As a consequence, the need to reform the existing Accord is widely recognised and supervisors are working very hard to shape the new Accord in close consultation with the private sector. The Basel II Accord is aimed at bringing the capital requirements closer to the true economic risks in banks’ portfolios and at offering a wide range of options and approaches to respond to the increased complexity of financial instruments. Basel II is achieving all of this basically by relying more on banks’ internal models in the supervisory process. An important by-product is, therefore, that there is a lot of pressure on banks to improve their risk management systems. Improvements are already visible. It seems clear to me that more supervisory efforts, similar to those in the banking sector, may also be needed in the other sectors of financial institutions, for example in insurance. The ECB has drawn attention since the early stages of the Basel II process and the implementation of the framework in the EU to macro-prudential implications and to the possibility of increased procyclicality of certain provisions. When bank capital is largely based on risk and risk increases in a recession, macroeconomic consequences might arise through a procyclical reduced ability of banks to lend. These concerns have been appropriately addressed in the revised proposals submitted for consultation by the Basel Committee and the European Commission. Pro-cyclicality concerns are substantially mitigated and a good balance can be found between risk-sensitivity and macroeconomic stability.
Paul Fisher: The Financial Regulation Reform agenda – what has been achieved and how much is left to do? Speech by Mr Paul Fisher, Executive Director for Supervisory Risk Specialists and Regulatory Operations of the Bank of England and Deputy Head of the Prudential Regulation Authority (PRA), at Richmond, the American International University, London, 30 September 2015. *  *  *  It is now 8 years since the start of the great financial crisis, and 7 years since the collapse of Lehman Brothers and AIG in the United States, followed by the bailing out of HBoS and RBS in the UK. The consequences were not limited to the financial sector – the economic recession that followed in much of the developed world was both deep and prolonged. This naturally created an imperative for changes to the regulation of the financial system to prevent the same thing happening again in future. Since I became Deputy Head of the Prudential Regulation Authority (the PRA) in June 2014, I have been asked a number of times to comment on how far the regulatory reform agenda has advanced. How close are we to ending “too big to fail”? How much more regulatory change can one expect?