Basel III
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BASEL III (sometimes "Basel 3") refers to a new update to the Basel Accords that is under development. The term appeared in the literature as early as 2005 [1] and is now in common usage[2][3] anticipating this next revision to the Basel Accords. The Bank for International Settlements (BIS) itself began referring to this new international regulatory framework for banks as "Basel III" in September 2010.
- The draft Basel III regulations include:
- "tighter definitions of Tier 1 capital; banks must hold 4.5% by January 2015, then a further 2.5%, totalling 7%.[4]
- the introduction of a leverage ratio,
- a framework for counter-cyclical capital buffers,
- measures to limit counterparty credit risk,
- and short and medium-term quantitative liquidity ratios."[5]
Professionals and officers with Basel II knowledge and experience will be required to lead the new Basel III projects, and they have started studying the differences from the Basel II framework [6]
In September 2010, the Basel Committee
Contents
Overview
In response to the recent financial crisis, the Basel Committee on Banking Supervision (BCBS) set forth to update their guidelines for capital and banking regulations:
- This consultative document presents the Basel Committee's proposals to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. The objective of the Basel Committee's reform package is to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy. [7]
On December 19, 2009 the BCBS issued a press release[8] which presented to the public two consultative documents for review and comment:
- Strengthening the resilience of the banking sector
- International framework for liquidity risk measurement, standards and monitoring
The BCBS allowed a public comment period (ended April 16, 2010) resulting in 272 responses to their request for comment.
[edit] Development of the New Basel III Standard
[edit] Summary of Changes Proposed in Basel III
- First, the quality, consistency, and transparency of the capital base will be raised.[8]
- Tier 1 capital: the predominant form of Tier 1 capital must be common shares and retained earnings
- Tier 2 capital instruments will be harmonised
- Tier 3 capital will be eliminated.[9]
- Second, the risk coverage of the capital framework will be strengthened.
- Strengthen the capital requirements for counterparty credit exposures arising from banks’ derivatives, repo and securities financing transactions
- Raise the capital buffers backing these exposures
- Reduce procyclicality and
- Provide additional incentives to move OTC derivative contracts to central counterparties (probably clearing houses)
- Provide incentives to strengthen the risk management of counterparty credit exposures
- Third, the Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework.
- The Committee therefore is introducing a leverage ratio requirement that is intended to achieve the following objectives:
- Put a floor under the build-up of leverage in the banking sector
- Introduce additional safeguards against model risk and measurement error by supplementing the risk based measure with a simpler measure that is based on gross exposures.
- Fourth, the Committee is introducing a series of measures to promote the build up of capital buffers in good times that can be drawn upon in periods of stress ("Reducing procyclicality and promoting countercyclical buffers").
- The Committee is introducing a series of measures to address procyclicality:
- Dampen any excess cyclicality of the minimum capital requirement;
- Promote more forward looking provisions;
- Conserve capital to build buffers at individual banks and the banking sector that can be used in stress; and
- Achieve the broader macroprudential goal of protecting the banking sector from periods of excess credit growth.
- Requirement to use long term data horizons to estimate probabilities of default,
- downturn loss-given-default estimates, recommended in Basel II, to become mandatory
- Improved calibration of the risk functions, which convert loss estimates into regulatory capital requirements.
- Banks must conduct stress tests that include widening credit spreads in recessionary scenarios.
- Promoting stronger provisioning practices (forward looking provisioning):
- Fifth, the Committee is introducing a global minimum liquidity standard for internationally active banks that includes a 30-day liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio.
- The Committee also is reviewing the need for additional capital, liquidity or other supervisory measures to reduce the externalities created by systemically important institutions.
