Basel III has recently been reformed and will bring about changes to financial institutions in Australia. To help you understand what has changed, we’ve summarised what Basel III is and how the reforms have changed the international regulatory framework for banks.
What is Basel III?
The Basel Accords are a series of banking regulations agreed by BCBS (The Basel Committee on Banking Supervision), a group comprising representatives from 27 major financial centres that aims to regulate finance and banking practices on an international level.
Basel III is an international regulatory framework for banks that was developed in response to the financial crisis of 2007–09.
Recent Basel III reforms
December 2017 saw reforms to Basel III, which focused on reducing variability of RWA (risk-weighted assets) and restoring credibility in the calculation of RWA by:
- “Enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios
- Constraining the use of internally modelled approaches
- Complementing the risk-weighted capital ratio with a finalised leverage ratio and a revised and robust capital floor”
Download a high-level summary of the reforms >>
The reforms place a greater focus on managing risks and the standardised approaches for doing so.
In a recent speech, Stefan Ingves, chair of the Basel Committee on Banking Supervision and governor of Sveriges Riksbank, highlighted cyber risk as an important topic for financial institutions: “The banking system is increasingly reliant on information technology, which exposes it to a growing and evolving set of operational risks.
“Banks with operationally resilient systems, staff, processes and technology can better adapt to evolving shocks and maintain the provision of critical financial services.”
How Basel III is interpreted in Australia
In the media conference announcing the finalised changes to Basel III in December 2017, Mario Draghi, chair of the GHOS (Group of Governors and Heads of Supervision) and president of the European Central Bank, highlighted that “this global agreement has to be […] transposed into national law and regulations”.
For this reason, the implementation date was set at 1 January 2022 and an agreed phase-in for the output floor over a period of five years.
On 14 February 2018, the APRA (Australian Prudential Regulation Authority) released a discussion paper proposing how it will introduce the Basel III requirements in Australia.
APRA proposes it will release a draft APS 110 (Prudential Standard APS 110 Capital Adequacy) and new reporting standard for consultation later in 2018 to improve transparency, international comparability and flexibility.
The paper also announces that “application of the minimum leverage ratio requirement would therefore be deferred until 1 July 2019, and implemented based on the revised Basel III exposure measure definition at that time”.