Monitoring Implementation of Basel III

Monitoring implementation of Basel III regulatory reform

The financial crisis in the world today results from various inconstancies within the economic sectors. Among these economic sector contributors to the crisis is the banking industry. The banking and finance systems in the world's leading economies determine the fluctuation of the currency exchange rate across the globe. Therefore, it is in this line that Basel III model remains fundamental in the process of establishing a resilient financial system. The core purpose of Basel III is to maintain public confidence in the regulatory ratios (Basel Committee on Banking Supervision (BCBS) 2). It also aims to provide a level fair playing ground for all the internationally active banks. The member countries in the G20 are among the first nations to implement the module. The Basel Committee supervises the adoption and implementation process of the Basel III regulatory standards to bolster their capitals. The committee highlights the progress of the implementation and related challenges in the implementation process.

Overview of the Report

This report covers the progress of the implementation of Basel III since the last report released in 2012. The scope of this report is quite broad, and updated, briefing the G20 ministers and central bank governors. This report also covers sections of developments in the regulatory standards and the banks progresses in managing their capital base. The report further indicates the challenges that require continued policy and operational attention. The members of Basel III agreed started to implement the capital standards from January 2013 (BCBS 3). They also required translating the Basel III standards to regulations and laws in their states. However, the implementation is gradual as some are implementing in parts while others in full. Since the last report released in 2012, an additional eight members issued the final Basel III capital regulations in their countries, bringing the total number of countries that have a final Basel III standards to fourteen. Of all these fourteen, thirteen member countries published their draft regulations late after missing 1 January 2013 deadline. The Basel committee continues to urge those countries to issue their final versions of the regulations, to ensure they align themselves with the international ally agreed deadline of the transition period.

There are delays in the implementation of the Basel III regulation requirements within several nations and some are showing reluctance in implementing the proposition. This is forcing the national supervisors to conduct follow up with their internationally active banks, to ensure they undertake the necessary procedures. The national supervisors of the Basel III regulations have the mandate to oversee the steady and progressive implementation of the required regulations. They are taking the initiative seriously, as it is evident that several nations have the regulations progressively implemented for the past one year period. The active banks implementing in the countries implementing the regulations have progressive and steadily strengthening capital base, which meets the standards of Basel.

The process of implementation received a boost from the Basel Committee's Regulatory Consistency Assessment Program (RCAP), which it introduced in the year 2012 (BCBS 8). The RCAP is significantly influencing the reform efforts of Basel III. It helps by monitoring the progress in the introduction process of the regulations. The RCAP also assesses the consistency of the regulations implemented within the international standards. Moreover, it analyses the outcome of the regulatory regimes across all the banks; therefore, helping to establish confidence of the banks and the people in the regulatory framework. The key element of RCAP is the assessing of the content and substance of the various jurisdictions. For instance, the initial three assessments covered Japan, the European Union and the United States. Subsequently, assessment for Singapore, China and Switzerland are now in progress. These indicate a progressive and positive outcome of the regulatory framework. The RCAP does not work in isolation, as these assessments do not guarantee successful implementation; hence, it works with sound supervisory and industry practices accompanied by rigorous enforcement and analysis of the expected prudential outcomes.

RCAP studied the effect of the regulations on the banks as well as the variations across the banks in terms of the risk-weighted assets. From the assessments, it indicates that, while some variations in risk-weighted assets are natural and desirable, the extreme variations diminish the comparability of the capital ratios. Consequently, the Basel committee is undergoing further analysis to determine the areas that the standards can modify to reduce the extreme variations that are apparent. In the considerations, three policies emerge; these are, to improve the public disclosure and regulatory data collection to aid the understanding of the calculation of risk-weighted assets for the banks. Secondly, the committee is considering narrowing the choices of modeling for the banks and lastly, the option of harmonizing the supervisory practices with regard to the model approvals. In this context, the committee is conducting a fundamental review of the market risk framework, which will address the key findings concerning the risk measurement of the trading asset book. The committee is progressively working to finalize the development of the post-crisis reforms. These include the remaining components of the Basel III framework. These include the liquidity frames, liquidity coverage ratio, the net stable funding ratio, securitization, large exposures and the leverage ratio all published in the year 2013 (BCBS 5). The committee hopes to complete these reforms by the year 2014. The emphasis of the adoption and implementation of the Basel framework remains remarkably essential. Its implementation should be timely and fully implemented. The Basel committee continues to strengthen its implementation monitoring progress and efforts and the RCAP. In addition, it urges the G20 Finance Ministers and Central Bank Governors to rejuvenate their commitments in the completion of the Basel III regulatory reforms expeditiously, completely and consistently.