[edit] Key Dates / Proposed Timeline
Date
Actual/
Planned
MilestoneDecember 19, 2009
Actual
BIS published documents for public review/commentApril 16, 2010
Actual
End of the public comment periodApril 23, 2010
Actual
Meeting of G-20 Finance Ministers and Central Bank Governors, 23 April 2010June 3–5, 2010
Actual
Meeting of Finance Ministers and Central Bank Governors. Busan, KoreaJune 26—27, 2010
Actual
G-20 Toronto Summit12 September 2010
Actual
Basel Committee set a minimum common equity level of 7%, plus a further counter-cyclical buffer containing up to 2.5% of risk-weighted assets.[11]November 11–12, 2010
Planned
G-20 Seoul SummitDecember 31, 2010
Planned
Fully calibrated set of standards will be developedDecember 31, 2011
Planned
All major G-20 financial centers commit to have adopted the Basel III Capital Framework by 2011December 31, 2012
Tentative
Target for implementation of Basel III[edit] Basel III Development In the News
[edit] Update on June 5–6 Meetings in Busan, Korea
- The official Communiqué Meeting of Finance Ministers and Central Bank Governors; Busan, Republic of Korea; June 5, 2010
- "Sustaining world economic growth is the most important item on the G-20 agenda this weekend," said British Chancellor George Osborne.[12]
- U.S. Treasury Secretary Timothy F. Geithner: "said the world cannot again bank on the cash-strapped U.S. consumer to drive growth and urged other nations to stimulate their own demand." [13]
- "All participants agreed on the importance of financial repair and fiscal structural reform, and a consensus was made to put in place credible, growth-friendly measures differentiated for and tailored to national circumstances to deliver fiscal sustainability." [14]
- "We are not in favour of having taxation on the banks. We suggested that ultimately you please take it up through the regulatory route...By and large, it was accepted," Mukherjee told reporters in New Delhi today, a day after his return from the G-20 ministerial at Busan in South Korea.[15]
[edit] Current News
In addition to articles used for references (see References), this section will list links to 5-10 recent high-quality, publicly-available current news articles relevant to Basel III. This section may be updated frequently as Basel III is currently under development and therefore is in the news.
Date
Source
Article Title / Link
CommentsQ1 2010
OECD Journal:
Financial Market Trends
Thinking Beyond Basel III: Necessary Solutions For Capital And Liquidity
Good paper on history of Basel I & II and an analysis of Basel IIIMay 19, 2010
Risk.net
Systemic risk regulators should direct policy not just give warnings, says HSBC's Haswell
Goodhart and Haswell were speaking at a seminar held on Basel III and banking regulation, hosted by the UK's National Institute of Economic and Social Research (NIESR) on May 18.May 21, 2010
Investorschronicle.co.uk
Can we bank on Basel?
Broad/balanced overview of potential impacts of Basel IIIMay 24, 2010
www.thelawyer.com
UK banks fend off mooted pre-election facelift
Politics & Bank Regulation in the U.K.May 24, 2010
Bloomberg
BusinessWeek
FDIC’s Bair Says Europe Should Make Banks Hold More Capital
Bair said regulators around the world need to work together on the next round of capital standards for banks ... the next round of international standards, known as Basel III, which Bair said must meet “very aggressive” goals.May 27, 2010
Reuters
FACTBOX-G20 progress on financial regulation
Finance ministers from the G20 group of industrial and emerging countries meet in Busan, Korea, on June 4–5 to review pledges made in 2009 to strengthen regulation and learn lessons from the financial crisis.May 27, 2010
The Economist
The banks battle back
A behind-the-scenes brawl over new capital and liquidity rules
"The most important bit of reform is the international set of rules known as “Basel 3”, which will govern the capital and liquidity buffers banks carry. It is here that the most vicious and least public skirmish between banks and their regulators is taking place."May 28, 2010
Reuters
G20 ministers face more wrangling over bank tax
"Bank capital is like a train in a dark tunnel -- nobody can see it and when it does come out, it does not capture the public's imagination,"May 30, 2010
The Financial Times
Bankers’ ‘doomsday scenarios’ under fire
"Banks are exaggerating the economic effects of the regulations they are likely to face in the coming years, the economist running an international impact study has told the Financial Times."May 2010
www.globalriskregulator.com
Regulators to stand their ground over Basel III
Overview of Basel III. Quote summarizing elements of draft Basel III inserted at top of article.June 3, 2010
Reuters
Danish wisemen play down Basel III mortgage mkt risks
"The Danish mortgage market -- the third-biggest by value after the U.S. and German -- accounts for two thirds of the total Danish bond market. ... Economists on Thursday played down the risk to Denmark's large mortgage bond market, and thereby the economy, from proposed Basel III banking reforms."June 5, 2010
The India Times
G20 scraps plans for universal bank tax
Busan Recap
* "There is no agreement to proceed with an ex ante bank tax," said Canadian Finance Minister, Jim Flaherty.
