FISMA director-general: Weak economy no excuse for postponing Basel III

Top FISMA civil servant says structural reforms should not be dependent on economic outlook

by | June 1, 2021 | bobsguide

The implementation of Basel III should not be delayed because of economic conditions said John Berrigan, director-general of the financial stability, financial services and capital markets union (FISMA) for the European Commission.

“One of the lessons we drew from the last crisis was that we should not shy away from necessary structural reforms in the financial sector, even when the economy was pretty weak after the great financial crisis,” he said, while speaking at the IIF’s European Summit.

“Even though in cyclical terms the economy was weak, these structural reforms, which were much more longer-term focused needed to put in place. And because we took that view, we entered the next crisis 10 years later in much better position.”

One of main sticking points to Basel III’s implementation in the EU are on its capital requirements. With the US economy rebounding faster, EU banks have argued raising capital requirements would hit them harder.

Berrigan remains unconvinced.

“The notion that we would soften prudential rules on a permanent basis, either by delaying or even postponing would actually put at risk the big achievement of this crisis, which was entering it with a banking system that was so resilient, that it was able to handle that shock.”

He added that delaying structural reform would send the opposite message, that the market isn’t actually so resilient that it could handle reforms.

“To postpone a long-term measure because of short term problems, we don’t think that’s necessarily the message that’s either justified or appropriate.”

Internationally, there was agreement to delay Basel III to 2023 in order to give operational capacity for the financial sector to handle the pandemic. There have been signals from regulators in both the US and Europe that there will be no further delay. But as the deadline approaches, banks want certainty in how Basel III will be implemented.

“The more time passes, the more work it will be and it will be challenging [to implement],” said Alexandra Habeler-Drabek, chief risk officer at Erste Bank.

While she does not advocate for the softening of Basel III, it is a priority for legislation to be made available as soon as possible to help banks. Two areas which she hopes to see more clarification on are, what levels the output floor would be applied to and the risk weight for equity investments and exemptions for intergroup exposures.

She added, “We hope that sticking to an internationally agreed to schedule will not be at the cost of implementation quality.”

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