Basel Committee’s Oversight Body Finalizes Basel III Reforms

Earlier today, December 7th, the Basel Committee on Banking Supervision announced the completion of the Basel III bank-capital rules overhaul following the 2008 financial crisis.

"Today's endorsement of the Basel III reforms represents a major milestone that will make the capital framework more robust and improve confidence in banking systems," said Mario Draghi, Chairman of the Group of Central Bank Governors and Heads of Supervision (GHOS) and President of the European Central Bank. He added, "The package of reforms endorsed by the GHOS now completes the global reform of the regulatory framework, which began following the onset of the financial crisis."

The reforms endorsed by the GHOS include the following elements:

  • a revised standardized approach for credit risk, which will improve the robustness and risk sensitivity of the existing approach;
  • revisions to the internal ratings-based approach for credit risk, where the use of the most advanced internally modeled approaches for low-default portfolios will be limited;
  • revisions to the credit valuation adjustment framework, including the removal of the internally modeled approach and the introduction of a revised standardized approach;
  • a revised standardized approach for operational risk, which will replace the existing standardized approaches and the advanced measurement approaches;
  • revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (G-SIBs), which will take the form of a Tier 1 capital buffer set at 50 percent of a G-SIB's risk-weighted capital buffer; and
  • an aggregate output floor, which will ensure that banks' risk-weighted assets (RWAs) generated by internal models are no lower than 72.5 percent of RWAs as calculated by the Basel III framework's standardized approaches. Banks will also be required to disclose their RWAs based on these standardized approaches.

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