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 introduction of the leverage ratio a 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 binding Pillar 1 (minimum capital requirement) treatment on 1 January 2018.
The Liquidity Coverage Ratio (LCR) (revised in January 2014) aims to promote short-term resilience of a bank’s liquidity risk profile by requiring banks to have sufficient high quality liquid assets to withstand a 30-day stressed funding scenario that is specified by supervisors. The liquidity framework includes a common set of monitoring metrics to assist supervisors in identifying and analysing liquidity risk trends at both the bank and system-wide level.
The Net Stable Funding Ratio (NSFR) complements the LCR and is designed to promote prudent funding structures by banks. It is a longer-term structural ratio designed to address liquidity mismatches. The NSFR covers the entire balance sheet and provides incentives for banks to use prevent over-reliance on short-term wholesale funding. The NSFR was finalised on 31 October 2014 by the BCBS.
Basel III also introduces a common set of monitoring tools.
The Basel III rules are implemented in the European Union by means of Capital Requirements Directive 2013/36/EU (CRD IV) and Regulation 575/2013/EU (CRR)
- Capital Requirements Directive (CRD IV) 2013/36/EU
- Capital Requirements Regulation (CRR) 575/2013/EU
14 January 2016 - The Basel Committee on Banking Supervision has published the new market risk framework for minimum capital requirements following endorsement by its oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS). The document sets out revised standards and includes:
- a revised boundary between the trading book and the banking book;
- a revised internal model approach for market risk;
- an overhaul of the standardised approach for market risk;
- a shift from value-at-risk to an expected shortfall measure of risk under stress; and ;
- measures to incorporate the risk of market illiquidity.
The new market risk framework will come into effect on 1 January 2019. Over the implementation period, the Committee will continue to monitor the capital impact of the revised standard in order to ensure consistency in the overall calibration of the Basel capital framework.
The GHOS also agreed that the Committee would complete its work to address the problem of excessive variability in risk-weighted assets by the end of 2016.
21 December 2015 - The Basel Committee on Banking Supervision has published for consultation guidance for the regulation and supervision of institutions relevant to financial inclusion. This consultative document builds on past work by the Basel Committee to elaborate additional guidance in the application of the Committee's Core principles for effective banking supervision to the supervision of financial institutions engaged in serving the financially unserved and underserved. This includes a report of the Range of practice in the regulation and supervision of institutions relevant to financial inclusion, and expands on Microfinance activities and the Core Principles for Effective Banking Supervision. The Committee proposes additional guidance on 19 of the 29 Core Principles for effective banking supervision.
Deadline for responses is 31 March 2016.
- Basel Committee Press release
- Proposed Guidance on the application of the Core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion
18 December 2015 - The Basel Committee on Banking Supervision has published supervisory guidance on credit risk and accounting for unexpected credit losses. The guidance replaces the Basel Committee’s previous 2006 guidance, ‘Sound credit risk assessment and valuation for loans’.
The guidance sets out supervisory expectations for banks relating to sound credit risk practices associated with implementing and applying an expected credit loss (ECL) accounting framework and comprises 11 principles, which are divided into ‘supervisory guidance for credit risk and accounting for expected credit losses’ (Principles 1 to 8) and ‘supervisory evaluation of credit risk practices, accounting for expected losses and capital adequacy’ (Principles 9 to 11).
17 December 2015 - The Basel Committee on Banking Supervision has published a consultative document on the identification and measurement of ‘step-in risk’. Step-in risk refers to the risk that a bank will provide financial support to an entity beyond, or in the absence of, its contractual obligations should the entity experience financial stress. he proposals would form the basis of an approach for identifying, assessing and addressing step-in risk potentially embedded in banks' relationships with shadow banking entities (although without limiting the proposals to specific entities). The Committee has yet to decide how the proposals should be incorporated into the regulatory framework, including whether a Pillar 1 or Pillar 2 approach is most appropriate.
The consultation period closes on 17 March 2016.
