In a discussion paper published on Monday, the Committee said it was committed to Basel III reforms but wanted to gather feedback from market participants on how it could simplify the framework.
Basel III’s focus on risk sensitivity and the specific circumstances of different institutions has led to increasing complexity in regulation — which “entails a number of potentially adverse consequences”.
Simplifying Basel III where possible and improving the comparability of capital ratios between institutions — for example by stopping banks from using their own internal models to calculate risk-weighted assets — is important to ensure the regulatory framework is fit for purpose, said the Committee.
Explicitly recognising simplicity as an additional objective in the Basel capital adequacy framework could help achieve this goal.
Enhancing disclosure standards for banks and using additional metrics to measure solvency — rather than just relying on RWA-based capital ratios — would make it easier to truly compare different institutions,
The multidimensional risks and diverse instruments banks are exposed to makes it difficult to simplify the framework, however. So do differing interpretations of certain terms, which could lead to additional criteria being published in certain areas, it said.
Banks should provide a range of options to measure capital requirements, which also makes simplicity challenging, said the Committee.
The use of risk models and the “possibility that indicators may lose their predictive power when relied on for regulatory purposes” also makes it difficult to find a common ground between simple regulation and a framework which takes into account the multidimensional nature of risk in complex banking organisations, the paper said.
Feedback on the discussion paper must be submitted by Friday October 11 this year.