing the gap between economics of current best
  practice and regulatory requirements
• Multi-track

3
Basel II is imperfect

• Risk measurement technology constantly evolving
• Imperfect measurement
• Time dimension weaker than cross-sectional
  dimension
• Interaction of financial and real sectors
• Basel II is only a step towards more complete
  framework
• Explicit portfolio risk analysis
• Capital adequacy is only a component of financial
  stability

4
Comments along two broad lines

• Micro how it impacts the banks and the banking
  market
• Macro how it impacts the banking system as a
  whole and the economy at large
• Direct impact form the implementation in a
  country
• Indirect impact from the implementation in other
  countries

5
Micro direct impact Implementation issues

• Questions
• Are the banks ready for Basel II?
• Are the regulators ready?
• Factors
• Risk measurement technology
• Human capital
• Data

6
Micro direct impact Implementation issues

• Banks and supervisors must progress in tandem,
  building from the foundations up
• Core principles
• Pillar 3
• Market infrastructure
• Care to not become too prescriptive
• We do not have the true model for risk, only
  some notions about its properties
• Valuable diversity in market participants
  opinions

7
Direct macro procyclicality

• The financial system is procyclical, policy
  should avoid emphasising this characteristic.
• Main issue does greater risk sensitivity of
  Basel II amplify the procyclicality of the
  financial system?
• Maybe true

8
Mexican output gap and hypothetical IB
requirements
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Direct macro procyclicality

• The side-effect of greater relevance of capital
  requirement
• Policy makers awareness should prompt the use of
  other tools to counterbalance procyclicality
• Provisions
• Discretionary tools
• Monetary policy?
• Key problem short assessment horizon (1
  year)Weakness shared with macro risk assessment
  technologies (macro stress testing)

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Indirect issues

• Foreign banks in Emerging Markets
• There are remaining issues on home-host country
  co-ordination and co-operation
• Given diversity unlikely to find single formula
  that addresses all situations equally well
• Important scope for bilateral contact in
  preparing mutually agreeable arrangements
• Capital flows
• To the extent that economic capital is driver the
  impact of Basel II should be marginal

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Conclusions

• Basel II is a challenge for banks and supervisors
  in all jurisdictions.
• Has imperfections
• measurement of macro risk
• ability to address all national circumstances
• Opportunity a step forward for financial
  stability
• Has raised awareness of risk measurement
• Mobilised resources to define and implement best
  practice
• Like all good work, brought about demand for more!