The Banking Committee on Banking Supervision (BCBS) introduced a number of fundamental reforms to the international regulatory framework to strengthen the regulation, supervision and risk management of the banking sector. The reforms known as “Basel III” introduce more onerous capital requirements for credit institutions and amend the existing standards of Basel I and II.
The broad outline of the Basel III framework was agreed in 2009 by the Basel Committee's oversight body and was further developed throughout the course of 2010. In December 2010 the Basel Committee issued two publications containing a near final version of its new rules and followed in January 2011 with the final elements of reform to the redefinition of regulatory capital. The three publications, collectively known as Basel III, change significantly the capital, liquidity and leverage rules for international banks.
The Liquidity Coverage Ratio (LCR) - an essential component of the Basel III reforms - has since been revised, most recently in January 2014. This simple, non-risk based "backstop" measure will restrict the build-up of excessive leverage in the banking sector. Basel III's leverage ratio is defined as the "capital measure" (the numerator) divided by the "exposure measure" (the denominator) and is expressed as a percentage. The capital measure is currently defined as Tier 1 capital and the minimum leverage ratio is 3%.The final calibration, and any further adjustments to the definition, will be completed by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment on 1 January 2018.
The the Net Stable Funding Ratio (NSFR) complements the LCR and is designed to promote prudent funding structures by banks, with a particular focus on preventing over-reliance on short-term wholesale funding.
The Basel III rules will be implemented in the European Union by means of amendment to the Capital Requirements Directive (Directives 2006/48/EC and 2006/49/EC). The new European legislation consists of a Regulation and a Directive (CRD IV) the bulk of which apply from 1 January 2014.
- Capital Requirements Directive (CRD IV) 2013/36/EU
- Capital Requirements Regulation (CRR) 575/2013/EU
4 February 2014 - the Basel Committee has published updated documents for the collection of December 2013 data. This includes:
- Basel III monitoring workbook (version 2.7.1)
- Instructions for Basel III monitoring
- Frequently asked questions on Basel III monitoring
12 January 2014 - the Basel Committee issued the full text of Basel III's leverage ratio framework and disclosure requirements following endorsement on 12 January 2014 by its governing body, the Group of Central Bank Governors and Heads of Supervision (GHOS). The document sets out the Basel III leverage ratio framework, along with the public disclosure requirements applicable as from 1 January 2015. These requirements supersede those in Section V of Basel III: A global regulatory framework for more resilient banks and banking systems.
The final calibration, and any further adjustments to the definition, will be completed by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment on 1 January 2018.
The Basel Committee also issued proposed revisions to the Basel framework's Net Stable Funding Ratio (NSFR) in the form of a consultative document. The revisions to the NSFR developed and agreed by the Basel Committee in December 2010 include reducing cliff effects within the measurement of funding stability, improving the alignment of the NSFR with the Liquidity Coverage Ratio (LCR), and altering the calibration of the NSFR to focus greater attention on short term, potential volatile funding sources. Closing date for responses is 11 April 2014. The Committee intends that the NSFR, including any revisions, will become a minimum standard by 1 January 2018 in line with other measures.
12 January 2014 - Following agreement on the final form of the Basel III LCR last year, the Basel Committee has now completed the required additional work on liquidity disclosure, the use of market-based indicators of liquidity within the regulatory framework, and the interaction between the LCR and the provision of central bank facilities. The package of material covers:
- final requirements for banks' LCR-related disclosures;
- Guidance for Supervisors on Market-Based Indicators of Liquidity; and
- The Liquidity Coverage Ratio and restricted-use committed liquidity facilities;
19 December - The Basel Committee on Banking Supervision has today issued a second consultative paper on revisions to the Basel securitisation framework. The paper sets out detailed proposals, including draft standards text, for a comprehensive revision of the treatment of securitisation within the risk-based capital framework. This follows on from the first consultation issued a year ago and revises in particular the hierarchy of approaches, and the calibration of capital requirement.
