30 Octobre 2017

Implementation of Basle III framework as of September 2017 International perspective

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On October 2017, the Basle Committee on Banking Supervision (hereafter « BCBS ») published its thirteen progress report on adoption of the Basle regulatory framework [1].

The Basle III framework is deemed to overcome the faulty approach of some of the Basel II framework. Its implementation that started in 2010 is due to be completed by 2019. We find it interesting to follow the progress report as significant milestones have been completed.

The progress report may be used as an early warning signal for jurisdiction falling behind, and in so far indicating an environment less safe for financial institutions active in the region/country.

 

1 – Status of Basle III rules due to be implemented by January 2017 :

The rules that are due to be in force by this year are mainly related to :

  •       Risk-based Capital requirements
  •       SIB (both global and local ones)
  •       Monitoring of intraday liquidity

Few disclosures requirements are also due.

For those requirements in force, significant progresses have been made and per the BCBS grading system an average of 3.1 out of 4 could be granted. This means that most of the regulation has been published and is in force.

This is somewhat reassuring for the global stability of the economy to see that SIB and countercyclical buffer rules are in force. One noticeable exception is with China which has yet to publish the detailed policy framework for its D-SIB (though a 1% surcharge apply to its commercial bank since 2013) and for the countercyclical buffer.

Switzerland, Saudi Arabia and Singapore are the only jurisdiction that fully comply with rules, while EU and South Africa aren’t that far behind.

Nevertheless, capital requirements for bank exposures to central counterparties and for equity investment in funds, as well as the implementation of the standardized approach for measuring counterparty credit risk (SA-CCR), and the Revised Pillar 3 requirements (published Jan 2015) lag all behind.

And yet, large countries such as China, Russia, Japan, the USA and Mexico have to make significant progresses to comply with the rules that are supposed to be in force.

In those countries for instance, the rules related to the punitive margin on non-centrally cleared derivatives is not in force (with the exception of the USA), while the absence of clearing houses for derivatives and other OTC instruments was a key issue back in 2008.

You'll find above a global mapping of the implementation progress and the average grading of each individual framework :

 

2 – Implementation through 2019:

As seen, only 3 jurisdictions fully comply with rules in force.

Yet a continuous batch of rules is expected to be gradually implemented through 2019. Those already lagging behind may continue to struggle unintentionally with the implementation of rules (where rules aren’t yet published), or “intentionally” at a national level (dispute over the need for such rules).

The map above really portrayed a financial industry that has a lot of work to do before complying with the regulation.

Once again, Switzerland, Saudi Arabia and Singapore seem to be the more advanced.

And once again too, Russia, Asia and North America seem to be less advanced.

 

 

3 – Exeis Conseil opinion :

  •  To BCBS and regulators

Obviously Basle III is a complex framework which implementation translates into country-led strategic discussions. Thus we already hear about s “Basle IV” (a fine tuning of Basle III in fact). If the goal is to make sure the regulation will adapt to its environment, and help focusing on efficiency and on “true risks” then this will be a positive move forward.  Instead, if “Basle IV” framework adds complexity for banks, then there is a risk of burying them under too many successive regulations, and to continue having a framework not fully or homogeneously implemented. Customers that pay the price for the regulation also requires efficient regulation.

  •  To Financial Institutions

Many Basle III rules are pertinent.  Probably as Chief Risk Officer, you should make the Basle III implementation status as one of your criteria when reviewing your risk appetite, and setting your limits.

This can’t be the only criteria of course but we believe it has an overall value.

For your institution, this also means that we would recommend you make sure that not only you comply with the rules, but that the rules are applied in the highest efficient possible way. Value can be extract from regulation.

For instance many of the BCBS 239 [2] principles are of highest interest when it comes to risk strategy and governance. Even if it does not apply to you, you may want to use the good practices and the recurrent processes to comfort your risk management.

 

For more information about how Exeis Conseil can help you navigate Basle III and comfort your risk management practices, you can contact Vincent Falgéras or François Pineau leading the practice.

 

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