Welcome to the Reading Room of the Basel iii Compliance Professionals Association, the largest association of Basel iii Professionals in the world.
The objective of the Basel 3 reforms, is to improve the banking sector’s ability to absorb shocks, arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy.
The Basel Committee’s comprehensive reform package addresses the lessons of the financial crisis.
Through its reform package, the Basel Committee aims to improve risk management and governance, as well as strengthen banks’ transparency and disclosures.
A strong and resilient banking system, is the foundation for sustainable economic growth, as banks are at the centre of the credit intermediation process between savers and investors.
The Basel Committee is raising the resilience of the banking sector, by strengthening the regulatory capital framework, building on the three pillars of the Basel 2 framework.
The reforms raise both, the quality and quantity of the regulatory capital base, and enhance the risk coverage of the capital framework.
The basel Committee is also introducing a number of macroprudential elements into the capital framework, to help contain systemic risks.
It is critical that banks’ risk exposures are backed by a high quality capital base. The crisis demonstrated that credit losses and writedowns, come out of retained earnings, which is part of banks’ tangible common equity base.
It also revealed the inconsistency in the definition of capital across jurisdictions, and the lack of disclosure, that would have enabled the market to fully assess and compare the quality of capital between institutions.
To this end, the predominant form of Tier 1 capital, must be common shares and retained earnings.
Innovative capital instruments, with an incentive to redeem, through features such as step-up clauses, will be phased out.
Supervisory authorities must be able to assure themselves, that banks using models, have risk management systems that are conceptually sound, and implemented with integrity.
Strong capital requirements are a necessary condition for banking sector stability, but by themselves are not sufficient. A strong liquidity base, reinforced through robust supervisory standards, is of equal importance.
Before Basel 3, we had no internationally harmonised standards in this area. The Basel Committee is introducing internationally harmonised global liquidity standards.
As with the global capital standards, the liquidity standards will establish minimum requirements, and will promote an international level playing field, to help prevent a competitive race to the bottom.
During the early “liquidity phase” of the financial crisis, many banks – despite adequate capital levels – still experienced difficulties, because they did not manage their liquidity in a prudent manner.
The rapid reversal in market conditions, illustrated how quickly liquidity can evaporate, and that illiquidity can last for an extended period of time.
The difficulties experienced by some banks, were due to lapses in basic principles of liquidity risk management.
In response, as the foundation of its liquidity framework, the Committee has published the “Principles for Sound Liquidity Risk Management and Supervision.”
To complement these principles, the Basel Committee has further strengthened its liquidity framework, by developing two minimum standards for funding liquidity.
An additional component of the liquidity framework, is a set of monitoring metrics, to improve cross-border supervisory consistency.
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Compliance with the Basel iii framework is a moving target, as regulators continue to develop new standards and regulations and amend the previous ones.
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