Featured Product

    FSI Summarizes Scope of Application of Basel Framework

    August 29, 2019

    The Financial Stability Institute (FSI) of BIS published an executive summary on the scope of application of the Basel framework. Executive summaries by FSI provide brief synopses of the new and revised global financial regulatory standards. They mainly cover topics related to banking and insurance regulation and supervision. The Basel framework is designed to be applied to internationally active banks on a fully consolidated basis. In practice, this includes applying the framework to any holding company that is the parent entity within a banking group to ensure that it captures the risks of the banking group as a whole. As such, the framework applies on a consolidated basis to all internationally active banks at every tier within a banking group.

    The executive summary mentions the entities that are subject to regulatory consolidation and risk-based capital. All banking and other relevant financial activities conducted within a group that contains an internationally active bank should be captured through consolidation. This includes majority-owned or controlled banking entities, securities entities, and other financial entities (excluding insurance entities). There are a few exceptions to this general principle; for majority-owned securities and other financial subsidiaries that are not consolidated for capital purposes, all equity and other regulatory capital investments in the group will be deducted and the assets and liabilities, as well as third-party capital investments in the subsidiary, will be removed from the balance sheet of a bank. For less than wholly owned banking, securities, and other financial entities that are fully consolidated, the minority interests (capital held by third parties) that arise can only be recognized in consolidated capital if they meet the applicable definition of capital under Basel III. Any minority interest in excess of the subsidiaries’ minimum regulatory capital requirements is not recognized.

    The leverage, liquidity, and large exposure rules follow the same scope of application as that applied in the risk-based capital framework. Pillars 2 and 3 are key components of the Basel framework and generally follow the same scope of application as Pillar 1 requirements. With respect to Pillar 2, and as part of the consolidated risk assessment of a banking group, supervisors should also consider various risks that may not necessarily be subject to regulatory consolidation. One such risk, “step-in risk,” is the risk that a bank decides to provide financial support to an unconsolidated entity that is facing stress in the absence of, or in excess of, any contractual obligations to provide such support. If the supervisory assessment reveals that significant residual step-in risks have not been appropriately estimated or mitigated, a supervisor may use the measures that it determines to be appropriate based on the nature and extent of step-in risks identified. Some of these measures may include additional liquidity requirements; expansion of the stress testing framework to include entities that are not part of the scope of regulatory consolidation; and inclusion, within the scope of regulatory consolidation, of entities where significant residual step-in risk is present.

     

    Related Link: Executive Summary

     

    Keywords: International, Banking, Basel Framework, Pillar 1, Pillar 2, Pillar 3, Scope of Application, Basel III, FSI, BIS

    Featured Experts
    Related Articles
    News

    PRA Finalizes Supervisory Approach for Non-Systemic Banks in UK

    PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.

    April 15, 2021 WebPage Regulatory News
    News

    EBA Finalizes Standards on Methods of Prudential Consolidation

    EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).

    April 15, 2021 WebPage Regulatory News
    News

    EBA Updates List of Other Systemically Important Institutions in EU

    EBA updated the list of other systemically important institutions (O-SIIs) in EU.

    April 15, 2021 WebPage Regulatory News
    News

    BCBS Report Concludes Basel Risk Categories Can Capture Climate Risks

    BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.

    April 14, 2021 WebPage Regulatory News
    News

    UK Authorities Welcome FSB Review of their Remuneration Regime

    UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.

    April 14, 2021 WebPage Regulatory News
    News

    PRA and FCA Letter on Addressing Risks from Use of Deposit Aggregators

    PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.

    April 14, 2021 WebPage Regulatory News
    News

    MFSA to Amend Banking Act and Rules in Coming Months to Transpose CRD5

    MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.

    April 14, 2021 WebPage Regulatory News
    News

    EC Delegated Regulation on Specialized Lending Exposures Under CRR

    EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.

    April 14, 2021 WebPage Regulatory News
    News

    OSFI Proposes to Enhance Assurance Expectations for Basel Returns

    OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.

    April 13, 2021 WebPage Regulatory News
    News

    ECB Issues Results of Benchmarking Analysis of Recovery Plans of Banks

    ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.

    April 13, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6858