The Basel Committee on Banking Supervision issued its Evaluation of the impact and efficacy of the Basel III reforms noting that the more sophisticated and multi-dimensional framework introduced through Basel III to address a variety of risks to enhance bank resilience came at the cost of greater regulatory complexity. With respect to this complexity, the report notes a position that has been consistently argued by the World Council that “complex rules applied to simple banking activities may limit competition, giving advantages to larger and more complex banks, potentially providing incentives for banks to become even more complex and aggravating the [too big to fail] problem.”
World Council on numerous occasions to the Basel Committee stated that compliance with overly complex regulations disproportionately affect credit unions as compared to larger more complex financial institutions. Their findings note that there are several drawbacks to a complex regulatory framework including challenges to capital planning and could lead to spurious risk assessments and a misallocation of capital.
These findings should now be of use to national level-regulators when implementing the Basel III framework who should take a proportional approach to regulations for credit unions, consistent with the proportionality built into the Basel III framework and consistent with other guidance issued by the Basel Committee.
Additionally, the report provides a holistic evaluation of the impact and efficacy of the implemented Basel III reforms assessing whether the implemented reforms have met their intended objectives, in particular of increasing bank resilience and reducing systemic risk. It also examines some potential unintended effects, notably on banks' lending and capital costs. This report specifically provides evidence on the following:
- the impact of the capital and liquidity reforms on bank resilience and systemic risk;
- potential side effects on banks' lending and capital costs; and
- interactions among elements of the reforms and the regulatory complexity within the Basel Framework.
A copy of the report can be viewed here.