Eric larcheveque bitcoin exchange rate32 comments
Usb bitcoin miner block erupter 336 mhs
For the first time, the microeconomic dimension of prudential rules came to be surrounded by a macro-prudential layer intended to target systemic risks,  while concerns over liquidity shortages in bad times led regulators to establish standards for liquidity coverage  and stable funding. Certainly, the implementation of the Basel III framework came at a significant price.
Compliance with the new prudential provisions required banks to sustain tremendous costs for recapitalization and risk management improvements. Some banks preferred to re-size their balance sheets, cutting billions of dollars of assets and rebalancing their portfolios.
One may wonder whether the overall benefits provided by Basel III in terms of stability of the financial system and resilience of its components outweigh these costs. Several studies sought to make this analysis by forecasting the overall impact of Basel III on the banking industry and the real economy. What is certain, however, is that today the Basel III framework is under international pressure.
Only a few years after the enactment of Basel III, critics have highlighted concerns about the fundamental underpinnings of its prudential rules. And, more importantly, international policymakers are already at work to reframe some of its most significant components in response to these criticisms.
Despite general support from the global community, Basel III has not been free of criticism. Immediately after its introduction, a number of scholars and officers started questioning its effectiveness in addressing idiosyncratic and systemic risks. For a large, complex bank, this has meant a rise in the number of calculations required from single figures a generation ago to several million today Haldane It also raises questions about regulatory robustness since it places reliance on a large number of estimated parameters.
Across the banking book, a large bank might need to estimate several thousand default probability and loss-given-default parameters.
To turn these into regulatory capital requirements, the number of parameters increases by another order of magnitude. Their granularity makes it close to impossible to account for differences across banks. It also provides near-limitless scope for arbitrage. This degree of complexity also raises serious questions about the robustness of the regulatory framework given its degree of over-parameterisation.
This million-dimension parameter set is based on the in-sample statistical fit of models drawn from short historical samples.
If previous studies tell us it may take years of data for a complex asset pricing model to beat a simple one, it is difficult to imagine how long a sample would be needed to justify a million-digit parameter set. Against this backdrop, the massive structure of Basel III can hardly be seen as an efficient and rational framework. The continuing reliance on internal model-based regulation to calculate capital requirements. Since Basel II became effective in , banks have been allowed to use their own internal models for the calculation of their funds and capital requirements, subject to approval by the competent authorities.
The use of internal models by global banks, permitted under and incentivized by the Basel II framework, has resulted in a number of negative spillover effects.
A number of analytical studies show how banks using these models can easily play with their own estimates in order to reduce the amount of capital required to be put aside. The Basel III framework does not significantly question the reliability of the internal risk model approach to capital regulation.
Internationally active banks are therefore incentivized, even under Basel III, to use their own risk models for the purpose of calculating their prudential requirements, in view of the inherent capital savings and competitive advantages. The calculation of capital requirements is basically constructed around three typologies of idiosyncratic risks, namely credit risk, market risk, and operational risk.
The Basel III standards—under either the standardized or the internal risk model approach—seek to provide sensitive methodologies for the determination of each of these risks. In order to enhance risk coverage of off-balance sheet activities, the Basel III framework introduced specific metrics for measuring counterparty credit risk related to trading book and complex securitization exposures, along with derivatives, repurchase agreements, and securities financing transactions.
However, although Basel III represents a praiseworthy effort to better detect the potential build-up of these risks, its provisions have fallen short of fully capturing residual risks,  such as interest rate risk arising from non-trading activities. To provide a common set of data on the capital and liquidity adequacy of banks to market participants and thus enhance market discipline, Basel III included the Pillar 3 disclosure requirements.
For a banking entity of any risk profile, the Basel Committee set out common principles and templates that allow stakeholders to conduct cross-jurisdictional comparisons among banks on business models, prudential metrics, risk management, and governance performance. However, critics have raised concerns about the lack of disclosure requirements for certain pivotal information. In one of his keynote speeches, William Coen, Secretary General of the Basel Committee, compared the Basel III framework to a bridge, which requires not only solid construction, but also regular maintenance.
