The implementing act for Basel III in the European Union was the new legislative package comprising Directive 2013/36/EU (CRD IV) and Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (CRRs). [27] Basel III was approved by the G20 in November 2010 and consists of several successive updates: the overall objective of Basel III and its Implementing Act in Europe, the Capital Requirements Regulation (CRR) and the Directive (CRD), is to strengthen the resilience of the banking sector across the European Union (EU) so that it is better able to: cushion economic shocks while ensuring that banks continue to finance economic activity and growth. Five factors are particularly important in the context of Basel III: after more than a year of deadlock in negotiations, the Basel Committee on Banking Supervision (BCBS) has announced an agreement on the remaining elements of the Post-Crisis Basel III Bank Capital Framework. An agreement on this reform package (often referred to as “Basel IV”) is an important step on the post-crisis regulatory path and a great success for the BCBS. This agreement will allow the banking sector to better understand the full impact of BCBS` capital package. However, this is far from the last word. There is still much to be done before these standards are finalized and implemented, and these steps can present banks with even more uncertainty and complexity than they thought. Basel III introduced new capital regulatory requirements that allow large banks to withstand cyclical changes in their balance sheets. In times of credit expansion, banks must provide additional capital. In times of credit crunch, capital requirements can be relaxed.
The Committee was expanded to 27 administrations in 2009, including Brazil, Canada, Australia, Argentina, China, France, Germany, India, the Netherlands, Russia, Hong Kong, Japan, Italy, Korea, Mexico, Singapore, Luxembourg, Germany, Turkey, Spain, Switzerland, Sweden, South Africa, the United Kingdom, the United States, Indonesia and Belgium. On 24 October 2013, the Governing Council of the Federal Reserve approved an inter-agency proposal for the US version of the Liquidity Coverage Ratio (LCR) of the Basel Committee on Banking Supervision (BCBS). The ratio would apply to certain U.S. banking organizations and other systemically important financial institutions. [11] The comment period on the proposal closed on January 31, 2014. Governors and Chief Supervisors Complete Basel III Reforms The American Bankers Association and a number of Democrats in the U.S. Congress have also spoken out against the implementation of Basel III, fearing it could cripple small U.S. banks by increasing their capital holdings of mortgages and SME loans. Basel III has also been criticized for its paper load and risk inhibition by banks organized at the Institute of International Finance, an international association of global banks based in Washington, D.C., who say it would “harm” both their business and overall economic growth. Basel III has also been criticised for negatively affecting the stability of the financial system by providing more incentives for banks to play the regulatory framework. [40] The American Bankers Association,[41] community banks organized into the Independent Community Bankers of America, and some of the most liberal Democrats in the United States. Congress, including the entire Maryland congressional delegation of Democratic Senators Ben Cardin and Barbara Mikulski, as well as Reps.
Chris Van Hollen and Elijah Cummings, spoke out against Basel III in its comments to the Federal Deposit Insurance Corporation,[42] stating that the Basel III proposals, if implemented, would harm small banks by “significantly increasing their holdings in mortgages and small loans.” [43] The total capital of a bank is calculated by adding the two levels. Under Basel III, the minimum capital ratio is 12.9%, with the minimum Tier 1 capital ratio of 10.5% of total risk-weighted assets (RWA), while the minimum Tier 2 capital ratio is 2% of the PLAR. A 2011 study by the Organisation for Economic Co-operation and Development (OECD) found that the medium-term effect of Basel III on GDP would be -0.05% to -0.15% per year. To stay afloat, banks will be forced to increase their credit spreads as they pass on the additional costs to their customers. Basel III is a set of internationally agreed measures developed by the Basel Committee on Banking Supervision in response to the 2007/09 financial crisis. The measures aim to strengthen the regulation, supervision and risk management of banks. Some critics argue that capitalization regulation is inherently unsuccessful because of these and other similar problems, and agree – despite an opposing ideological view of regulation – that “too big to fail” persists. [39] Professor Robert Reich argued that Basel III did not go far enough to regulate banks, arguing that inadequate regulation was a cause of the financial crisis. [44] On 6 January 2013, the global banking industry fought for a significant relaxation of Basel III rules when the Basel Committee on Banking Supervision not only extended the implementation schedule until 2019, but also expanded the definition of liquid assets. [45] Basel III is a comprehensive set of reform measures developed by the BCBS to strengthen the regulation, supervision and risk management of the banking sector. The measures include both liquidity and capital reforms.
The BCBS reports to the Group of Governors and Supervisors, also known as GHOS, and is based in Basel, Switzerland, at the Bank for International Settlements, also known as the BIS. In contrast, Tier 2 refers to a bank`s additional capital, such as undisclosed reserves and unsecured subordinated debt, which must have an initial maturity of at least five years. .