* Several finance ministers signalled that a lengthy phase-in for Basel III beyond 2012 was now inevitable.June 6, 2010
The Daily Mail (UK)
Osborne set to press ahead with bank tax
"Chancellor George Osborne is planning to slap a levy on lenders after the group of the world’s twenty biggest economies declared that banks should be forced to repay bailout costs in full."[edit] See also
- Basel I
- Basel II
- Capital adequacy
- Financial crisis of 2007–2010
- G-20
- Operational risk
- Operational risk management
- Risk
[edit] References
- ^ From Basel II to Basel III By: Schulte-Herbrüggen, Walter; Becker, Gernot. Risk, Jan2005, Vol. 18 Issue 1, p58-61, 4p
- ^ The Basel III Proposals' Flaws... By: Cassidy, Gerard S.. American Banker, 5/13/2010, Vol. 175 Issue 74, p8-8, 1/2p,
- ^ The Lesson of Basel's Bean Counters by George Melloan, The Wall Street Journal, April 24, 2010
- ^ "Stock markets rise on new Basel III rules, China economy - Telegraph". 2010-09-13. http://www.telegraph.co.uk/finance/markets/8000128/Stock-markets-rise-on-new-Basel-III-rules-China-economy.html. Retrieved 2010-09-13.
- ^ http://www.webcitation.org/5q1G9aLQI Regulators to stand their ground over Basel III, Global Risk Regulator May 2010 Volume:8 Issue:5
- ^ http://www.basel-iii-association.com The Basel iii Compliance Professionals Association (BiiiCPA)
- ^ http://www.bis.org/publ/bcbs164.htm BCBS Consultative Proposal: "Strengthening the resilience of the banking sector"
- ^ a b Press Release Consultative proposals to strengthen the resilience of the banking sector announced by the Basel Committee available at the BIS site.
- ^ "Strengthening the resilience of the banking sector" (pdf). BCBS. December 2009. p. 15. http://www.bis.org/publ/bcbs164.pdf. "Tier 3 will be abolished to ensure that market risks are met with the same quality of capital as credit and operational risks."
- ^ "Basel II Comprehensive version part 2: The First Pillar – Minimum Capital Requirements". November 2005. p. 86. http://www.bis.org/publ/bcbs128b.pdf.
- ^ "European banks: Basel III - The Whimper | The Economist". 2010-09-13. http://www.economist.com/node/17027188. Retrieved 2010-09-13.
- ^ ELAINE KURTENBACH. "G20 finance chiefs mull growth agenda, finance". AP. . URL:http://www.google.com/hostednews/ap/article/ALeqM5hsRR4QqJ1OtEAwI6OXKCcTJ_PXCQD9G4GIMG1. Accessed: 2010-06-04. (Archived by WebCite at http://www.webcitation.org/5qEknsYHS)
- ^ Simon Kennedy and Mark Deen. "G-20 Clash Over Recovery Risks ’Sub-Potential’ Growth (Update1)". Bloomberg Businessweek. . URL:http://www.businessweek.com/news/2010-06-06/g-20-clash-over-recovery-risks-sub-potential-growth-update1-.html. Accessed: 2010-06-08. (Archived by WebCite at http://www.webcitation.org/5qKrxL1px)
- ^ Source: Korea Ministry of Strategy & Finance. "Results of Busan G20 meeting". Korea.net. . URL:http://www.korea.net/news.do?mode=detail&guid=47376. Accessed: 2010-06-08. (Archived by WebCite at http://www.webcitation.org/5qKsZcxXk)
- ^ Press Trust Of India. "G-20 accepted our opposition to bank tax: Pranab". Hindustan Times. . URL:http://www.hindustantimes.com/G-20-accepted-our-opposition-to-bank-tax-Pranab/Article1-554441.aspx. Accessed: 2010-06-08. (Archived by WebCite at http://www.webcitation.org/5qLCGDLdM)
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