In banking, capital buffers were increased, liquidity requirements were introduced, and caps placed on leverage under a new Basel III accord. In the derivatives markets, requirements were put in place for trade reporting, central clearing, and margining. To tackle the too-big-to-fail problem, global systemically important financial institutions, or GSIFIs, were identified and subjected to higher loss absorbency requirements, more intensive supervision, and resolution planning. Implementation of the reforms – especially Basel III – progressed well, driven by a broad-based consensus on preventing a repeat of the Global Financial Crisis. The generous timelines for implementation allowed industry to adjust to the new regulatory landscape. It was only last year, in 2027, that we achieved full implementation of the final component of the Basel III reform package – the output floor. Regulatory evaluation and adjustment (2017 to 2020) During the second phase, from 2017 to 2020, the focus turned to evaluating the effects of the regulatory reforms. There was growing feedback that some reforms had unintended consequences, some reforms were at odds with others, and that the cumulative impact of the reforms had dampened economic growth. A series of reviews was undertaken during this period to assess both the effectiveness and effects of various reforms. The reviews largely affirmed that the benefits of the reforms, in terms of reducing the risk of financial crisis and its consequent economic impact, far outweighed the costs. In fact, controlling for other factors, there was little evidence that the reforms resulted in any general deterioration in the availability or pricing of credit.
The empirical evidence that has been produced by the Committee indicates that, in fact, banks with less capital headroom, and here the key word is “headroom”, tended to lend less during the pandemic. There was also a relatively larger decline in average risk weights at banks with less capital headroom, perhaps because of an attempt to defend capital ratios, and importantly also, the buffer threshold appears to have been the constraint, forcing banks to adjust their behaviour as lower capital ratios alone did not drive the results. Finally, another interesting finding is that the issue was not only one of quantity but also about prices. Banks’ proximity to buffers appears to have affected the cost of lending. The reasons behind this problem are unclear. It may have occurred because the level of uncertainty was very high for banks, and they were foreseeing that there might be losses in the future, and thus wanted to keep these buffers so they could be used to cover those losses. That is one possibility. The lack of formal guidance by supervisors on the rebuilding of these buffers might be another issue. Low profitability may also be a reason for this result or market stigma. We are now in the process of trying to understand precisely the origin of this problem. Closely related to this and a very important issue is the question of releasable buffers.