- Basel Committee Press release
- Consultative Document - Identification and measurement of step-in risk
16 December 2015 - The Basel Committee on Banking Supervision has issued a progress report on banks' adoption of the Committee's Principles for effective risk data aggregation and risk reporting. Published in 2013, the Principles aim to strengthen risk data aggregation and risk reporting at banks to improve their risk management practices and decision-making processes. Firms designated as global systemically important banks (G-SIBs) are required to implement the Principles in full by 2016. The report reviews banks' progress in 2015, outlining the measures G-SIBs have taken to improve their overall preparedness to comply with the Principles, as well as the challenges they face. G-SIBs are increasingly aware of the importance of this topic and have moved towards implementing the Principles.The Principles apply initially to all global systemically important banks. In addition, the Committee recommends that national supervisors apply the Principles to institutions identified as domestic systemically important banks three years after their designation.
- Basel Committee Press release
- Progress in adopting the Principles for effective risk data aggregation and risk reporting
10 December 2015 - The Basel Committee has published a second consultation document on its proposed revisions to the standardised approach for credit risk. The revised proposals form part of the Committee's broader review of the capital framework to balance simplicity and risk sensitivity, and to promote comparability by reducing variability in risk-weighted assets across banks and jurisdictions.The second consultation differs in a number of respects to initial proposals published in December 2014. The Committee has decided to reintroduce the use of ratings in a non-mechanistic manner for exposures to banks and corporates, and has also proposed alternative approaches for jurisdictions that do not allow the use of external ratings for regulatory purposes.
In addition, revisions have been made to the proposals for the risk weighting of real estate loans, with the Basel Committee proposing the assessment of a borrower’s ability to pay as a key underwriting criterion instead of using a debt service coverage ratio as a risk drive, as initially proposed.
The consultation period closes on 11 March 2016.
- Basel Committee Press release
- Second consultative document - Standards - Revisions to the Standardised Approach for credit risk
18 November 2015 - The Basel Committee on Banking Supervision has published the results of its interim impact analysis of its fundamental review of the trading book. The report assesses the impact of proposed revisions to the market risk framework set out in two consultative documents published in October 2013 and December 2014. Further revisions to the market risk rules have since been made, and the Committee expects to finalise the standard around year-end.
The analysis was based on a sample of 44 banks that provided usable data for the study and assumed that the proposed market risk framework was fully in force as of 31 December 2014. It shows that the change in market risk capital charges would produce a 4.7% increase in the overall Basel III minimum capital requirement. When the bank with the largest value of market risk-weighted assets is excluded from the sample, the change in total market risk capital charges leads to a 2.3% increase in overall Basel III minimum regulatory capital.
13 November 2015 - The Basel Committee on Banking Supervision has published two reports for the G20 Leaders at their Summit in Antalya on 15-16 November.
The first report on Finalising post-crisis reforms: an update reviews the Basel Committee's work since the global financial crisis to strengthen the international regulatory framework for banks. The report also focuses on the Committee's substantial progress towards finalising its post-crisis reforms, which includes reducing excessive variability in risk-weighted assets. As a result, the Committee is well on track to finalise the remaining elements of the regulatory reform agenda for global banks.
The second report is an update on the implementation of Basel III standards since the 2014 progress report to the G20 Leaders. It notes that implementation has generally been both timely and consistent with the globally agreed standards. All Committee member jurisdictions have implemented the Basel III risk-based capital regulations. Final rules on the Liquidity Coverage Ratio are in force in almost all member jurisdictions. Efforts are continuing to adopt the Basel III standards for the leverage ratio and the Net Stable Funding Ratio as well as for systemically important banks.
10 November 2015 - The Basel Committee on Banking Supervision released a consultative document on Capital treatment for "simple, transparent and comparable" (STC) securitisations. This proposal builds on the revised capital standards issued by the Committee in December 2014.