They must be sympathetic to their surroundings and their design and construction rely on the expertise of many parties. A weak bridge jeopardises the safety of those crossing it, and may create wider problems for society at large. A loss of confidence in a structure or its builders shakes confidence in every similar structure. These knock-on effects can be severe and persistent.
So it is essential that a bridge, like the Basel framework, is built to last. We must also not forget the importance of regular maintenance. The Harbour Bridge opened with four traffic lanes but now has eight, together with a complementary tunnel. Some parts are repainted every five years, while others last as long as 30 years. We face the same imperatives with the Basel framework. Maintenance does not imply re-opening every previous decision; we understand the importance of stability and certainty.
But it does mean staying vigilant to market developments and keeping in mind the increasingly widespread use of the Basel framework. The significance of this statement is twofold. On one hand, a complex regulatory architecture, such as the one of Basel III, requires continuing adjustments over time due to market innovations and industry developments.
On the other hand, the BCBS recognizes its policy limitations and seems to suggest that Basel III should not appear as a complete regulatory framework. Rather, it represents, in essence, an ever-evolving system  that should balance the stability of its normative content with evolving understanding of its policy foundations. When gaps and weaknesses are found in the application of the prudential framework, international policymakers should re-discuss the premises of their previous work and, accordingly, lay down new regulatory proposals that might better capture the externalities of market behaviors.
Over the last two years, in acknowledging its past policy-making limitations, the BCBS has followed this path. As of , several regulatory adjustments to the Basel III framework have been made, and public consultations by BCBS on these new proposals have been carried out to gauge market reactions.
Some examples are worth noting. For the same purpose, in March , the BCBS launched an effort to revise the standardized approach for calculating operational risk  and proposed changes to the Basel III internal ratings-based approaches  in order to reduce variations in credit risk-weighted assets. In the same month, the BCBS published its consultative document on consolidated and enhanced Pillar 3 disclosure requirements  aimed at addressing disclosure shortcomings found in the Basel III framework.
In April , the BCBS also issued a revised version of the leverage ratio requirement  and new standards regarding the management and supervision of interest rate risk in the banking book. If these indications about a future Basel IV package are accurate, it is of outmost importance to figure out what are likely to be its main components.
In view of the criticisms of the Basel III framework, and considering some of the reform proposals issued over the last few years by the BCBS, the following elements are likely to be considered in the future prudential package: A the total loss-absorbing capacity requirements; B standardized and internal model-based approaches; C operational, interest rate, and step-in risks; D sovereign risk; E large exposures and concentration; F securitization; G additional macroprudential instruments; and H enhanced disclosure requirements.
Although TLAC cannot be considered a revised version of the Basel III capital requirements—as it is supposed to constitute an add-on requirement for G-SIIs already subject to the Basel III prudential standards—the actual implementation of these provisions will require consistency in the calibration of both frameworks.
In view of this, Basel IV will need to align a number of Basel III provisions with the TLAC regulatory package, particularly with regard to the eligibility of capital instruments, deduction approaches, and holdings restrictions. As noted above, one of the main criticisms of Basel III framework has been the level of complexity underlying the capital requirements calculation. Against this backdrop, Basel IV is expected to revisit the scope of internal model-based rules in the calculation of risk-weights.
To further this purpose, future proposals will introduce floors for credit risk parameters to reduce distortions on the determination of the EAD, LGD, and PD. Credit counterparty risk and market risk frameworks will probably be revisited along the same lines. For a number of derivatives classes and long settlement transactions, the credit counterparty risk will be measured primarily by relying on the standardized approach developed by the BCBS in March For market risk, minimum capital requirements will be calculated by either a revised internal model approach or a revised standardized approach, which would permit a more sensitive capitalization of material risk factors across banks while limiting the capital-reducing effects of hedging and diversification.
