Basel Reforms - The end is in sight

Basel Standards for capital adequacy have been around since 1988, increasing in complexity and scope ever since.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

We can pinpoint three significant revisions to Basel since the first standards were introduced. 

These started with Basel II in 2004, prescribing increasingly sophisticated methods for banks to calculate their capital ratios across credit risk, operational risk and market risk. 

The efficacy of these changes were questioned as a result of the financial crisis in 2007-8, culminating with Basel III in 2010 introducing changes to the quality and quantity of regulatory capital, additional capital buffers, the introduction of a leverage ratio, and the incorporation of liquidity risk for the first time. 

Lessons were then learnt from the crisis, resulting in a set of revisions between 2012 and 2017 and which are the changes that are now referred to as Basel 3.1, Basel IV, or Basel ‘End Game’ depending on where you sit in the world. 

Why the need for further revision? 

Whilst Basel III addressed some of the weaknesses in the framework highlighted by the crisis, it was widely recognised that three key issues remained. 

The credibility of the framework was being questioned, as a result of the wide variability in risk weighted assets (RWA) across financial institutions, causing reduced confidence in the reporting of RWA amounts. 

The use of internal models and possibilities for capital ‘optimisation’ were also a concern, with opportunities for banks to minimise risk weights through some of the parameter and calibration choices made in their models. 

Finally the market risk framework, having not changed since its introduction in 1996, needed a fundamental review due to issues with capitalising trading activities that the crisis exposed. 

Where are we now? 

With years having passed since the Basel Committee on Banking Supervision (BCBS) finalised the prudential regulatory reforms following the financial crisis, and with the prescribed 2028 end date of the transitional arrangements on the horizon, we are now in the last stages of what has been a monumental programme of regulatory change. 

In our latest whitepaper, we recap the genesis and key objectives of the Basel reforms, explore what the key changes are and the current status of implementation around the world. 

We dive into the detail on how these latest Basel changes are being implemented in key jurisdictions highlighting similarities and differences and taking a deeper dive into some of the complexities and challenges - those issues that only arise when you really look at the detail of the changes. 

Finally, we discuss what firms should be thinking about now from a practical perspective, from business model changes, to the ongoing optimisation of the use of regulatory capital, to embracing the latest changes as an opportunity to consider how they are processing data for both internal purposes but also for regulatory reporting and risk calculations. 

For more information on the topics above and to view the whitepaper in full please click here