BCBS Report Evaluates Impact and Efficacy of Basel III Reforms

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

• Press Release
• Evaluation Report

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