In July 2015 the Basel Committee and the International Organization of Securities Commissions published Criteria for identifying simple, transparent and comparable securitisations . STC criteria are designed to mitigate securitisation risks, including uncertainty related to asset risk, structural risk, governance and operational risk. Transactions that comply with these criteria should therefore have lower structural and model risk. The Committee proposes to supplement these STC criteria with additional criteria for the specific purpose of differentiating the capital treatment of STC from that of other securitisation transactions. Compliance with the expanded set of STC criteria provides additional confidence in the performance of the transactions. The Committee is proposing to reduce minimum capital requirements for such STC securitisations by reducing the risk weight floor for senior exposures, and by rescaling risk weights for other exposures. A range for the potential reduction in capital charges is suggested. The Committee will make a final decision on calibration in 2016 based on further analysis and assessment of the quantitative impact of the proposals.
Responses are due by 5 February 2016.
- BCBS: Consultative Document - Capital treatment for “simple, transparent and comparable” securitisation
9 November 2015 - The Basel Committee on Banking Supervision (BCBS) has published a consultative document which sets out its proposed deduction treatment for banks’ investments in Total Loss-Absorbing Capacity (TLAC). It is applicable to all banks subject to the Basel Committee's standards, including both G-SIBs and non-G-SIBs.
The proposed treatment is for banks to deduct from their regulatory capital their holdings of TLAC instruments, subject to thresholds. It also addresses the treatment of holdings of instruments that rank pari passu to TLAC in the creditor hierarchy. The objective of the proposed treatment is to support the TLAC regime by reducing the risk of contagion if a G-SIB should enter resolution.
The TLAC regime also necessitates changes to Basel III to specify how G-SIBs must take account of the TLAC requirement when calculating their regulatory capital buffers. In particular, any Common Equity Tier 1 that is being used to meet the TLAC requirement cannot be used to meet the regulatory capital buffers. The proposed changes to Basel III to give effect to this requirement are set out in the consultative document.
Responses are due by 12 February 2016.
9 November 2015 - The Financial Stability Board (FSB) has issued the final Total Loss-Absorbing Capacity (TLAC) standard for global systemically important banks (G-SIBs). The TLAC standard has been designed so that failing G-SIBs will have sufficient loss-absorbing and recapitalisation capacity available in resolution for authorities to implement an orderly resolution that minimises impacts on financial stability, maintains the continuity of critical functions, and avoids exposing public funds to loss.
The final standard reflects changes made following the public consultation and comprehensive impact assessment studies. The results of the impact assessment studies are published alongside the final TLAC standard, and the BCBS has separately released a consultative document on TLAC holdings.
G-SIBs will be required to meet the TLAC requirement alongside the minimum regulatory requirements set out in the Basel III framework. Specifically, they will be required to meet a Minimum TLAC requirement of at least 16% of the resolution group’s risk-weighted assets (TLAC RWA Minimum) as from 1 January 2019 and at least 18% as from 1 January 2022. Minimum TLAC must also be at least 6% of the Basel III leverage ratio denominator (TLAC Leverage Ratio Exposure (LRE) Minimum) as from 1 January 2019, and at least 6.75% as from 1 January 2022.
- FSB: Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution - Total Loss-absorbing Capacity (TLAC) Term Sheet
- FSB: Overview report summarising the findings of the TLAC impact assessment studies
- FSB: Press release
9 November 2015 - The Financial Stability Board (FSB) has published its first annual report to the G20 on the Implementation and effects of the G20 financial regulatory reforms. The report describes progress by FSB member jurisdictions in implementing the financial reforms agreed in the wake of the global financial crisis. The report notes that the Basel III reforms to bank capital and liquidity are ahead of schedule.
19 October 2015 - The Basel Committee has published FAQs on the Basel III countercyclical capital buffer. The countercyclical capital buffer aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate. The countercyclical capital buffer regime will be phased-in in parallel with the capital conservation buffer between 1 January 2016 and end-2018, becoming fully effective on 1 January 2019.
