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Preparing for Basel IV, V and VI

Policymakers need to be careful about muddying the waters with their public debates over how to regulate banks. But at the same time, banks and markets must come to terms with the fact that regulation has to be dynamic to be effective.

Banks rightly complain that the rocky regulatory landscape has made life difficult for them this year. When it comes to both funding and capital, the way ahead has been clouded by regulatory uncertainty. Consultation on bail-ins in January worried senior unsecured investors, and the wait for clarity on how new style hybrids can be structured has seemed unbearable at times. Final rules for both are still pending, hampering both unsecured and hybrid issuance.

Meanwhile, policy debates rage on. European regulators are said to be tussling over the details of a common term sheet for contingent capital that is being drawn up by the EBA. More generally, everyone has a different opinion of the broad rules laid down by politicians. EBA chair Andrea Enria made that much clear on Monday when he criticised the package set out in October, saying it had “major” shortcomings.

Market participants will tell you this is unhelpful. But the dialogue is important: it is necessary to understand the rationale and decisions behind new rules.

Above all, we must understand that the regulatory process is not a static one. Basel III and CRD IV are the end game in the minds of most in the market. The final implementation deadline of January 2019 is certainly a long time away — the euro may have been long gone by then.

But there are already whispers about Basel IV. The Basel Committee has only just finished hammering out version three – and is unlikely to be at the stage of timetabling meetings to discuss the next round of changes yet. But the market must not doubt that they are inevitable.

We don't know where the next crisis will come from. Regulators do their best to cover the gaps that they can see – and must try to be as innovative as markets. Basel III will certainly not mark the end of regulatory evolution. Banks must not be fall into the trap of thinking that it is.

The debates will go on. The UK Financial Policy Committee recently suggested internal models could include minimum risk weights; discussions will continue over whether European bank funding guarantees should be national or supranational; there will have to be agreement on whether hybrids should take temporary or permanent write-downs.

Some ideas will succeed, some will be flashes in the pan, but the debate and discussion along the way are as important as whatever is the final form of Basel IV, V or VI.

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