Featured Product

    BCBS Report Evaluates Impact and Efficacy of Basel III Reforms

    December 14, 2022

    The Basel Committee on Banking Supervision (BCBS) published a report on the evaluation of impact and efficacy of the implemented Basel III reforms. The scope of the evaluation is limited to the elements of Basel III that were implemented by 2019. The analysis provides evidence on the impact of the capital and liquidity reforms on bank resilience and systemic risk; potential side-effects on lending and capital costs of banks; and interactions among elements of the reforms and the regulatory complexity within the Basel framework.

    This recent Basel implementation assessment provides the first holistic evaluation of the impact and efficacy of the Basel III reforms. It sets out evidence that the overall resilience of the banking sector has increased since the implementation of the Basel reforms. Moreover, the analyses show greater improvements for institutions that were more heavily impacted by the reforms, suggesting that the reforms were an important driver of this increased resilience. Overall, the report confirms that the reforms coincided with improvements in capital and liquidity positions, particularly at the banks with the weakest capital and liquidity ratios. In addition to their capital positions, banks have improved their liquidity positions by increasing their levels of high-quality liquid assets (HQLA) and reducing their reliance on unstable, short-term funding sources. Banks have also increased the overall stability of their funding profiles, measured under the Net Stable Funding Ratio (NSFR), by increasing their available stable funding (ASF) more than their required stable funding (RSF). Also, there is some indication that banks with low capital ratios at the time of the reforms experienced a greater improvement in market-based resilience measures, which suggests that the observed effect is related to these reforms.

    The Basel III reforms also aimed to broadly reduce systemic risk in the banking sector. The report finds that market-based measures of banking sector systemic risk have improved following the implementation of the Basel III capital and liquidity reforms, making the financial system less vulnerable to distress at individual banks. Additionally, higher risk-based capital and leverage ratios are associated with lower levels of systemic risk. Evidence shows that higher capital requirements for global systemically important banks (G-SIBs) decreased the market’s perception of their levels of systemic risk. Overall, this suggests that enhancing capital positions of banks, which is an objective of the Basel III reforms, dampens the negative feedback effects between banks under stress and reduces negative spillovers to the real economy. 

    However, greater resilience did not come at the expense of banks’ cost of capital, as banks more heavily impacted by the reforms also saw a greater decrease in their cost of capital. There is no robust evidence and only some indication that banks with lower initial common equity tier 1 ratios and liquidity coverage ratios (LCRs) had lower loan growth than their peers. While the reforms may have limited lending by banks with weaker initial regulatory ratios, there is no indication that the reforms impaired the aggregate supply of credit to the economy. Furthermore, the assessment on how the components of the reforms have interacted concludes that the Basel III framework does not suffer from redundant elements. It acknowledges that the more sophisticated and multidimensional framework Basel III, which was introduced to address a wider variety of risks, results in higher regulatory complexity, but does not assess whether such complexity could be reduced while maintaining bank resilience.

     

    Related Links

     

    Keywords: International, Banking, Basel, Regulatory Capital, Lending, Credit Risk, Systemic Risk, Liquidity Risk, BCBS

    Featured Experts
    Related Articles
    News

    EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS

    The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.

    February 23, 2024 WebPage Regulatory News
    News

    ECB to Expand Climate Change Work in 2024-2025

    Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.

    February 23, 2024 WebPage Regulatory News
    News

    BIS Bulletin Examines Cognitive Limits of Large Language Models

    The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.

    January 25, 2024 WebPage Regulatory News
    News

    ECB is Conducting First Cyber Risk Stress Test for Banks

    As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.

    January 24, 2024 WebPage Regulatory News
    News

    EBA Continues Momentum Toward Strengthening Prudential Rules for Banks

    A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.

    January 24, 2024 WebPage Regulatory News
    News

    EU and UK Agencies Issue Updates on Final Basel III Rules

    The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards

    December 19, 2023 WebPage Regulatory News
    News

    Industry Agency Expects Considerable Uptake for Swiss Climate Scores

    The Swiss Federal Council recently decided to further develop the Swiss Climate Scores, which it had first launched in June 2022.

    December 18, 2023 WebPage Regulatory News
    News

    BCBS Consults on Disclosure of Climate Risks, Issues Other Updates

    The Basel Committee on Banking Supervision (BCBS) launched consultation on a Pillar 3 disclosure framework for climate-related financial risks, with the comment period ending on February 29, 2024.

    December 18, 2023 WebPage Regulatory News
    News

    US Government Moves to Regulate Development and Use of AI Models

    The U.S. President Joe Biden signed an Executive Order, dated October 30, 2023, to ensure safe, secure, and trustworthy development and use of artificial intelligence (AI).

    December 18, 2023 WebPage Regulatory News
    News

    MAS Launches Gprnt Digital Platform for ESG Reporting for SMEs

    The Monetary Authority of Singapore (MAS) launched an integrated digital platform, Gprnt, also known as “Greenprint.”

    November 29, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8949