The FAQs are set out under six headings:
- national buffer decisions;
- jurisdictional reciprocity;
- identification and calculation of geographic credit exposures;
- calculation of the final bank-specific buffer add-on;
- public disclosure requirements; and
- timing and frequency of changes in the buffer rates.
The FAQs contain an Annex to assist in identifying the geographic location of exposures.
15 October 2015 - The Basel Committee has published the Ninth progress report on adoption of the Basel regulatory framework. The report focuses on the status of domestic rule-making processes to ensure that the Basel standards are transformed into national law or regulation according to the internationally agreed timeframes. The report is based on information provided by individual members as part of the Committee's Regulatory Consistency Assessment Programme (RCAP) and includes the status of adoption of the risk-based capital standards, the liquidity standards (LCR and NSFR), the framework for systemically important banks, the leverage ratio, the revised Pillar 3 disclosure requirements and the large exposure framework.
10 October 2015 - Stefan Ingves, Basel Committee Chairman has spoken on an update of the work of the Basel Committee and also its future work agenda. Mr. Ingves stated that the policy agenda during the next 12 to 18 months would cover the following themes:
- finalising the post-crisis regulatory reforms;
- revising the risk-based capital framework - striking a balance between simplicity, comparability and risk sensitivity; and reducing the excessive variability in risk-weighted assets (RWAs) under internal models; and
- monitoring the impact of the agreed reforms ensuring that the agreed standards we have agreed are implemented consistently, and strengthen supervision.
He added that additional time may be needed to refine existing proposals in order to take into account comments received during the public consultation process and the outcomes of quantitative impact studies.
- Speech by Stefan Ingves at the IIF Annual Membership Meeting
- all large internationally active banks meet the Basel III risk-based capital minimum requirements as well as the Common Equity Tier 1 (CET1) target level of 7.0%;
- there is no capital shortfall for Group 2 banks included in the sample for the CET1 minimum of 4.5%;
- the average CET1 capital ratios under the Basel III framework across the same sample of banks were 11.1% for Group 1 banks and 12.3% for Group 2 banks.
- The weighted average LCR for the Group 1 bank sample was 125% on 30 June 2014 and 144% for Group 2 banks. For banks in the sample, 85% reported an LCR that met or exceeded 100%, while 98% reported an LCR at or above 60%; and
- the weighted Net Stable Funding Ratio (NSFR) for the Group 1 bank sample was 111%, with 114% for Group 2 banks. 75% of the Group 1 banks and 85% of the Group 2 banks had a ratio that met or exceeded 100%. 92% of the Group 1 banks and 93% of the Group 2 banks reported an NSFR at or above 90%.
- EBA: Press release
- EBA: CRD IV-CRR/Basel III monitoring exercise report - Results based on data as of 31 December 2014
- criteria for the recognition of cash variation margin associated with derivative exposures;
- centrally cleared client derivative exposures;
- exposures and netting of securities financing transactions (SFTs);
- the treatment of netting of SFTs and derivatives under a cross-product netting agreement;
- the exposure measure under the additional treatment for credit derivatives; and
- the treatment of long settlement transactions and failed trades.
- Frequently asked questions on the Basel III leverage ratio framework
- ensure that all important drivers of credit valuation adjustment (CVA) risk and CVA hedges are covered in the Basel regulatory capital standard;
- align the capital standard with the fair value measurement of CVA employed under various accounting regimes; and
- ensure consistency with the proposed revisions to the market risk framework under the Basel Committee's Fundamental review of the trading book.
- rebalancing the disclosures required quarterly, semi-annually and annually;
- streamlining the requirements related to disclosure of credit risk exposures and credit risk mitigation techniques; and
- clarifying and streamlining the disclosure requirements for securitisation exposures.
