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Forthcoming challenges to banking regulation (sovereign risk, RWA variability, trading book…) - Resilience of the EU financial sector in the global context

The Basel Committee’s post-crisis regulatory framework: its evolution and impact

By Coen William - Secretary General, Basel Committee on Banking Supervision (BCBS)


The Basel Committee has made substantial progress towards finalising its post-crisis reforms. These reforms include significantly higher requirements for the quality and level of capital, while better capturing the full scope of risks that banks face.

G20 leaders have endorsed this ambitious and comprehensive strengthening of international bank regulatory standards. Various G20 summits have reaffirmed leaders’ commitment to the strengthened regulatory framework as it helps ensure that the banking system can contribute to strong, sustainable and balanced growth.

The Committee’s reforms complement a range of other post-crisis measures. These include improving the resolvability of financial firms, enhancing the resilience of financial market infrastructures and transforming shadow banking into resilient market-based finance. Together, these measures have enhanced financial stability.

In the following, I briefly review the evolution of the Committee’s regulatory framework and the impact of its post-crisis reforms on banks and the wider economy.

The Committee’s post-crisis regulatory framework comprises multiple metrics. Compared with the pre-crisis framework – which relied only on the risk-weighted capital ratio – the revised framework now includes a leverage ratio, large exposure limits, a Liquidity Coverage Ratio, a Net Stable Funding Ratio as well as a minimum standard for “Total Loss Absorbing Capacity” (TLAC) for global systemically important banks. In addition, although not part of the Pillar 1 (minimum capital requirements) framework, supervisory stress testing has played an increasingly important role in a number of jurisdictions and has in some cases proven to be the binding regulatory constraint for banks.

The shift to multiple metrics and a greater reliance on stress testing reflects the importance of an eclectic regulatory framework based on a range of complementary measures and supervisory judgment. Such an approach is more robust to arbitrage and erosion over time, as each measure offsets the shortcomings and adverse incentives of the others. For example, the leverage ratio provides an absolute cap on leverage but, by itself, could incentivise banks to increase their holdings of high risk assets. The risk-weighted framework compensates for this as it constrains a bank that materially increases its risk profile without commensurate capital.

Reforms will help the banking system contribute to strong, sustainable and balanced growth.

In assessing the impact of post-crisis reforms, it is important to take a medium-term perspective. The Basel III reforms are expected to have a transitional impact; they were introduced to tackle the major fault lines highlighted by the financial crisis. But in the medium-term, a banking system that is resilient will be able to support the real economy and contribute positively to growth. This is ultimately the key outcome for society.

From a bottom-up perspective, banks have made impressive progress towards meeting the Basel III requirements. The Committee’s latest monitoring exercise shows that all large internationally-active banks meet the risk-weighted Common Equity Tier 1 requirements (both minimum and buffer requirements). And importantly, this has been achieved primarily by an increase in capital resources (either organically or by issuing equity). For the largest internationally-active banks, Tier 1 capital has increased by over 60% since 2011. This is in stark contrast to predictions made by some stakeholders of the perverse deleveraging impact that Basel III would cause. In fact, total bank assets have increased by around 20% during this time period.

From a top-down perspective, the Committee’s assessment of the long-term economic impact of stronger capital and liquidity requirements, recently refreshed to incorporate the impact of TLAC, suggests that the net benefits of such requirements remain positive for a broad range of capital ratios. This analysis is supported by a wide range of academic and stakeholder studies, which show that more resilient banks are better able to maintain the provision of key financial services through the credit cycle.

The Committee is well on track to finalise the remaining core elements of the global bank regulatory reform agenda. As it does, it will continue to be guided by three overarching principles: (i) a firm commitment to enhancing global financial stability; (ii) an extensive consultation process with a wide range of stakeholders; and (iii) a comprehensive and rigorous assessment of the impact of its reforms.

Going forward, the Committee will continue to assess the coherence, interactions and impact of its post-crisis reforms.