Basel 1 and Basel 2 have failed. The crisis of 2008 is the confirmation of this. But Are the new Basel 3 rules really capable of safeguarding savers – and citizens in general – from the risk of a new shock on the markets? Stefano Micossi, general manager of Assonime, and Jacopo Carmassi, economist, are not convinced at the same association. The two experts, who also publish studies at Ceps, the Center for European Policy Studies in Brussels, presented a paper entitled "Time to set banking regulation Right" in which they invite the governments of the European Union to review the CRD IV directive – which introduces the Basel 3 rules to over 8 European banks – because they consider it insufficient to avert a new financial crisis.
According to the authors, the latest Basel agreement has indeed strengthened the capitalization requirements of banks but has not resolved the fundamental problem: the approach to RWA (risk-weighted assets) or risk-weighted assets which correspond to the minimum of capital required from institutions based on their credit risk. The RWA approach has left too much autonomy to national supervisors vis-à-vis "too big too fail" banks and it fails to eliminate the competitive distortions that allow larger institutions ample leeway to decide their own capital requirements.
The two economists dwell in detail on the difference between the Basel 3 and the Crd IV. The directive presented by the European Commission seems to be taking a step back from the one established by the Swiss committee: protects undercapitalised universal banks rather than establishing a fairer regulatory framework, it offers more lax rules on requirements for banks, allows more autonomy for national regulators and still places too much importance on ratings for calculating credit risk.
To complete the work of Basel 3 Micossi and Carmassi suggest implementing 3 main points:
- Replace RWA-based capital requirements and calculated on internal models, with stronger, clearer and simpler rules. The new limit should be raised to between 7% and 10% and an additional market-based capital strength indicator should be released referencing Pillars 2 and 3.
- Strengthen the action of supervisors through a restructuring of the second Pillar. Furthermore, to eliminate the risk of moral hazard, the system must provide for a mandatory procedure to be applied to banks when the minimum capital is not reached.
- Strengthen market discipline through transparent and easy-to-understand capital requirements for all market players, such as the obligation for banks to issue a large number of convertible bonds.
These actions should be applicable to all banks without exception. It is time for governments and parliaments to decide to revise the latest Basle agreement by promising greater accountability towards the public interest.
Download the complete text from the Ceps website