- BCBS: Revised Pillar 3 disclosure requirements 28 January 2015
- reduced reliance on external credit ratings;
- enhanced granularity and risk sensitivity;
- updated risk weight calibrations, which for purposes of this consultation are indicative risk weights and will be further informed based on the results of a quantitative impact study;
- more comparability with the internal ratings-based (IRB) approach with respect to the definition and treatment of similar exposures; and;
- better clarity on the application of the standards.
- Bank exposures: would no longer be risk-weighted by reference to the bank's external credit rating or that of its sovereign of incorporation, would instead be based on two risk drivers: the bank's capital adequacy and its asset quality.
- Corporate exposures: would no longer be risk-weighted by reference to the borrowing firm's external credit rating, but would instead be based on the firm's revenue and leverage. Risk sensitivity and comparability with the IRB approach would be increased by introducing a specific treatment for specialised lending.
- Retail category: would be enhanced by tightening the criteria to qualify for a preferential risk weight, and by introducing an alternative treatment for exposures that do not meet the criteria
16 September 2015 - The Basel Committee has updated its responses to frequently asked questions regarding Basel III monitoring.
15 September 2015 - The Basel Committee has published the results of its latest Basel III monitoring exercise. The results of the exercise assumed the final Basel III package is fully in force, based on data as of 31 December 2014 and do not take account of the transitional arrangements set out in the Basel III framework, such as the gradual phase-in of deductions from regulatory capital. The results indicate that:
The report also indicated that:
All data, including for previous reporting dates, reflect revisions received up to 28 August 2015 with the exception of Table A.20, which was revised on 21 September 2015.
15 September 2015 - The EBA has published its eighth report of the Basel III monitoring exercise on the European banking system. This exercise, run in parallel with the one conducted by the Basel Committee on Banking Supervision (BCBS) at a global level, allows the gathering of aggregate results on capital ratios and leverage ratio (LR), as well as on liquidity ratios - liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) - for banks in the European Union (EU).
The exercise monitors the impact of the transposition of the Basel III requirements on EU banks. In particular, it monitors the impact of fully-implemented Capital Requirements Directive and Regulation (CRD IV/CRR) on capital and risk-weighted assets (RWA), and the impact of fully implementing the Basel III framework on leverage ratio (LR) and liquidity ratios (LCR and NSFR) using data as of December 2014 under a static balance sheet assumption.
10 September 2015 - The Building Societies Association BSA has responded to the BCBS June consultation on interest rate in the banking book. The BSA’s members, the 44 UK building societies, all experience interest rate risk in the banking book (IRRBB,) though none is a “Basel bank” - i.e. a large, internationally-active bank. The BSA's concern is that the finalised Basel proposals, when rolled out to domestic entities, will prove over-complex and unsuitable for, in particular, smaller members, and as a result will have anti-competitive effect.
7 September 2015 - The Basel Committee has published updated versions of its Basel III monitoring workbook and FAQs.
19 August 2015 - The Basel Committee on Banking Supervision (BCBS) has received a number of interpretation questions related to the Standardised Approach for measuring counterparty credit risk (SA-CCR), as published in March 2014 (and revised in April 2014). The SA-CCR will replace both current non-internal model approaches, the Current Exposure Method (CEM) and the Standardised Method (SM). To help ensure consistent global implementation of its standards, the Committee has agreed to periodically review frequently asked questions and publish answers along with any technical elaboration of the standards and interpretative guidance that may be necessary. This document presents a set of frequently asked questions that relate to the SA-CCR.
31 July 2015 - The BCBS has published an updated set of FAQs on Basel III monitoring. This document provides answers to technical and interpretive questions raised by supervisors and banks during the Committee’s Basel III monitoring. Questions which have been revised (other than updated cell references) are shaded red.
7 July 2015 - The BCBS has published a document setting out the first and second set of FAQs that relate to the Basel III leverage ratio framework. The questions and answers are grouped according to different relevant areas:
1 July 2015 - The Basel Committee on Banking Supervision is reviewing the Credit Valuation Adjustment (CVA) risk framework. The objectives of the review are to:
Responses to the consultation are due by 1 October 2015.
