ECB’s Knot: ‘May Need Some Targeted Changes in Banking Regulation Beyond Basel III’

11 October 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Friday urged the complete implementation of Basel III banking standards and said that some additional modifications might be necessary in light of the turmoil among some banks in March 2023.

In a speech at a conference of the Institut International d'Études Bancaires, Knot, who heads De Nederlandsche Bank, called it ‘essential to implement the Basel III standards in all jurisdictions', but said that last year’s turmoil in the banking sector ‘highlighted that we may need some targeted changes in banking regulation beyond Basel III.’

Among these changes, it had to be asked whether the liquidity coverage ratio should be specific to the relevant deposits so as to make banks more resilient and facilitate the diversification of funding, he said.

‘Another avenue which should be explored in the light of the SVB [Silicon Valley Bank] case is whether unrealised losses should be better reflected in the capitalisation of banks’, he said, specifying that this would apply to potential deviations between the worth assigned by banks to bonds held to maturity and the pricing of these bonds in the market.

‘And we should look at how to address the issue that, in times of stress, banks may be hesitant to use instruments in the liquidity buffer that are not marked to market daily for accounting purposes’, he said.

Last year’s banking sector upheaval highlighted the importance of being ready to cope with liquidity stress, implying a need for proven contingency funding plans and the ability to turn to relevant central bank facilities, he said.

‘While this may be more of an issue in the US, we should also look at how this can be improved in the EU’, he said.

Interest rate risk management and thus an appropriate regulatory framework incorporating ‘prudent assumptions’ about how depositors might act had also been seen last year to be critical, Knot continued.

Being ready to mitigate uncertainty regarding how bank customers might act required capital, so that interest rate risk might be worth including among the Pillar 1 requirements of Basel III, he said.

Experience showed that so-called Additional Tier 1 instruments absorbed losses only when a bank failure had progressed very far, he said, citing the case of Credit Suisse last year. ‘This should encourage regulators to reflect on the role and functioning of AT1 instruments in determining the capital position of banks’, he said.