Banking and Finance Law Daily Basel III reforms released, focus turns to implementation
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Friday, December 8, 2017

Basel III reforms released, focus turns to implementation

By Lisa M. Goolik, J.D.

The Basel Committee on Banking Supervision has finalized reforms to the Basel III agreement on bank capital standards, concluding the international reforms initiated in response to the global financial crisis. The finalized reforms address variability in the calculation of risk-weighted assets (RWAs) and, according to the U.S. banking regulators, "level the playing field among internationally active banks." The reforms, endorsed by the Committee's oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), take effect from Jan. 1, 2022, and will be phased in over five years.

Revised Basel III standards. The initial Basel III agreement—designed for internationally active banks—established the revised minimum standards that were intended to increase the quality and quantity of regulatory capital. According to the Committee, a key objective of the revisions incorporated into the framework is to reduce excessive variability of RWA. At the peak of the global financial crisis, said the BCBS, a wide range of stakeholders lost faith in banks' reported risk-weighted capital ratios.

The reforms include the following:

  • a revised standardized approach for credit risk;
  • revisions to the internal ratings-based approach for credit risk;
  • revisions to the credit valuation adjustment framework, including the removal of the internally modelled approach and the introduction of a revised standardized approach;
  • a revised standardized approach for operational risk;
  • revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (G-SIBs), taking the form of a Tier 1 capital buffer set at 50 percent of a G-SIB's risk-weighted capital buffer; and
  • an aggregate output floor, intended to ensure that banks' risk-weighted assets (RWAs) generated by internal models are no lower than 72.5 percent of RWAs as calculated by the Basel III framework's standardized approaches. Banks will also be required to disclose their RWAs based on these standardized approaches.

"Today's endorsement of the Basel III reforms represents a major milestone that will make the capital framework more robust and improve confidence in banking systems," said Mario Draghi, Chairman of the GHOS and President of the European Central Bank. Draghi added: "The package of reforms endorsed by the GHOS now completes the global reform of the regulatory framework, which began following the onset of the financial crisis."

Alongside the full text of the reforms, the Committee released an abstract to the reforms and a high-level summary. The Committee also published its assessment of the reforms’ quantitative impact.

Deferred implementation for market risk standards. The GHOS also endorsed the Committee's proposal to extend the implementation date of the revised minimum capital requirements for market risk, which were originally set to be implemented in 2019, to 2022. Deferring implementation of the revised market risk framework aligns its effective date with those of the Basel III revisions for credit risk and operational risk, explained the GHOS. The additional time will also allow banks to develop the infrastructure needed to apply the framework.

U.S. banking regulators respond. The federal banking agencies announced their support for the conclusion of the reform process. Treasury Secretary Steven T. Mnuchin commented, "The consensus agreed to by the [GHOS] completes nearly seven years of work on the Basel III bank capital standards. The reforms standardize the approach, improve the quality and consistency of bank capital requirements, and will help level the playing field for U.S. firms and businesses operating internationally."

Focus turns to implementation. The Financial Stability Board and International Monetary Fund (IMF) "welcomed" the announcement and encouraged "timely implementation." Mark Carney, Chair of the FSB, encouraged "full, consistent and timely implementation," while the IMF urged regulators to "move swiftly to implement these reforms in a timely and consistent manner."

In contrast, the American Bankers Association released a statement urging the U.S. banking regulators to implement the revised standards "in a manner that’s consistent with our country’s interests and financial conditions" and to seek early public comment through an advanced notice of proposed rulemaking.

The federal banking agencies have stated that any proposed changes based on the agreement will be made through the standard notice-and-comment rulemaking process (NR 2017-47).

Companies: American Bankers Association

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