Agreement Reached on the Finalisation of the Basel III Framework

The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, announced that agreement has been reached on the finalisation of Basel III. The agreement improves the comparability of banks’ risk-weighted assets and reinforces the credibility of the bank capital framework. Agreement on these final elements means that key reforms pursued to address the causes of the global financial crisis has now been completed and can be fully implemented.

The reforms include the following elements: 

  • 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 standardised approaches. Banks will also be required to disclose their RWAs based on these standardised approaches. (Advocated for by WOCCU which should help level the competitive playing field for credit unions and other community-based financial cooperatives          
  • a revised standardised 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 modelled approaches for low-default portfolios will be limited;
  • revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modelled approach and the introduction of a revised standardised approach;
  • a revised standardised approach for operational risk, which will replace the existing standardised 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; and

A summary of the agreed reforms can be found in the summary document and the final text can be viewed here.  The revised standards will take effect from January 1, 2022 and will be phased in over five years. 

Bank of International Settlements

Monitoring Group Seeks Input on Reforms to Global Audit Standard Setting

The Monitoring Group, consisting of public authorities responsible for monitoring the international audit standard-setting process (the International Organization of Securities Commissions (IOSCO), the Basel Committee on Banking Supervision (BCBS), the European Commission (EC), the Financial Stability Board (FSB), the International Association of Insurance Supervisors (IAIS), and the World Bank Group (WBG)), has issued a consultation paper setting out options to enhance the independence, relevance and transparency of international audit standard setting in the public interest.

The consultation paper focuses on the governance and structure of the Standard Setting Boards (SSB) that support auditing as a public interest activity, namely the International Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants. The proposal is far-reaching, setting out the main areas of concern regarding the current structure and considering, among other matters, the number, remit and size of the SSBs and their staffs; the accountability of the SSBs to International Federation of Accountants (IFAC); the process for nominating members to the SSBs; the roles of the Public Interest Oversight Board and the Monitoring Group; and the means by which the structure is funded.

Comments on the Consultation are due February 9, 2018 and can be viewed here.

Bank of International Settlements, The Monitoring Group

Basel Committee Secretary General Indicates Willingness to Fine-Tune Basel Rules to Reduce Reg Burden

Basel Committee Secretary General William Coen indicated in recent public remarks that the Basel Committee is willing to fine-tune its international standards to reduce unintended regulatory burdens. Mr. Coen's remarks were made at the 2017 Institute of International Finance's Annual Membership Meeting in Washington, DC.

Secretary Coen confirmed that “there is likely to be a period during which no further major policy initiatives will be undertaken” by the Basel Committee once the Committee finalizes the rest of their Basel III-related rulemakings: (a) Revisions to the Standardised Approach for credit risk; (b) Standardised Measurement Approach for operational risk; (c) Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches; and (d) Revisions to the Basel III leverage ratio framework.

Toward the end of the remarks Secretary Coen implies that since the Basel Committee is not certain exactly certain how the new Basel III standards will work in practice (since phase-in is technically in January 2018 for most Basel III rule), the Committee will be open to fin-tuning the standards if they turn out to have unintended consequences.

Also included are comments from Svein Anderson, Secretary General of the Financial Stability Board on a ongoing research project on the effects of reform that, once finalized, "will be an evidence-based starting point for discussing potential deregulatory changes especially with respect to lending to small and medium enterprises (SMEs) and long-term financing." 

The entire update can be viewed here. WOCCU will continue to monitor and engage on these and other issues as they progress.  

Bank of International Settlements, Basel

WOCCU Seeks Input on Basel Market Risk Proposal

The Basel Committee on Banking Supervision has proposed a simplified alternative to the market standardized approach in an effort to facilitate adoption of the Basel Committee’s standard for minimum capital requirements for market risk for banks and credit unions that are not large and internationally active.  

The proposal in short provides for an operationally simpler (and less granular) method of calculating market risk capital in exchange for higher capital requirements and less favorable risk weights. 

Use of the proposed “Simplified Alternative” would be subject to national supervisory approval and oversight, and available only to smaller, less complex banks or credit unions.  The proposal includes a simplified version of the sensitivities-based method (“Standardized Approach”) which is the primary component of the Standardized Approach.  The Basel Committee last updated the standardized approach to market risk in January of 2016

WOCCU's initial summary and analysis of the proposal can be found here.

Please provide comments to Andy Price, Regulatory Counsel at by September 21, 2017.

Bank of International Settlements, Basel

New Guidance Strives to Make Reg Burdens More “Proportional”

Reduced compliance burdens for community-based financial institution are closer to reality with new guidance on “proportional” regulation from the Bank for International Settlements.  The Financial Stability Institute, the arm of Bank for International Settlements that promotes regulatory consistency across jurisdictions, on August 3rd issued new guidance clarifying when supervisors are allowed to deviate from international financial rules in order to reduce burdens on community-based financial institutions.

The guidance shows the range of approaches used to achieve “proportional” regulation in Brazil, the European Union, Hong Kong, Japan, Switzerland and the USA. “National-level supervisors are supposed to apply international financial regulatory standards ‘proportionally’ to smaller, less complex institutions like credit unions, but it was not always clear what ‘proportional’ meant in practice” said Michael Edwards, vice president and general counsel of World Council. “This new guidance provides national-level regulators with examples of compliance burden reduction ‘proportionality’ in six G20 economies that supervisors have discretion to adopt in any jurisdiction.”  Concurrently, the Financial Stability Institute also issued new guidance on cyber-risk.

Bank of International Settlements