GHOS Finalizes Outstanding Basel III Regulatory Reforms

The GHOS has endorsed the BCBS proposal to extend the implementation date of the revised minimum capital requirements for market risk, which were originally set to be implemented in 2019, to January 01, 2022 (which will constitute both the implementation and regulatory reporting date for the revised framework). Deferring implementation of the revised market risk framework will align its start date with that of the recently announced Basel III revisions for credit risk and operational risk. It will allow additional time for banks to develop the systems infrastructure needed to apply the framework and for BCBS to address certain issues related to the market risk framework. This includes a review of the calibrations of the standardized and internal model approaches to ensure consistency with the original expectations of BCBS. The reforms endorsed by the GHOS include the following elements:

• Revised standardized approach for credit risk, which will improve the robustness and risk- sensitivity of the existing approach.
• Revisions to the internal ratings-based approach for credit risk, where the use of the most advanced internally modeled approaches for low-default portfolios will be limited.
• Revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modeled approach and the introduction of a revised standardized approach.
• Revised standardized approach for operational risk, which will replace the existing standardized approaches and the advanced measurement approaches.
• Revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (G-SIBs), which will take the form of a tier 1 capital buffer set at 50% of a G-SIB's risk-weighted capital buffer.
• An aggregate output floor, which will ensure that banks' risk-weighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs, as calculated by the Basel III framework's standardized approaches. Banks will also be required to disclose their RWAs based on these standardized approaches.

GHOS members also reaffirmed their expectation of full, timely, and consistent implementation of all elements of this package, including the minimum capital requirements for market risk. The standards agreed by GHOS constitute minimum standards, although jurisdictions may elect to adopt more conservative standards. Moreover, jurisdictions will be considered compliant with the Basel framework if they do not implement any of the internally modeled approaches and instead implement the standardized approaches. The Basel Committee has established a program to evaluate the post-crisis reforms and will actively participate in the efforts of FSB to evaluate the effects of reforms. Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, said: "Now that the Basel III regulatory reform agenda is complete, we must focus on the important task of ensuring the standards are implemented consistently around the world. The Committee, through its Regulatory Consistency Assessment Program, will therefore continue to monitor closely the implementation of the Basel III standards."

Related Links

• Press Release
• Summary of Standards (PDF)
• Text of Final Standards (PDF)
• Results of Quantitative Impact Study (PDF)
• Capital Requirements for Market Risk (PDF)

Effective Date: January 01, 2022

Keywords: International, Banking, Final Basel III, Output Floor, QIS, BCBS