Compliance/Regulatory Risk – Example - Basel III
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision, and risk management of banks. Basel III standards are minimum requirements that apply to internationally active banks. Members are committed to implementing and applying standards in their jurisdictions within the time frame established by the Committee. Understand the key considerations of Basel III for a banking institution.
The Basel Committee on Banking Supervision (BCBS) is the primary global standard-setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. There have been over 150 systemic banking crises around the globe since 1970. The Basel Committee itself was established in the aftermath of a series of banking crises in 1974, the most notable being the failure of Bankhaus Herstatt in then West Germany. Its mandate is to strengthen the regulation, supervision, and practices of banks worldwide with the purpose of enhancing financial stability. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions. The Basel III reforms have unquestionably strengthened the resilience of the global banking system.
Basel III (or the Third Basel Accord or Basel Standards) is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
The Basel III standard aims to strengthen the requirements from the Basel II standard on the bank's minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank.
Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 31 March 2019 and then again until 1 January 2022.
Furthermore, Basel III introduced two additional capital buffers and a minimum "leverage ratio". The "Liquidity Coverage Ratio" was supposed to require a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days. The Committee is also reviewing the need for additional capital, liquidity, or other supervisory measures to reduce the externalities created by systemically important institutions.
What is the current business challenge?
We have had experienced one of the biggest turmoil in the financial market, which is still not 100% behind us. The identified hallmarks of the crisis were: too-big-to-fail institutions that took on too much risk, insolvency resulting from contagion and counterparty risk, the lack of regulatory and supervisory integration. The new Basel III capital proposal (Basel is the name for central regulatory framework issued by Bank of international settlement with HQ in Basel, Switzerland) address this issues observed during the crisis through (1) Leverage ratio (2) capital buffer (3) proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses (4) liquidity buffers. In this project, we will be focused only on the liquidity issue
Key considerations
- What was the root cause of the crisis?
- How in past banking regulation addressed the issue of the liquidity?
- What is the Basel III proposal addressing the liquidity issue?
- How the Bank was dealing with liquidity in the past?
- What are the possible changes to the assessment of the liquidity in the future?
- What is the cost of such changes? What are the benefits of such changes?
What is the goal of this project?
- Understand the liquidity of the bank
- Understand and create the model bank, which would include the profiles of the common banks
- Describe the changes which will be necessary to the management of the liquidity within the model bank
- Describe the benefits of changes coming from the Basel III documents
- Describe the costs of such changes coming from the Basel III documents
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