Understanding Basel III, What is different after August 2013

Implementation of Basel standards

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Ten years after the start of the crisis, the global economy is still recovering from its effects. These costs include much higher public debt, increased unemployment and substantial output losses. The increase in banks' capital and liquidity resources will help mitigate both the probability and impact of future banking crises. But a major faultline remained in the regulatory framework, namely, the way in which RWAs were calculated. At the peak of the global financial crisis, a wide range of stakeholders lost faith in banks' internally modelled risk-weighted capital ratios.

The complexity and opacity of internal models, the degree of discretion provided to banks in modelling risk parameters, and the use of national discretions all contributed to an excessive degree of RWA variation. A growing number of studies by authorities, academics and the private sector pointed to a worryingly large variation in banks' estimated RWAs BCBS a,b. The recently finalised Basel III reforms seek to restore the credibility of RWA calculations, and as a result the public's confidence in the banking system, by:.

Implementation of Basel standards

Collectively, the set of Basel III reforms addresses a number of shortcomings in the pre-crisis regulatory framework and provides a foundation for a resilient banking system that will help mitigate the impact of future banking crises and the build-up of systemic vulnerabilities. The post-crisis framework will also help the banking system support the real economy and contribute to economic growth. But are these reforms enough, or does more need to be done? The answer depends in part on the extent to which the reforms are implemented in a full, timely and consistent manner across jurisdictions.

To borrow the words of Goethe The Basel Committee's standards are global minimum standards. The Committee has no supranational authority, its decisions carry no legal force, and it cannot impose fines or sanctions.

Rather, once the Committee agrees on a standard, its member jurisdictions are responsible for converting this standard into law or regulation. So internationally agreed standards that are not properly implemented will ultimately have no impact in practice. It is therefore imperative that the Basel standards are effectively implemented by all the Committee's jurisdictions. To this end, the Committee's flagship Regulatory Consistency Assessment Programme RCAP monitors the timely adoption of Basel standards across jurisdictions and reviews whether standards are completely and consistently adopted by member jurisdictions.

They also highlight any deviations from the Basel framework. Two thirds of Basel Committee members have risk-weighted capital rules that are considered compliant or largely compliant with the Basel standards.

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But let me stress three points. First, in developing its standards, the Committee actively seeks the views of all stakeholders, public and private. For example, in finalising Basel III, the Committee consulted extensively with academics, analysts, banks, finance ministries, parliamentarians, market participants and trade associations as well as the general public.

These views were duly considered by the Committee in finalising its standards. So there are plenty of opportunities for all stakeholders to express their views before the standards are finalised. The focus then should be on full, timely and consistent implementation. So I take comfort that all of the Committee's members keep this aim in the forefront of their minds during the implementation phase.

Third, the move to national implementation should not be read as an invitation to reopen policy issues and debates at a domestic level. While the varying legislative and procedural arrangements used to implement Basel standards across the Committee's membership must be fully respected, it is concerning to see ongoing lobbying efforts by some banks and other stakeholders to undo or dilute aspects of the agreed Basel standards in some jurisdictions.

The unsound expedient of adopting standards that fall below the Basel Committee's minimums can only lead to regulatory fragmentation, and in a bad scenario a potential race to the bottom.

Assuming that the Basel reforms are properly implemented, will they reduce excessive RWA variability and restore the credibility of the risk-weighted capital framework? While I am confident that the Basel III reforms are an important step in that direction, the honest answer is that only time will tell.

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To that end, the Committee has initiated a rigorous evaluation of its post-crisis reforms, including those that relate to reducing excessive RWA variability. As the reforms will only start to be implemented from onwards, this exercise will take several years. But I believe that the Committee should remain open to the possibility of considering whether additional measures, or revisions to existing measures, are warranted to reduce excessive RWA variability.

In a similar vein, the Committee is also further evaluating the interactions and coherence of its post-crisis reforms. The findings will provide an important input for future deliberations by the Committee about the robustness and effectiveness of its post-crisis framework. I will not prejudge the outcomes of these evaluations, but let me make three observations.

First, the purpose of these evaluations is not to reopen already agreed standards. Second, the Basel Committee is a member-led and consensus-based body. Accordingly, the Basel III reforms are a compromise that reflects the different views of its members. Third, as the Basel reforms are minimum standards, jurisdictions are welcome to apply more conservative requirements should they wish to do so. If the Basel reforms do reduce excessive RWA variability, is the job then done?

Probably far from it. Banking crises are inevitable.

Basel III: Are we done now?

So, while the Basel standards cannot prevent all future crises, they can seek to mitigate their likelihood and impact. This, in turn, requires the Basel Committee to remain vigilant for emerging conjunctural and structural risks. It also needs to monitor how banks are responding to its post-crisis reforms. All this highlights the importance of supervision as a complementary tool to regulation. Let me say a few remarks about both these issues. An example of a topical risk of direct relevance for the Basel Committee is cyber-risk.

The banking system is increasingly reliant on information technology, which exposes it to a growing and evolving set of operational risks. Banks with operationally resilient systems, staff, processes and technology can better adapt to evolving shocks and maintain the provision of critical financial services. Welcome to the monthly newsletter of the Solvency II Association.

Today we will try to understand better the Solvenbcy ii directive. Solvency II is a regulatory project that provides a risk-based, economic-based, and principle-based framework for the supervision of insurance and reinsurance undertakings. Discover new books on Goodreads. Sign in with Facebook Sign in options. George Lekatis Goodreads Author. Business , Philosophy , Psychology. Solvency II, an Overview. In Solvency II, capital requirements will be determined on the basis of the risk profile of Published on June 22, George Lekatis Average rating: Want to Read saving….

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