Featured Product

    BCBS Report Assesses Effectiveness of Basel Reforms During Pandemic

    July 06, 2021

    BCBS published an interim evaluation report assessing the impact of the implemented Basel reforms in light of the COVID-19 pandemic. The report outlines the initial findings on the overall resilience of the banking system during the pandemic as well as on the usability of capital and liquidity buffers, the impact of the leverage ratio on financial intermediation, and the cyclicality of specific Basel capital requirements. While the report finds that some features of the Basel reforms such as the functioning of capital and liquidity buffers, the degree of countercyclicality in the framework, and the treatment of central bank reserves in the leverage ratio may warrant further consideration, it does not seek to draw firm conclusions regarding the need for potential revisions to the reforms.

    This report outlines the following key initial findings:

    • Resilience of banking system. The analysis indicates that the banking system has remained resilient through the pandemic, strengthened by substantial increases in capital and liquidity held by banks since the adoption of the Basel reforms. Banks have generally managed to absorb temporary increases in the costs of liquidity and higher credit risk while substantially maintaining their services to customers. The analysis also indicates that more strongly capitalized banks showed greater increases in lending to businesses and households than other banks.
    • Use of capital buffers. The analysis indicates that most banks maintained capital ratios well above their minimum requirements and buffers during the pandemic, partially due to the reduction in capital requirements and buffers, and the imposition of restrictions on capital distribution, and the extensive fiscal and monetary support to borrowers; this makes it difficult to draw conclusions regarding the willingness of banks to use capital buffers.
    • Use of liquidity buffers. Banks met large drawdown demands on committed lines and engaged in early buybacks of funding instruments from money market funds. Despite relatively limited liquidity stress, some jurisdictional studies highlighted that a range of banks took defensive action, reflecting in part their targeting of internal liquidity coverage ratio levels well above 100%. However, these actions do not appear to have contributed materially to the wider disruption in financial markets that prompted central banks to intervene in March 2020.
    • Impact of leverage ratio on financial intermediation. Bank positions in government bond and repurchase agreement (repo) markets remained stable or rose in response to the rapid surge in client demand for liquidity at the onset of the crisis, though there is evidence that leverage ratio requirements may have reduced banks’ incentives to mitigate the large imbalances that emerged in some markets.
    • Cyclicality of Basel capital requirements. The analysis indicates that extensive governmental support measures to borrowers significantly dampened the impact of the economic contraction on bank capital. Measures taken to delay the recognition of credit provisions in the measurement of regulatory capital also deferred the impact. Collectively, these measures make it difficult to draw conclusions about the cyclicality of capital requirements. The analysis finds that sources of cyclicality in the current market risk framework prompted supervisors to take relief measures in several jurisdictions. However, revisions to this framework, agreed upon in January 2019, are expected to mitigate these sources of cyclicality.

    The empirical analysis in the report will be updated as additional data regarding the impact of the pandemic become available. Any updates will be included in a comprehensive evaluation report covering the Basel reforms implemented over the past decade, which the Committee plans to publish in 2022. The findings will also be reflected in the interim report of FSB on financial stability lessons learnt from the COVID-19 pandemic, which is to be submitted to G20 Finance Ministers and Central Bank Governors.

     

    Related Links

    Keywords: International, Banking, Basel, COVID-19, Regulatory Capital, Credit Risk, Liquidity Risk, Market Risk, Leverage Ratio, BCBS

    Featured Experts
    Related Articles
    News

    OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities

    The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.

    May 17, 2022 WebPage Regulatory News
    News

    EBA Proposes Standards to Support Secondary NPL Markets

    The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.

    May 17, 2022 WebPage Regulatory News
    News

    EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution

    The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).

    May 13, 2022 WebPage Regulatory News
    News

    EBA Issues Standards for Crowdfunding Service Providers Under ECSPR

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.

    May 13, 2022 WebPage Regulatory News
    News

    EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution

    The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.

    May 12, 2022 WebPage Regulatory News
    News

    EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA

    The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.

    May 11, 2022 WebPage Regulatory News
    News

    EC Mandates ESAs to Propose Amendments to SFDR Technical Standards

    The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.

    May 11, 2022 WebPage Regulatory News
    News

    EBA Examines Supervisory Practices, Issues Deposits Reporting Template

    The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),

    May 11, 2022 WebPage Regulatory News
    News

    SNB Updates NSFR Forms and FINMA Consults on Operational Risk Circular

    The Swiss National Bank (SNB) published Version 1.2 of the reporting forms (NSFR_G and NSFR_P) on the net stable funding ratio (NSFR) of banks, along with the associated documentation.

    May 10, 2022 WebPage Regulatory News
    News

    US Agency Publications Address Basel, Reporting, and CECL Developments

    The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances

    May 09, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8191