Finally, in order to clarify the regulatory boundaries between the trading book and banking book of credit institutions and to reduce the related risk of arbitrage, the BCBS will implement new definitions for the instruments deemed to be held either on the banking book or the trading book. To address this concern, the BCBS revealed a revised operational risk framework in March , and its principles are likely to constitute a prominent component of the Basel IV package.
By the same token, Basel IV is expected to revisit the framework for capturing interest rate risk. As a foundation for this, in April the BCBS updated its principles on interest rate risk in the banking book, setting out methods that banks should use for measuring, managing, monitoring, and controlling this risk typology.
The BCBS proposal focuses on identifying unconsolidated entities that could generate significant step-in risk for banks. Although the development of such framework is at an early stage and its basic contours are only preliminary,  it is easy to assume that the Basel IV package will incorporate this risk category as one of its innovative prudential profiles.
The Basel IV framework is also likely to reflect the outcome of the ongoing policy discussions on special prudential treatment of sovereign bonds. The magnitude of sovereign risk and its spillover effects have been at the center of policy attention following the severe deterioration of Greek, Irish, Portuguese, Spanish, and Italian government bonds during the Euro zone debt crisis. At this stage it is not possible to determine what might be the likely outcome of this policy debate due to the variety of options available.
However, a BCBS consultation paper on this subject is expected in the upcoming months. In April the BCBS published its final supervisory framework on measuring and controlling large exposures as a backstop to risk-weighted capital requirements. This large exposure framework is expected to be applied as of and will overrule the previous standards on large exposures set out in Another notable element of the likely Basel IV package relates to securitization.
In order to refine the Basel III provisions on securitization, which date back to the Basel II era, in July the BCBS published a final paper setting out the regulatory treatment for capitalizing securitization exposures.
Based on this paper, a number of innovations are expected to be introduced for the purpose of calculating capital requirements. The framework aims at reducing complexity by limiting the number of approaches accepted for determining securitization capital. To this end, it favors the internal ratings-based approach in order to reduce the mechanistic reliance on external ratings.
Although this new framework is considered to be part of Basel III, given the number of substantial changes proposed and the timeframe for implementation January ,  it is more appropriate to conceptualize it as a complementary element of the Basel IV credit risk revisions described above. Beyond the microprudential proposals outlined thus far, the Basel IV package could incorporate a number of new macroprudential instruments, which would complete the countercyclical regulatory dimension introduced with Basel III.
As part of such an effort, not only can exposure-based capital surcharges for G-SIIs and other credit institutions be implemented, but real estate tools, such as loan-to-value and debt-to-income caps, could also be developed in the near future by the BCBS. In addition, the Basel IV framework could incorporate a macroprudential stress testing framework for liquidity and solvency risks. Finally, in order to reflect the number of regulatory changes proposed under the Basel IV package, it is likely that the Basel III disclosure framework will be amended accordingly.
The foundations of this enhanced disclosure regime can be found in the consultative document on Pillar 3 disclosure requirements published by the Basel Committee in March If all these proposals were implemented, what would remain of the Basel III framework?
The adoption of these proposals as supplementary prudential standards would override the core components of Basel III, setting the stage for a radical reformulation of banking law throughout the world. If this holds true, market participants need to ponder the implications of these regulatory reforms on the banking industry as a whole.
Compliance with Basel III imposed substantial costs on credit institutions. The array of regulatory changes introduced by the BCBS in required banks to adjust not only their capital and liquidity structure, but also their business models, governance structure, and investment strategies. In this evolving scenario, the implications of a future Basel IV package might be overwhelming.
One the one hand, the likely simplification of risk-weighting and parameter calculations could provide some compliance cost savings to banks. On the other hand, limitations on the use of internal risk models for the purpose of capital requirements, along with the general increase of prudential buffers, could further undercut the viability of banking activities.