Why finalising Basel III is good for the European banking sector

Basel III is an internationally agreed set of measures to strengthen the regulation, supervision and risk management of banks. Finalising the 2017 agreement will contribute to a banking system that is more resilient and in a better shape to support the real economy. It is possibly the final milestone in the post-crisis reform agenda, and represents a crucial step towards a level playing field for banks internationally. The EU banking sector is particularly sensitive to the conclusion of this process, as solvency ratios will be more affected there than in other jurisdictions.

This paper shows the advantages of adopting a multi-metrics approach to capital measurement, simultaneously using risk-weighted criteria for capital adequacy, the establishment of an output (risk-weighted assets) floor and the deployment of a minimum leverage ratio, as defined in the Basel III finalisation. The complementary use of those metrics brings a far more robust approach to capital measurement since each one may constitute a binding restriction for different banks. Consistent implementation of Basel standards at the global level is fundamental to a sound banking system. It is therefore of the utmost importance that the legislative implementation of the Basel III finalisation in the EU is timely and in full compliance with internationally agreed standards.

Pedro Duarte Neves is Former Vice-Governor of Banco de Portugal