17 December - The Basel Committee on Banking Supervision has published its second report on the regulatory consistency of risk-weighted assets (RWAs) for market risk in the trading book. This second Phase study is a part of its wider Regulatory Consistency Assessment Programme (RCAP), which is intended to ensure consistent implementation of the Basel III framework.
The report contains the results of Phase 2 of the analysis of banks’ trading book risk weighted assets (RWAs). The results of Phase 1 were published in January 2013.
The Phase 2 analysis confirms that differences in modelling choices are the most significant drivers of the amount of variation in market risk RWAs (mRWA) across banks. Thus, this second analysis supports the types of policy recommendations that were identified in Phase 1 to reduce the level of variability in mRWA: (i) improving public disclosure and the collection of regulatory data to aid the understanding of mRWAs; (ii) narrowing the range of modelling choices for banks; and (iii) further harmonising of supervisory practices with regard to model approvals.
13 December - The Basel Committee on Banking Supervision published a final standard revising the prudential treatment of banks' investments in the equity of funds within the Basel risk-based capital framework.
The revised framework includes three approaches for setting capital requirements for banks' equity investments in funds. This hierarchy of approaches provides varying degrees of risk sensitivity and has been adopted to incentivise due diligence by banks and transparent reporting by the funds in which they invest.
The Committee's objective in revising the current treatment of banks' equity investments in funds was to develop an appropriately risk-sensitive and consistently applied risk-based capital regime. The revised standard improves upon the existing regime by:
- incorporating a fund's leverage when determining the capital requirements for banks' investments;
- clarifying the application of the Basel framework's capital adequacy standards for credit risk; and
- more appropriately reflecting the risk of a fund's underlying investments, including a higher capital requirement for situations in which a fund's holdings are not sufficiently transparent.
The revised policy framework is scheduled to take effect from 1 January 2017 and will apply to banks' equity investments in all funds (eg hedge funds, managed funds and investment funds) that are not held for trading purposes.
31 October 2013: The Basel Committee on Banking Supervision issued a second consultative paper on the fundamental review of capital requirements for the trading book, comprising a detailed set of proposals for a comprehensive revision of the market risk framework.
The Committee has focused on the following key areas as part of its review:
- The trading book/banking book boundary
- Treatment of credit
- Approach to risk measurement
- A comprehensive incorporation of the risk of market illiquidity
- Treatment of hedging and diversification
- Relationship between internal models-based and standardised approaches
- Revised models-based approach, and
- Revised standardised approach
Responses are due by 31 January 2014.
15 October - The Basel Committee on Banking Supervision (BCBS) published an updated methodology for its jurisdiction-specific Regulatory Consistency Assessment Programme (RCAP). The document presents an overall framework for assessing how consistently different jurisdictions are implementing the Basel standards and it provides guidance on the approaches and methodologies used under the RCAP.
9 October - The BCBS published an updated Progress report on implementation of the Basel regulatory framework providing a high-level view of Basel Committee members' progress in adopting Basel II, Basel 2.5 and Basel III, as of end September 2013.
24 September - The Basel Committee on Banking Supervision (BCBS) published the latest Basel III Monitoring Report which sets out the results of the Basel Committee's Basel III monitoring exercise. A total of 223 banks participated in the current study, comprising 101 large internationally active banks ("Group 1 banks", defined as internationally active banks that have Tier 1 capital of more than €3 billion) and 122 Group 2 banks (ie representative of all other banks).
2 August 2013 - the PRA published a consultation paper on changes to its rules required to implement the EU’s Capital Requirements Directive (CRD IV). The paper also sets out proposed supervisory statements, giving more information on the PRA’s approach to certain CRD IV provisions. Much of the framework contained in the CRR will apply directly which means A number of instruments under the heading "PRA Rulebook - CRR Firms" will make the proposed changes. The instruments will have the effect of disapplying almost all of GENPRU and BIPRU to CRD firms regulated by PRA. The PRA plans to grandfather over certain waivers currently in force under BIPRU and GENPRU rules which will no longer apply. Responses to the consultation are due by 2 October 2013.
30 July 2013 - the PRA updated its statements on bank and capital leverage ratios to include Barclays. The PRA has agreed to Barclays' capital plan aimed at meeting a leverage ratio of 3%, as set by PRA, by June 2014.