22 June 2015 - The Basel Committee on Banking Supervision issued disclosure requirements for the Net Stable Funding Ratio (NSFR), following the publication of the NSFR standard in October 2014. The NFSR disclosure template includes the major categories of sources and uses of stable funding. Banks will be required to comply with the disclosure requirements from the date of the first reporting period after 1 January 2018.
15 June 2015 - The Basel Committee on Banking Supervision published reports assessing the implementation of the Basel risk-based capital framework and the Liquidity Coverage Ratio (LCR) for India and South Africa. These form part of a series of reports on Basel Committee members' implementation of Basel standards under the Committee's Regulatory Consistency Assessment Programme (RCAP).
8 June 2015 - The Basel Committee on Banking Supervision issued a consultative document on the risk management, capital treatment and supervision of interest rate risk in the banking book (IRRBB). This consultative document expands upon and is intended to ultimately replace the Basel Committee's 2004 Principles for the management and supervision of interest rate risk.
27 April 2015 - The Basel Committee has published its eighth progress report on the adoption of the Basel regulatory framework. The update provides a high-level overview of Basel Committee members' progress in adopting Basel II, Basel 2.5 and Basel III standards as of the end of March. The report focuses on the status of domestic rule-making processes to ensure that the Basel standards are transformed into national law or regulation according to the internationally agreed timeframes. The report includes the status of adoption of the risk-based capital standards, the standards for global and domestic systemically important banks (SIBs), the Basel III leverage ratio and the liquidity coverage ratio (LCR).
2 April 2015 - The Basel Committee published updated FAQs on Basel III monitoring. Questions which have been added since the previous version of the FAQs are shaded yellow; questions which have been revised (other than updated cell references) are shaded red.
3 March 2015 - The Basel Committee has published the results of its latest Basel III monitoring exercise. A total of 224 banks participated in the current study, comprising 98 large internationally active banks "Group 1 banks", defined as internationally active banks that have Tier 1 capital of more than €3 billion) and 126 Group 2 banks (ie representative of all other banks). The results of the monitoring exercise assume that the final Basel III package is fully in force, based on data as of 30 June 2014.
The weighted average LCR for the Group 1 bank sample was 121% on 30 June 2014, up from 119% six months earlier. For Group 2 banks, the weighted average LCR was 140%, up from 132% six months earlier. For banks in the sample, 80% reported an LCR that met or exceeded 100%, while 96% reported an LCR at or above 60%.
The weighted average NSFR for the Group 1 bank sample was 110% while for Group 2 banks the average NSFR was 114%. As of June 2014, 80% of the 212 banks in the NSFR sample reported a ratio that met or exceeded 100%, while 92% of the banks reported an NSFR at or above 90%. (Based on analysis of data collected under the consultative document issued in January 2014 prior to the revised standard of October 2014.)
28 January 2015 - The Basel Committee on Banking Supervision (BCBS) has issued the final standard for the revised Pillar 3 disclosure requirements. The revised disclosure requirements will enable market participants to compare banks' disclosures of risk-weighted assets. The revisions focus on improving the transparency of the internal model-based approaches that banks use to calculate minimum regulatory capital requirements.
The revised standard published retains the structure of the Committee's June 2014 consultative paper. Compared with the consultative version, the key changes involve:
The revised requirements will take effect from end-2016. They supersede the existing Pillar 3 disclosure requirements first issued as part of the Basel II framework in 2004 and the Basel 2.5 revisions and enhancements introduced in 2009.
22 December 2014 - the Basel Committee on Banking Supervision (BCBS) has released a consultative document on Revisions to the Standardised Approach for credit risk. The proposed revisions seek to strengthen the existing regulatory capital standard in several ways. These include:
The Committee is considering replacing references to external ratings, as used in the current standardised approach, with a limited number of risk drivers that provide a meaningful differentiation for risk however the Committee acknowledges that such proposals are still at an early stage of development. The key aspects of the proposals are: