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Practice paper

The evolution of the Basel framework: Are we back to where we started?

Frankie Phua
Journal of Risk Management in Financial Institutions, 12 (2), 115-124 (2019)
https://doi.org/10.69554/LAZR9053

Abstract

While the ‘Basel IV’ standards have been finalised since December 2017, the jury is still out on its global implementation. This paper asks whether all Basel Committee on Banking Supervision (BCBS) jurisdictions will implement the standard consistently within the same timeline? Or whether there will be pervasive regulatory divergence resulting in regulatory fragmentation and an unlevel playing field? Does ‘Basel IV’ mark the endgame of internal-ratings based (IRB) models? Regulatory fragmentation is a corollary of the one-size-fits-all Basel standards that are calibrated based on internationally active banks’ data. In particular, these calibrations might not necessarily be appropriate for Asian banks. A more granular calibration approach or proportionality strategy might be tenable alternatives to make the Basel standards more relevant to specific geographies. Above all, the reason banks exist is because they play an important role as financial intermediaries to allocate funds to support productive investments in the real economy. Capital requirements must be appropriately calibrated and not be excessively conservative; banking regulations fail if the banking system becomes stronger because banks are lending less to the real economy.

Keywords: ‘Basel IV’; regulatory fragmentation; risk sensitivity; capital output floor; revised standardised approach; IRB models

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Author's Biography

Frankie Phua is the Managing Director and Head of Group Risk Management at United Overseas Bank (UOB). Currently the Chairman of the Board of the Singapore Chapter of the Risk Management Association, Frankie is widely regarded as a subject matter expert for the Basel framework and is a frequent speaker who enjoys sharing his perspective and experience at international risk management conferences. Frankie was conferred the Institute of Banking and Finance (IBF) Fellow Award in Risk Management, which recognises industry veterans for mastery and leadership.

Citation

Phua, Frankie (2019, March 1). The evolution of the Basel framework: Are we back to where we started?. In the Journal of Risk Management in Financial Institutions, Volume 12, Issue 2. https://doi.org/10.69554/LAZR9053.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 12 / Issue 2
© Henry Stewart
Publications LLP

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