19 July 2013 - the Basel Committee on Banking Supervision (BCBS) published a consultation on Liquidity coverage ratio disclosure standards. The disclosure requirements set out in this document are to be applied to all internationally active banks on a consolidated basis. National supervisors may apply these disclosure requirements to other banks and to any subset of entities of internationally active banks to ensure greater consistency and a level playing field between domestic and cross-border banks.
The disclosure framework is set out in three sections:
- Section 1: sets out requirements on the scope of application, implementation date, and the frequency and location of reporting.
- Section 2: the disclosure requirements for the LCR.
- Section 3: provides additional guidance on other information that banks may choose to disclose in order to facilitate understanding and awareness of their internal liquidity risk measurement and management.
The Annexes set out an explanation of the LCR common disclosure template and its completion responses are due by 14 October 2013.
National authorities will give effect to the liquidity disclosure requirements set out in this standard by no later than 1 January 2015. Banks will be required to comply with these disclosure requirements from the date of publication of their first set of financial statements relating to balance sheet data on or after 1 January 2015.
19 July 2013 - the Financial Stability Institute published the results of its 2013 survey by disclosing the information received from 74 non-BCBS/non-EU jurisdictions. Survey results are presented in three parts:
- Section One sets out responses in relation to Basel II implementation, which includes the Pillar 2 and Pillar 3 requirements released by the BCBS in 2006;
- Section Two presents information relating to implementation of Basel 2.5; and
- Section Three details responses in regard to Basel III
17 July 2013 - the Basel Committee on Banking Supervision (BCBS) has launched a joint QIS on non-internal model method for measuring counterparty credit risk and its proposed revisions to the capital requirements for bank exposures to central counterparties. The Committee will also give due consideration to an assessment being performed by the OTC Derivatives Assessment Team regarding the collective impact of a group of regulatory reforms affecting OTC derivatives that have been developed - or that are under development - by global standard setting bodies. The assessment will evaluate whether these regulatory reforms create appropriate incentives for market participants to centrally clear OTC derivatives.
The Basel Committee on Banking Supervision updated its assessment methodology for global systemically important banks. The framework text sets out the Basel Committee's methodology for assessing and identifying global systemically important banks (G-SIBs). It also describes the additional loss absorbency requirements that will apply to G-SIBs, the phase-in arrangements for these requirements and the disclosures that banks above a certain size are required to make to enable the framework to operate on the basis of publicly available information.
The Basel Committee will finalise and publish, by November 2013, certain elements of the regime one year in advance of timeline set out in the November 2011 publication. These elements will enable banks to calculate their scores and higher loss absorbency requirements using end-2012 data, prior to the requirements coming into effect based on end-2013 data. The publication today does not change the date from which the higher loss absorbency requirements start to take effect, which remains 1 January 2016.
The US bank Regulators recently promulgated the final Basel III capital rules to establish a new comprehensive regulatory capital framework for US banking organisations. The Final Rule implements various capital-related provisions of the Dodd-Frank Act.
28 June 2013 - The Basel Committee on Banking Supervision (BCBS) published two consultative papers on the treatment of derivatives-related transactions under the capital adequacy framework.
The non-internal model method for capitalising counterparty credit risk exposures outlines a proposal to improve the methodology for assessing the counterparty credit risk associated with derivative transactions. The proposal would, when finalised, replace the capital framework's existing methods - the Current Exposure Method (CEM) and the Standardised Method. It improves on the risk sensitivity of the CEM by differentiating between margined and unmargined trades. The proposed non-internal model method updates supervisory factors to reflect the level of volatilities observed over the recent stress period and provides a more meaningful recognition of netting benefits. At the same time, the proposed method is suitable for a wide variety of derivatives transactions, reduces the scope for discretion by banks and avoids undue complexity.
Capital treatment of bank exposures to central counterparties sets out proposals for calculating regulatory capital for a bank's exposures to central counterparties (CCPs). This proposal has been developed in close cooperation with the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO). It is designed to replace an interim treatment for bank exposures to CCPs issued by the Basel Committee in July 2012.
