What is Basel III and who is making the decisions?
Basel III is a set of proposed changes to international capital and liquidity requirements and some other related areas of banking supervision. It is the second major revision to an original set of rules, now known as Basel I, which was promulgated by the Basel Committee in 1988. The committee was established in the mid‐1970’s, after the failure of a small German bank (Herstatt) sent shudders through the global financial system as a result of poor coordination between national regulators. The Basel Committee is composed of banking regulators from a number of industrialized countries, with a core membership concentrated in the traditional banking powers within Europe, plus the US and Japan. The Basel accords are not formal treaties and the members of the committee do not always fully implement the rules in national law and regulation. One prominent example of this is in the United States. We had not implemented the Basel II revisions for our commercial banks by the time of the financial crisis, which put any such changes on hold. It is not clear whether we would eventually have implemented them, despite having been closely involved in the negotiations that led to that agreement. In truth, few countries choose to implement every detail of the Basel accords and they sometimes find unexpected ways to interpret the aspects they do implement. Despite this, the accords have led to much greater uniformity of capital requirements around the globe than existed prior to Basel I. In fact, the uniformity extends well beyond the countries represented on the Basel Committee, as most nations with significant banking sectors have modeled their capital regulation on the Basel rules. The Basel Committee is loosely affiliated with the Bank for International Settlements (BIS) which is often referred to as the club for the world’s central bankers. The BIS provides certain financial services to central banks and also serves as a vehicle to promote cooperation between them. In addition, it provides support services to the Basel Committee and several other multi‐lateral bodies focused on the world’s financial systems. Prominent among these is the Financial Stability Board (FSB) which was charged last year by the heads of government of the Group of Twenty (G‐20) nations with the mission of promoting financial stability around the world. In that capacity, it has been a prominent advisor to the Basel Committee in its work on Basel III.
What is the timetable for Basel III?
The G‐20 heads of government have charged the Basel Committee with finalizing the Basel III rules in time for the G‐20 meeting in Seoul, Korea on November 11‐12, 2010. The process leading to that started with the issuance of consultation papers in December of 2009 that outlined the changes proposed by the Basel Committee for the capital and liquidity requirements1. Comments were solicited by mid‐April of 2010 and many parties responded at length. In parallel, the Basel Committee, with assistance from the BIS and the FSB, has been conducting a Quantitative Impact Study (QIS) to estimate the potential effects on the financial markets and the economy of putting in place the proposed changes. It appears that the QIS has been completed in draft form and is being reviewed by the Basel Committee and themember regulators. Release to the public is expected in September, although there is no announced deadline for this. The QIS will presumably influence the Basel Committee’s choices on the levels of certain key ratios and on any revisions that it deems necessary to the elements of the original proposal. The intention is to implement Basel III by the end of 2012, although it seems clear that there will be transition periods, observation periods, or phase‐ins for a number of the more important requirements, as well as “grandfathering” of certain features of existing regulation. All of these exceptions would be intended to ease the...
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