Governors and Heads of Supervision finalise Basel III reforms
The Basel Committee's oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), has endorsed the outstanding Basel III post-crisis regulatory reforms.
"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 ECB. Mr 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."
Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, said: "These reforms will help reduce excessive variability in risk-weighted assets and will improve the comparability and transparency of banks' risk-based capital ratios. Now that the Basel III regulatory reform agenda is complete, we must focus on the important task of ensuring the standards are implemented consistently around the world. The Committee, through its Regulatory Consistency Assessment Programme, will therefore continue to monitor closely the implementation of the Basel III standards."
The reforms endorsed by the GHOS include the following elements:
- a revised standardised approach for credit risk, which will improve the robustness and risk sensitivity of the existing approach;
- revisions to the internal ratings-based approach for credit risk, where the use of the most advanced internally modelled approaches for low-default portfolios will be limited;
- revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modelled approach and the introduction of a revised standardised approach;
- a revised standardised approach for operational risk, which will replace the existing standardised approaches and the advanced measurement approaches;
- revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (G-SIBs), which will take the form of a Tier 1 capital buffer set at 50% of a G-SIB's risk-weighted capital buffer; and
- an aggregate output floor, which will ensure that banks' risk-weighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel III framework's standardised approaches. Banks will also be required to disclose their RWAs based on these standardised approaches.
A short description of the agreed reforms is set out in an accompanying summary document. The final standards text detailing the reforms and the Committee's assessment of their quantitative impact are also being published today. The revised standards will take effect from 1 January 2022 and will be phased in over five years. The Committee has established a programme to evaluate its post-crisis reforms and will actively participate in the Financial Stability Board's efforts to evaluate the effects of reforms.
GHOS members acknowledged ongoing challenges related to implementing certain bank capital reforms, in particular the most complex standards. The GHOS has therefore 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 1 January 2022 (which will constitute both the implementation and regulatory reporting date for the revised framework). Deferring implementation of the revised market risk framework will align its start date with those of the Basel III revisions for credit risk and operational risk that were announced today. It will allow banks additional time to develop the systems infrastructure needed to apply the framework and for the Committee to address certain specific issues related to the market risk framework. This includes a review of the calibrations of the standardised and internal model approaches to ensure consistency with the Committee's original expectations.
GHOS members also reaffirmed their expectation of full, timely and consistent implementation of all elements of this package, including the minimum capital requirements for market risk. The standards agreed by GHOS constitute minimum standards. As such, jurisdictions may elect to adopt more conservative standards. Moreover, jurisdictions will be considered compliant with the Basel framework if they do not implement any of the internally modelled approaches and instead implement the standardised approaches.