Responses to both papers are due by 27 September 2013.
- BCBS: Consultative Document - The non-internal model method for capitalising counterparty credit risk exposures
- BCBS: Consultative Document - Capital treatment of bank exposures to central counterparties
26 June 2013 - The Basel Committee on Banking Supervision (BCBS) published its revised leverage ratio framework and disclosure requirements for consultation. revisions to the framework relate primarily to the denominator of the leverage ratio, the Exposure Measure. The major changes to the Exposure Measure include:
- specification of a broad scope of consolidation for the inclusion of exposures;
- clarification of the general treatment of derivatives and related collateral;
- enhanced treatment of written credit derivatives; and
- enhanced treatment of Securities Financing Transactions (SFTs) (eg repos).
Responses are due by 20 September 2013.
- BCBS: Consultative Document - Revised Basel III leverage ratio framework and disclosure requirements
12 April - the Basel Committee of Banking Supervision (BCBS) has published a new report on the progress towards a full, timely and consistent implementation of Basel III. The report is broader than previous progress reports to the G20 as it covers developments in other Basel III regulatory standards, and banks' progress in bolstering their capital bases.
- Report to G20 Finance Ministers and Central Bank Governors on monitoring implementation of Basel III regulatory reform
11 April - the BCBS has published monitoring tools for intraday liquidity management. The new reporting framework consists of seven quantitative tools to enable banking supervisors to monitor banks’ intraday liquidity risk and their ability to meet payment and settlement obligations on a timely basis. The reporting of the monitoring tools will commence on a monthly basis from 1 January 2015 to coincide with the implementation of the LCR reporting requirements. The framework includes:
- the detailed design of the monitoring tools for a bank's intraday liquidity risk;
- stress scenarios;
- key application issues; and
- the reporting regime.
The tools are for monitoring purposes only and only internationally active banks will be required to apply them. National supervisors will determine the extent to which the tools apply to non-internationally active banks within their jurisdictions.
The BCBS has published a document detailing the phase-in arrangements of the Basel III reforms.
a refreshed statement regarding the Capital Requirements Directive (CRD IV). The Regulator has said it is continuing to prepare for the implementation and expects to be able to begin collecting data under Common Reporting for the period beginning 1 January 2014, should the legislation have entered into force by this date. 15 February 2013 - the BCBS published finalised supervisory guidance for managing risk associated with the settlement of foreign exchange (FX) transactions. The guidance is organised into seven "guidelines" that address governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk, and capital for FX transactions and relates to FX transactions that consist of two settlement payment legs, including FX spot transactions, FX forwards, FX swaps, deliverable FX options and currency swaps involving exchange of principal. The BCBS will begin monitoring progress made on implementation from 2015.
- Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions
- revisions to the definition of high quality liquid assets (HQLA) and net cash outflows;
- a timetable for phase-in of the standard;
- a reaffirmation of the usability of the stock of liquid assets in periods of stress, including during the transition period;
- and an agreement for the Basel Committee to conduct further work on the interaction between the LCR and the provision of central bank facilities.
The LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.
- BIS: Press release
- Annex 1 - Summary description of the LCR
- Annex 2 - Complete set of agreed changes to the Liquidity Coverage Ratio
- Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools
28 December 2012 - the Basel Committee on Banking Supervision has updated the FAQs on Basel III's counterparty credit risk rules and the interim framework for bank exposures to central counterparties (CCPs). the publication sets out the fourth set of FAQs relating to Basel III counterparty credit risk requirements, including the default counterparty credit risk charge, the credit valuation adjustment capital charge and asset value correlations. It also includes FAQs relating to the interim framework for bank exposures to CCPs. FAQs added since the publication of the November version of this document are shaded yellow.
18 December 2012 - the Basel Committee on Banking Supervision has published a consultative paper on Revisions to the Basel Securitisation Framework. The Committee's objectives are to make capital requirements more prudent and risk-sensitive; to mitigate mechanistic reliance on external credit ratings; and to reduce current cliff effects in capital requirements. The key elements of the proposed revised framework include:
- Two possible hierarchies that would be significantly different from those employed in the existing securitisation framework.
