Publication - What are capital markets telling us about the banking sector? - Speech by Mr Jaime Caruana, General Manager of the BIS, at the IESE Business School conference on "Challenges for the future of banking: regulation, governance and stability", - London, 17 November 2016.
Introduction
Copyright: Centralbahnplatz 2 4051 Basel
Switzerland BISBCHBB
Website:www.bis.org
It is a pleasure to be back at the IESE Business School and to join such distinguished panellists for this conference. Today, I would like to offer some reflections on the challenges facing the banking sector and their relationship with regulatory reforms.
As we all know, in response to the Great Financial Crisis of 2008–09, regulators pursued ambitious financial reforms to make the financial system more resilient to systemic risks. A key element is a significant increase in the quantity and quality of regulatory capital. While Basel III is still being completed – full implementation is scheduled for 2019 – these more stringent regulatory standards have already improved banks’ capital structure.
For example, for the major banks monitored by the Basel Committee, CET1 capital ratios (CET1/RWA) increased, on average and on a fully loaded basis, from about 7% in 2011 to 11.8% at end-2015.1 During the same period, leverage ratios rose from about 3.5% to 5.6% on average. Let me remind you that the minimum capital for CET1 is 4.5% and that the target capital (minimum plus the conservation buffer) is 7%; actual capital ratios for most banks significantly exceed these requirements. These moves to more and better capital are a response not only to regulation but also to market pressure, as the crisis experience has also sharpened the risk perception of banks, bank creditors and equity market investors.
Those creditors and investors now sanction banks that are undercapitalised, not profitable or not creditworthy. Despite this progress in increasing banks’ loss absorption capacity, the path to recover trust remains difficult. The best example is the puzzling and protracted scepticism of bank equity investors. For many banks, especially in Europe, price-to-book ratios have been under pressure and remain close to the troughs that were observed in the aftermath of the Great Financial Crisis. There is no shortage of accounts offered for these challenges, ranging from modest growth to persistently low interest rates, unresolved asset quality problems, the presence of new fintech competitors, and tighter regulation. To be sure, efforts to reduce leverage also tend to lower return on equity. How much weight should we place on each of these factors in assessing the challenges facing the banking sector?
My perspective today is from the capital markets. If we think of capital markets as a mirror, what are the reflections telling us about the current state of the banking sector? I believe they are quite revealing, especially about the pressures faced by banks as borrowers, and these pressures are contributing to the downward trend seen in bank leverage.
This capital markets perspective and some BIS analysis support the notion that, even if regulation is a factor in the way that banks approach their business, it is not the only factor, nor perhaps the most important one. Before I get into the discussion, let me clarify where we stand with the capital regulation. Typically, there are two concerns: the first is that regulation is excessive and that it is constraining lending capacity; and the second is the uncertainty associated with completing the reforms and the final calibration.
The Basel Committee is working to finalise the Basel III regulatory framework by the end of this year, thereby dissipating regulatory uncertainty. And both the Basel Committee and the Governors and Heads of Supervision reaffirmed that there should not be a significant increase in the overall capital requirements.
Copyright: Centralbahnplatz 2 4051 Basel
Switzerland BISBCHBB
Website:www.bis.org
page source https://www.bis.org/
