1. Update on Basel regulations impacts
on the financing of infrastructure projects !
Michel BILGER
Confederation of International Contractors' Associations
7 November 2017

2. Basel 1 Basel 2 Basel 3 Basel 4 So why ?
Evolution of the banking regulation
First bank solvency ratio
Basel 1
1988
Own funds
Risks
Basel 2
2004
Risks :
Internal models
Basel 3
Own funds :
quality & quantity
2010
Basel 4
So why ?
2017 ?

3. The view of the Basel Committee :
The challenge is to complete the Basel 3 reform
September 2011: the Basel Committee launched a program of evaluation of the implementation of Basel 3. This program aims to ensures the concordance of the regulations and the consistency of the produced measures
Market risk
Janv. & déc. 2013
Report on RWA in the trading activities
Credit risk
July 2013 & April 2016
Report on RWA in the banking activities
Report to G20
November 2016
Reduction of the excessive variability
1 – Review of standard risk methodologies
2 – Stricter control of internal models
3 – Introduction of « floors »

4. Page 4 – ESR Financial Conglomerate - May 2016
The view of the industry:
The reform is dubbed “Basel 4” given the far reaching effects !
It is a revolution ! The process set up by sequence (successive consultations : standard methods then models and calibration) did not properly analyze the risks and impacts.
This is a step backwards compared to the sensitivity measures of risks introduced by Basel 2 and it may reintroduce the negative effects of Basel 1 (move to riskier loans...)
There are technically strong contradictions in the consultations (there is even no common definition of default !)
It promotes the shadow banking
It will penalize customers
Page 4 – ESR Financial Conglomerate - May 2016

5. The European system must tend towards an American-style system
a secure model !

6. Page 6 – ESR Financial Conglomerate - May 2016
Two logics oppose …
The standard methods for the daily risk and stress tests "top-down" to the extreme risk
Better integrate supervision constraints to internal management to encourage better risk assessment by the use of finer management methods
A very external oversight institutions, disconnected from their internal management
Intrusive supervision mobilizing substantial resources
Page 6 – ESR Financial Conglomerate - May 2016

7. Update on Basel regulations impacts on the financing of infrastructure projects

8. The normal shape of a risk curve

9. Basel 4 is less risk sensitive :
The example of corporates !

10. Less risk sensitive weightings

11. The output floor New standard Output floor Current sensitive but >2
Output floor 3
Current
sensitive 1
but 3
>
> 1 !

12. The impacts would be very significant !
For real estate :
a move to the standardised approach would represent a 230% increase in capital requirements
For specialised lending :
a move to the IRB-Foundation approach would multiply capital requirements
by 2 to 4 depending on the project.

13. Page 13 – ESR Financial Conglomerate - May 2016
3 challenges for banks ?
Banks face at the same time 3 challenges that can affect their ability to finance the economy:
a regulatory impact (Basel 3) increases the cost of intermediation by requiring more capital, more resources "bailinable",
a technology shock that facilitates competition from non-banks (platforms that facilitate contacts, access to payments…)
very low rates that erode margins banking intermediation
Page 13 – ESR Financial Conglomerate - May 2016

14. The risk of unintended consequences on the global economy and society
Volumes
Prices

15. Update on Basel regulations impacts on the financing of infrastructure projects
What can we do ?

16. But if there is an agreement in Basel, it is not the end of it !
A review clause ?
From recommandations to regulations
A very long phasing : 2026 to 2029 ?
The regulatory offsets (« Pillar 2 ») ?
Randal Quarles, 60 ans, qui a été sous-secrétaire au Trésor sous George W. Bush et dirigeait jusqu'ici un fonds d'investissement

17. Statements are quite reassuring…
” As a result of this assessment, the Committee will focus on not significantly increasing overall capital requirements”.
“The EBA also believes that the Basel Committee should avoid that the new proposals lead to significant increase in overall capital requirements and preserve the core strength of the IRB approach, namely a high degree of risk-sensitivity”.
Danièle Nouy And Basel III, the centre piece of regulatory reform, is about to be finalised (...). There will be no significant further increases in capital requirements, and we are not discussing Basel IV. Regulatory reform is coming to an end.
Page 17

18. Current proposals are not calibrated to differences in markets
Mutual mobilization is essential !
Current proposals are not calibrated to differences in markets
and they use too much a « one size fits all » approach…
Recognition of the quality of the team and models in terms of capital requirements
Recognition of :
* the benefit of dual recourse on the property AND on the borrower.
* the fixed rate borrower's benefits