- Proposed enhancements to the current ratings-based approaches and the supervisory formula approach that are part of the Basel II securitisation framework.
- The introduction of new approaches, such as a simplified supervisory formula approach and different applications of the concentration ratio-based approach that was included in the Basel 2.5 enhancements.
Comments on the proposals are due by 15 March 2013. In the coming months, the Committee will conduct a quantitative impact study (QIS) on the proposals.
13 and 14 December 2012 - the Basel Committee discussed progress on the implementation of the Basel III reforms. Although several jurisdictions have published their final set of regulations, a number, including the European Union and the USA have missed the 1 January 2013 target, The Basel Committee welcomes the fact that national supervisors have already instructed internationally active banks to strengthen their capital base.
21 November 2012 - the Basel Committee on Banking Supervision has updated the FAQs on counterparty risk and published a third set of questions. FAQs that have been added since the publication of the previous version of this document are shaded yellow.
9 November 2012 - the US federal banking agencies have issued a joint press release saying that American banks are not yet ready to start the process of complying with Basel III. The release stated that the agencies do not expect that any of the proposed rules would become effective on January 1, 2013. Although they have stated their intention to complete the process "as expeditiously as possible" an indication of timing has not been given.
6 November 2012 - Wayne Byres, Secretary General of the Basel Committee on Banking Supervision has given a speech entitled "Basel III: Necessary, but not sufficient" in which he sets out the reasons why Basel III is necessary and its key elements, then further outlines three reasons why it needs to be complemented by other measures to deliver the outcomes necessary.
31 October 2012 - the FSB has reported to G20 on progress of the key financial regulatory reforms. Although generally pleased at the progress made, it notes that although the transitional phase of Basel III commences on 1 January 2013, to date only 8 of the 27 member jurisdictions of the Basel Committee have issued the final set of Basel III related regulations. It is therefore very likely that only 6 of the 28 G-SIBs identified by the FSB will be subject to Basel III regulations from the globally agreed start date.
5 October - The Basel Committee on Banking Supervision (BCBS) published its its third Progress report on Basel III implementation. It is the Committee's last report ahead of the globally agreed start date of 1 January 2013 for implementing Basel III although the Committee will continue to provide updates through next year and beyond.
The Basel III implementation review comprises the following three levels:
- Level 1: ensuring the timely adoption of Basel III
- Level 2: regulatory consistency with Basel III
- Level 3: consistency of outcomes (initially focusing on risk-weighted assets)
This report provides the adoption status of Basel II, Basel 2.5 and Basel III for each Basel Committee member jurisdiction as of end September 2012.
3 September - The BCBS published an update to its FAQs on Basel III monitoring. The document provides answers to technical and interpretive questions raised by supervisors and banks during the Committee’s Basel III monitoring. It intends to facilitate the completion of the monitoring questionnaire and is not to be construed as an official interpretation of other documents published by the Committee.
June - The Basel Committee on Banking Supervision has published its final rules on the Pillar 3 disclosure requirements on the composition of banks' capital. The rules contain a common template that internationally-active banks across Basel member jurisdictions will be required to use to publish their capital positions. The dislosure template must be used from 1 January 2018.
12 April - The Basel Committee on Banking Supervision has published the aggregate results of the latest Basel III monitoring exercise, based on data as of 30 June 2011.
4 April - European finance ministers have agreed to an “exceptional” meeting on 2 May in order to discuss bank capital rules and come to some agreement according to Reuters. Britain is demanding flexibility to impose higher standards of capital, whilst countries such as Germany and France want to maintain a level playing field in the EU.
3 April - The Basel Committee on Banking Supervision has published its second progress report on Basel III implementation which tracks the implementation of Basel II, Basel 2.5 and Basel III by Committee member countries.
Following a number of interpretation questions relating to the Basel III regulatory framework, the Basel Committee on Banking Supervision has published a first set of FAQs on the counterparty credit risk rules, including the default counterparty credit risk charge, the credit valuation adjustment (CVA) capital charge and asset value correlations.