Basel Committee on Banking Supervision (BCBS)

The Basel Committee on Banking Supervision (BCBS) is a group of banking regulators set up in 1974 by the central bank governors of the G10 countries. Since then, its membership has grown, and by 2019, it included 45 members from 28 jurisdictions, made up of central banks and banking regulators.

The BCBS provides a platform for regular cooperation on banking supervision and aims to improve the quality of supervision worldwide. It issues guidelines and standards on key topics, including capital adequacy, effective banking supervision, and cross-border banking oversight. The Committee’s Secretariat is based at the Bank for International Settlements (BIS) in Basel, Switzerland, which hosts and supports several global financial standard-setting bodies, including BCBS.

As the main global standard-setter for bank regulation, BCBS focuses on strengthening supervision, regulation, and banking practices to improve financial stability. While its rules primarily target banks, some jurisdictions, like the UK, apply similar regulations to non-bank financial institutions, including investment and securities firms.

The Basel Accord sets minimum capital ratios that banks must maintain, based on key risks: credit, market, and operational risks. This means banks with higher risks need more capital to stay safe. Other risks may also require regulatory capital but tend to be firm-specific, whereas all banks must consider credit, market, and operational risks.

Recent updates under Basel III have introduced additional measures:

Countercyclical capital buffer – limits bank activity during credit booms to reduce losses during busts.
Leverage ratio – ensures a minimum amount of capital relative to all assets and off-balance sheet exposures, regardless of risk.
Liquidity requirements – set minimum liquidity standards to ensure banks can meet short-term obligations.

Finally, Basel capital adequacy rules are organized under three pillars, which we’ll explore in detail below.

Pillar 1: Sets out the minimum capital banks must hold to cover key risks. It uses clear, formula-based methods to calculate how much capital a bank needs.

In simple terms, the basic Pillar 1 capital requirement can be written as:

capital
——————————————————- > 8%
credit risk + market risk + operational risk

Pillar 2: Supervisory review process – goes beyond the minimum capital rules of Pillar 1. It gives regulators a chance to review a bank’s overall risk and capital position.

Banks provide extra information, including:

Risks not covered under Pillar 1 – anything outside credit, market, or operational risks
Risk management practices – how the bank identifies, monitors, and controls risks
Control infrastructure quality – the effectiveness of internal systems and processes
Alignment with strategy and finances – how the bank’s risk profile fits with its strategic and financial plans

Pillar 3: Market discipline – focuses on transparency. Banks are required to publish clear information about how they manage risks. This allows investors, customers, and other market participants to make informed decisions and encourages banks to maintain strong risk management practices.

Basel IV is the informal name for the latest set of banking reforms that build on Basel I, II, and III. It strengthens capital and risk rules and is set to start on January 1, 2023, ensuring banks are better prepared for financial shocks.

How Basel I, II, and III Work

Basel I, also called the Basel Capital Accord, was introduced in 1988. Its main goal was to create a global standard for banking stability and reduce unfair competition caused by different national capital rules. The Accord focused on capital requirements, which are the liquid assets a bank must hold to cover potential risks. Basel I set a minimum capital ratio of 8% of risk-weighted assets, which banks had to meet by the end of 1992.
In 2004, the Basel Committee introduced Basel II, updating the original Accord. Basel II refined how banks calculate the minimum capital ratio by classifying assets into tiers based on risk and liquidity. Tier 1 capital is the highest quality and most reliable. Banks still had to hold a total capital ratio of 8%, but now at least 4% had to be Tier 1 capital. This change ensured that banks maintained a stronger core of high-quality capital to absorb potential losses.
Basel III – The 2007-2008 global financial crisis exposed weaknesses in Basel I and II, showing that existing rules weren’t enough to protect banks. In response, the Basel Committee introduced Basel III in 2009. Key changes included: Higher Tier 1 capital requirement: Increased from 4% to 6% and Additional capital buffers are meant to strengthen banks’ resilience, bringing the total capital requirement up to 13% in some cases. Although Basel III was initially planned for 2015, implementation has been delayed and is now scheduled for January 1, 2023, with some provisions already in effect in certain countries.

What Would Basel IV Do?

As Basel III approached its final implementation, the Basel Committee continued to refine its rules. Some in the financial community call these updates Basel IV, though the committee considers them part of Basel III rather than a completely new framework.

Basel IV is scheduled to begin on January 1, 2023. Its main aim is to: