Reflecting ongoing market developments, the Basel Committee has finalized revisions to all three “pillars” of the final Basel Accord. These deal with specific regulatory-capital standards, supervisory and risk-management requirements and additional disclosures that are designed to improve market discipline. Much in the revisions addresses specific problems that have led to the global financial-system’s collapse. For example, the rules will sharply increase the risk-based capital required for complex securitizations and reduce reliance on the credit ratings agencies (on whom much of the mortgage-backed securities debacle has been blamed). The final standards also include a detailed discussion of compensation practice, mandating an array of reforms designed to link remuneration incentives to long-term risk-management ones. The net result of the new capital and risk-management requirements will be sharply higher regulatory capital, especially for institutions with concentrated and/or complex positions. This will contribute to the industry restructuring already under way as a result of market forces, likely leading to smaller institutions that rely more on traditional intermediation, not securitization and complex off-balance sheet structures. Sharply higher capital will also be required for reputational risk, with this affecting those banks active in sponsoring investment vehicles such as money-market mutual and hedge funds.
In conjunction with this final rule, the Basel Committee also clarified next steps for revising the overall risk-based capital, supervisory and disclosure framework. Although nothing will be done to raise regulatory-capital requirements until 2011 at the earliest to minimize market disruption and slow the recovery, global regulators have finalized plans to impose a new, minimum capital standard and revise the types of instruments that can be considered capital.
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