On December 7, 2017, the U.S. Federal banking agencies announce their support for concluding efforts to reform the international bank capital standards, initiated in response to the 2008 global financial crisis. On the same date, the Governors and Heads of Supervision, and the Basel Committee on Banking Supervision (BCBS) also announced the finalization of the reforms to the “Basel III” agreement on bank capital standards.1 The Basel III agreement was designed for globally active banks, and was introduced in 2010 to establish minimum standards to increase the quality and quantity of regulatory capital held by those institutions. These now completed reforms complement the original Basel III framework of regulatory standards.2
What this means
The initial phase of Basel III reforms focused on improving the quality of bank regulatory capital, and increasing the level of capital requirements so banks could withstand losses in times of stress. It revised areas of the risk-weighted capital framework, by introducing capital buffers, and establishing a “large exposures regime” that mitigates systemic risks arising from connectivity across global financial institutions and concentrated exposures. The BCBS also specified a minimum leverage ratio to constrain excess leverage, and introduced a framework for mitigating excess liquidity risk through the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR). The revisions announced on December 7, 2017, seek to standardize the calculation of risk-weighted assets (RWAs) and improve the comparability of banks’ capital ratios. These include:3
- Strengthening the robustness and risk sensitivity of standardized approaches for credit risk, credit valuation adjustment (CVA) risk, and operational risk.
- Limiting the use of internally-modeled approaches for CVA and operational risk, facilitating the comparability of banks’ capital ratios.
- Introducing a leverage ratio buffer to further reduce the leverage of global systemically important banks (GSIBs).
- Complementing the risk-weighted capital ratio with a finalized leverage ratio, and a more robust risk-sensitive output floor.
These additional reforms focus on risk sensitivity, reducing regulatory capital variability, and restoring credibility in the RWA calculations, all of which should standardize the regulatory framework for internationally active banks.4
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), are to consider how to appropriately apply these Basel III reform revisions in the United States. Any proposed changes or modifications proposed are to be made through the standard notice-and-comment rulemaking process.5
- “U.S. banking agencies support conclusion of reforms to international capital standards,” Board of Governors of the Federal Reserve System, December 7, 2017. Access at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171207b.htm.
- “U.S. banking agencies support conclusion of reforms to international capital standards,” Board of Governors of the Federal Reserve System, December 7, 2017. Access at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171207b.htm. “High-level summary of Basel III reforms,” Basel Committee on Banking Supervision, December 2017. Access at: https://www.bis.org/bcbs/publ/d424_hlsummary.pdf.
- “High-level summary of Basel III reforms,” Basel Committee on Banking Supervision, December 2017. Access at: https://www.bis.org/bcbs/publ/d424_hlsummary.pdf.
- “US banking agencies support Basel III reforms,” Financial Regulation News, December 11, 2017. Access at: https://financialregnews.com/us-banking-agencies-support-basel-iii-reforms/.
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