BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules

At its September 15, 2022 meeting, BCBS discussed risks and vulnerabilities such as rising inflation, increasing banks' interconnections with non-bank financial intermediation (NBFI), finalizing a prudential framework for crypto-assets, evaluating and implementing Basel III reforms, and addressing climate-related financial risks. BCBS exchanged views on the supervisory implications of the use of artificial intelligence (AI) and machine learning (ML) by banks. Members discussed the challenges raised by AI/ML for banks when seeking to understand and explain the outputs from models, as well as for banks' governance and accountability arrangements, and their use of third-party AI/ML applications. They agreed to continue to assess these developments and exchange supervisory best practices. Earlier, on September 12, 2022, GHOS had met to reaffirm its expectations on implementing Basel III and to provide direction on key areas of work by BCBS. The GHOS reiterated its expectation to implement all aspects of the Basel Framework quickly and consistently; provided direction to BCBS on its work on climate-related financial risks and crypto-assets, reviewed the BCBS work program, and reaffirmed the importance of a stable regulatory framework to facilitate implementation.

At the GHOS meeting, it was noted that over two-third of jurisdictions plan to implement all, or the majority of, the standards in 2023 or 2024, with the remaining jurisdictions planning to implement Basel III in 2025. There are only a limited set of technical standards that are particularly subject to an implementation delay. In a related development, certain US Agencies reaffirmed their commitment to implement the final set of Basel III standards, which the BCBS issued in December 2017. These US Agencies are the Board of Governors of the Federal Reserve System (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). The agencies are developing a joint proposed rule on the new capital standards for large banking organizations and expect to issue it as soon as possible. Community banking organizations, however, would not be impacted by the proposal. The outcomes of the two meetings led to the following key tangible decisions:

• The GHOS tasked BCBS with finalizing the crypto-asset framework near the end of 2022. First proposal on this framework was issued in June 2021 and the second one in June 2022. Under the proposed prudential treatment of crypto-asset exposures of banks, crypto-assets are divided into two broad groups: Group 1 includes crypto-assets eligible for treatment under the existing Basel framework with some modifications while Group 2 includes unbacked crypto-assets and stablecoins with ineffective stabilization mechanisms, which are subject to a new conservative prudential treatment. BCBS is proposing to introduce an “infrastructure risk add-on” to address the risks associated with distributed ledger technology and this would apply to Group 1 crypto-assets. BCBS is also proposing a new exposure limit to apply to all Group 2 crypto-assets which fall outside the existing large exposure rules, with the provisional limit proposed to be set at 1% of tier 1 capital and may be reviewed periodically.
• BCBS agreed to publish a second evaluation report on buffer usability and cyclicality in the Basel framework, ahead of the G20 Leaders' Summit in November 2022.
• BCBS plans to publish the third evaluation report, around the year-end, on a comprehensive assessment of the impact of the implemented Basel III standards over the past decade.
• As part of its Regulatory Consistency Assessment Program  or RCAP, BCBS reviewed and approved the assessment reports on Japan's implementation of the Net Stable Funding Ratio and large exposures framework. The reports will be published soon.
• BCBS approved the results of the annual assessment exercise for G-SIBs and these results will be submitted to the Financial Stability Board before BCBS publishes the 2022 list of G-SIBs.

Related Links

• Basel Committee Meeting
• GHOS Meeting
• US Agencies on Basel Implementation
• Proposal on Crypto Framework, June 2022

Keywords: International, Banking, Basel, Crypto-Asset Regulation, G-SIBs, NSFR, Large, Exposures, US, Japan, RCAP, GHOS, US Agencies, BCBS