Finalising Basel III: Stability through reform International Council of Securities Associations, ICSA (2016-05-23) Stefan Ingves Governor of the Riksbank Chairman of the Basel Committee on Banking Supervision

This year will mark the end of the development of Basel III Today’s agenda: Where we are today What’s to come What happens after 2016

Basel III requires more capital of better quality 2% 4% Additional Tier 1 capital CET1 capital Tier 2 8% 4.5% 2.5% 1.5% Minimum requirement Capital conservation buffer Countercyclical capital buffer 9.5% 7% Basel III Capital/ Risk-weighted assets 13% 0 - 2.5% Note: CET1 = Common Equity Tier 1

Basel III also marked the introduction of new liquidity standards Short term liquidity Long term funding Liquidity Coverage Ratio Net Stable Funding Ratio High quality liquid assets Available stable funding ≥ 100 % ≥ 100 % Net cash outflows over a 30 day period Required stable funding

The goal of this year is to finalise the remaining elements of Basel III Motivation: Lessons learned from the crisis and observations on the workings of the framework Revised modelled approaches Credit risk, Market risk, Operational risk Robust standardised approaches New capital floor Finalised leverage ratio

Studies suggest considerable variation in the RWA:s across banks 23.05.2018 Studies suggest considerable variation in the RWA:s across banks An illustrative example: two banks with the same portfolio and capital, but different ways of calculating risk weights CET 1 ratio (%) Minimum level Basel III 4.5 % Bank A Low risk weights Bank B High risk weights Sources: The BIS and the Riksbank

Proposals to limit the use of internal models face critisism Models can play an integral role in risk management of a bank When properly designed, applied and governed With a management team and board that understand and are willing to challenge the output However, models have fallen short in a framework intended to provide understandable and comparable levels of exposure and risk

We now have a system of multiple constraints Concern has been expressed about how to calibrate the remaining reforms The committees quantitative impact studies are critical input The objective is to reduce excessive and unwanted variation in banks’ risk-weighted assets, not to significantly increase overall capital requirements

What’s next: 2017 and beyond Provide guidance to help implementation Monitoring implementation and banks progress Other issues that supports the broader goal and agenda of supervision Corporate governance Stress testing Anti-money laundering Financial technology …

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