What is it about?
Following the revelations of the inadequacies of Basel II, the need for liquidity standards (namely the Liquidity Coverage Ratio and the Net Stable Funding Ratio) - as well as the leverage ratios (and subsequently supplementary leverage ratios and enhanced supplementary leverage ratios), not only highlights the need for macro prudential policy tools in financial supervision, but also the growing importance of Off Balance Sheet instruments, Special Purposes Vehicles (SPVs) and SFTs (amongst other complex financial instruments) - along with the shadow banking sector.
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Why is it important?
The importance of the above mentioned, as well as their impact on the financial sector and financial developments which have taken place over the years is also illustrated thus: “The new framework was designed to improve the way regulatory capital requirements reflect underlying risks and to better address the financial innovation that had occurred in recent years. The changes aimed at rewarding and encouraging continued improvements in risk measurement and control.” (Basel Committee for Banking Supervision, 2018)
Perspectives
Given one of the key goals of market discipline, as highlighted by the Committee, namely, to improve comparability and consistency of disclosures, It is evident that it is a much needed complement and facilitator, not only to Pillar One’s objectives, But also in respect of Pillar two’s approach to supervision. Further, even though principles still embody the application of market discipline and disclosures, it is also important to note the emphasis placed on presentation, the use of qualitative and quantitative metrics – where applicable, and more importantly, in a manner which can easily be understood by its eventual users.
Prof Marianne Ojo
Northwestern University
Read the Original
This page is a summary of: Credit Risk Measurement, Leverage Ratios and Basel III: Proposed Basel III Leverage and Supplementary Leverage Ratios, SSRN Electronic Journal, January 2014, Elsevier,
DOI: 10.2139/ssrn.2517059.
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