So, what remains of the regulatory reform agenda? While the Committee’s reforms have tackled some of the major weaknesses of the pre-crisis regulatory framework, the framework remains centred on risk-weighted capital requirements. The Committee’s own review of this framework, supplemented by a wide range of empirical evidence, suggests that more can be done toward achieving a better balance between risk sensitivity, simplicity and comparability. In particular:
some parts of the regulatory framework are unduly complex, challenging the ability of banks’ boards and supervisors to adequately oversee the way in which banks manage their risks;
a number of studies have found material variation in the risk-weighted assets calculated by banks, which has eroded faith in the comparability, if not the accuracy, of banks’ capital ratios; and
the blanket use of a single metric – in this case, the risk-weighted capital framework – does not allow for a sufficiently robust regulatory framework.
As a result, the Committee’s outstanding post-crisis reforms can be grouped into three broad categories:
First, the Committee is working on enhancing the risk sensitivity and robustness of standardised approaches, which facilitate the comparability of banks’ capital ratios.
Second, the Committee is considering additional constraints to the role of internally modelled approaches in the capital framework, particularly in areas for which the use of models may not be suitable for calculating regulatory capital.
Third, the Committee is finalising the design and calibration of the leverage ratio and a potential capital floor based on standardised approaches. These measures would complement the risk-weighted capital framework and help ensure that the regulatory framework is more robust to arbitrage and erosion over time.
The full speech is available here.