The Basel Committee on Banking Supervision (BCBS) has issued the Basel III rules text, which presents the details of global regulatory standards on bank capital adequacy and liquidity agreed by the Governors and Heads of Supervision, and endorsed by the G20 leaders at their November Seoul summit.
The BCBS is raising the resilience of the banking sector by strengthening the regulatory capital framework, building on the three pillars of the Basel II framework. The reforms raise both the quality and quantity of the regulatory capital base and enhance the risk coverage of the capital framework. They are underpinned by a leverage ratio that serves as a backstop to the risk-based capital measures, are intended to constrain excess leverage in the banking system and provide an extra layer of protection against model risk and measurement error. Also, the BCBS is introducing a number of macro-prudential elements into the capital framework to help contain systemic risks arising from pro-cyclicality and from the interconnectedness of financial institutions.
The BCBS recognises that strong capital requirements are a necessary condition for banking sector stability but are not sufficient on their own. The BCBS believes that a strong liquidity base reinforced through robust supervisory standards is of equal importance. To date, there have been no internationally harmonised standards in this area. The BCBS is therefore introducing internationally harmonised global liquidity standards. As with the global capital standards, the liquidity standards will establish minimum requirements and will promote an international level playing field to help prevent a competitive race to the bottom.
The BCBS is introducing transitional arrangements to implement the new standards that help ensure that the banking sector can meet the higher capital standards through reasonable earnings retention and capital raising, while still supporting lending to the economy. The transitional arrangements are described in the Basel III liquidity rules text document.
After an observation period beginning in 2011, the Liquidity Coverage Ratio (LCR) will be introduced on 1 January 2015. The Net Stable Funding Ratio (NSFR) will move to a minimum standard by 1 January 2018. The BCBS will put in place reporting processes to monitor the ratios during the transition period and will continue to review the implications of these standards for financial markets, credit extension and economic growth, addressing unintended consequences as necessary. Both the LCR and the NSFR will be subject to an observation period and will include a review clause to address any unintended consequences.
The BCBS has also published a document entitled Guidance for national authorities operating the countercyclical capital buffer. This document sets out the procedures and guidance for national authorities operating the countercyclical capital buffer regime. It sets out what is required of the national authorities responsible for operating the countercyclical buffer regime, the principles that they should follow in making buffer decisions and the calculation of the common buffer guide that will feed into buffer decisions across jurisdictions. In addition to providing guidance for national authorities, the document should also help banks to understand and anticipate the buffer decisions in the jurisdictions to which they have credit exposures.
The BCBS has also released a report which sets out the results of the comprehensive quantitative impact study. The quantitative impact study (QIS) was conducted to ascertain the impact of the new requirements.
View the BCBS press release concerning the rules text and results of the QIS.