Q&A Basel
and the Basel Accords
Credit
0 What are the Basel Accords?
0 Why is so much attention
being paid to Basel III?
0 So are the Basel III regulations
now complete?
0 So what are the main topics addressed
in the Basel III amendments?
where we see a perfect match with institutional investors who like
to hold long-term assets to match their pension liabilities. In my
experience, by test ing the resistance of the system you force the
market to develop creative solutions and step outside the normal
banking environment, and I thinkthat'll be one of the offshoots of
Basel III."
Wim Boonstra, Chief Economist at Rabobank, views Basel III as a
step forward for the banking industry and is in favour of tighter
solvency and liquidity rules. He's optimistic about Rabobank's
ability to adapt to a changing market environment, although
The Basel Accords are a series of recommendations on banking
laws and regulations issued by the Basel Committee on Banking
Supervision. The Basel Committee, which was set up by the
governors of the central banks of the Group ofTen nations in 1974,
was established to create supervisory standards and regulations
to facilitate best practices in banking supervision, with the aim
of creating common approaches and standards across the
international banking sector.
Spurred on by the financial crisis, which saw some banks forced
to receive financial help from central banks and governments
after engaging in risky property lending or investing in securities
composed of subprime loans, the Basel Committee decided that
tighter regulations needed to be introduced. This led to the release
of initial Basel III proposals at the end of 2009, stipulating that banks
need to hold more capital and liquidity to be able to ride out any
future crisis without having to ask for government help. Following
a period of dialogue with governments and central banks, the
Basel Committee released an amended set of proposals in July and
September of 2010.
Not quite. The full set of Basel III regulations won't be final until later
in 2010. The aim is for the Group of 20 leading countries to provide
its support to the Basel III proposals in November 2010, although
the changes won't begin taking effect until the start of 2013, with
some delayed until 2019.
he believes the new regulations will force the industry to
address some core issues. "I think that one of the challenges
will be conducting business with higher solvency rates, and for
many banks it will be about conducting business in such a way
that they're profitable enough to be of interest to shareholders
looking to invest. One of the consequences of this, though, will
be either higher prices for products or lower costs within the
banks."
Boonstra explains that moving from the legacy system that
was in place before the crisis to a new, more stable and risk-
averse system comes with an additional cost to society and the
The Basel III proposals will affect banks in a number of ways.
Revised Capital Requirements aim to improve both the quantity
and the quality of capital held by banks. Core Tier 1 capital,
which is the highest form of capital, will need to be composed of
common equity and retained earnings that cover a percentage
of the Risk Weighted Assets (RWAs). Whereas the previous Tier 1
ratio was set at 2 percent, the new minimum requirement will
increase to 6 percent by 2015. Updated Liquidity requirements
have been designed to ensure that banks are able to withstand
a short-term financial shock. To do this, they need to have
enough liquid assets to survive for a 30-day period, which will
be calculated using the liquidity coverage ratio. However, banks
will be able to include sovereign debt and high-quality corporate
debt, alongside cash, in their pool of liquid funds. Introduction
of the net stable funding ratio, which has been designed to
ensure banks hold more long-term or stable liabilities to fund
their long-term assets, will be delayed until at least 2018.
Meanwhile, the introduction of a Leverage Ratio, which
requires banks to hold Tier 1 capital equivalent to 3 percent of
all assets, will not take place until 2018. The Basel Committee has
also watered down proposals on Risk, although banks will still
have to hold more capital than before to balance counter party
risk. Additionally, a distinction has been made on the amount of
capital that will have to be held against some products (such as
exchange-traded derivatives, which carry low counterparty risk)
and higher-risk products (such as over-the-counter derivatives),
which will now require more capital.
ISSUE 25 OCTOBER.'IIIO RI WORLD
