BCBS

Basel Committee on Banking Supervision (BCBS) 

The Basel Committee on Banking Supervision (BCBS) was set up in 1974 by the central bank governors of the G10 countries. Its membership has expanded over time in 2009 and 2014, 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. Its goal is to improve the understanding of key supervisory issues and enhance the quality of banking regulation worldwide. The committee sets guidelines and standards in several areas, including capital adequacy, the Core Principles for Effective Banking Supervision, and the Concordat on cross-border banking supervision.

The BCBS Secretariat is based at the Bank for International Settlements (BIS) in Basel, Switzerland. The BIS supports several international financial institutions, including the BCBS. The committee has its own governance, reporting lines, and agenda, guided by the G10 central bank governors.

Mandate and Function of BCBS

The Basel Committee on Banking Supervision (BCBS) is the main global standard-setter for the prudential regulation of banks. It also provides a forum for supervisors to cooperate and share best practices. Its main goal is to strengthen regulation, supervision, and practices to improve financial stability worldwide.

While the BCBS focuses on banks, many regulators like those in the UK also apply similar rules to non-bank financial institutions, such as investment managers and securities firms. This means that some banking regulations may also apply to non-banks, though often in a modified form.

Need for a Multinational Accord

The Committee recognised the need for a global agreement to keep the international banking system stable and to prevent unfair advantages caused by differences in national capital rules.

The Basel Accord sets minimum capital ratios that banks in member countries must maintain. These ratios cover key risks: credit, market, and operational risks. Simply put, the higher a bank’s exposure to these risks, the more capital it needs to hold.

Other types of risk may also require capital, but these are usually specific to individual firms. In contrast, the Basel Accord assumes all financial institutions face credit, market, and operational risks, so these are the risks that determine the core capital requirements. 

In recent years, Basel III introduced some important concepts beyond just capital ratios:

• Countercyclical capital buffer – limits how much banks can lend during credit booms, helping reduce losses in downturns.
• Leverage ratio – sets a minimum amount of capital compared to all assets and off-balance sheet exposures, regardless of risk.
• Liquidity requirements – ensures banks have enough liquid assets to meet short-term obligations.

The capital adequacy requirements are grouped into three pillars:

Pillar 1: This pillar sets out a formula-based method for calculating the capital banks must hold.

In simple terms, Pillar 1 shows the minimum amount of capital a bank needs to cover its credit, market, and operational risks.

                             capital 

——————————————————-        > 8%

credit risk + market risk + operational risk

Pillar 2: Supervisory review process – requires banks to provide extra information, beyond what is included in Pillar 1, so regulators can check whether the bank is holding enough capital. 

This additional information usually covers:

• Risks that Pillar 1 doesn’t cover
• How the bank manages its risks
• The strength of the bank’s control systems 
• How the bank’s risk profile fits with its strategic and financial plans

Pillar 3: Market discipline – banks must publicly share information about how they manage the risks they face. This helps promote transparency and allows the market to assess a bank’s stability.

Basel IV is the informal name for the next set of banking reforms that build on Basel I, II, and III (also called Basel 3.1). Its implementation is scheduled to start on January 1, 2023.

How Basel I, II, and III Work

• Basel I. Also called the Basel Capital Accord, was introduced in 1988. Its goal was to create a multinational agreement to strengthen the stability of the international banking system and reduce competitive differences caused by varying national capital rules. Capital requirements are the minimum liquid assets a bank must hold to cover potential obligations. Basel I required banks to maintain at least 8% of capital relative to their risk-weighted assets by the end of 1992.
• Basel II. In 2004, the Basel Committee introduced Basel II to update the original accord. It improved how banks calculate the minimum capital needed for their risk-weighted assets. Bank assets were divided into tiers based on quality and risk, with Tier 1 capital being the highest quality. Under Basel II, banks still needed an 8% capital reserve, but now at least 4% had to be Tier 1 capital, ensuring that the most reliable forms of capital were held against risks.
• Basel III After the 2007–2008 global financial crisis, it became clear that Basel I and II didn’t fully address banking risks. In response, the Basel Committee introduced Basel III in 2009. Implementation was originally planned for 2015 but has been delayed multiple times, now set for Jan 1, 2023, with some rules already active in certain countries. Key changes included – Increasing Tier 1 capital from 4% to 6%. Adding capital buffers, raising total capital requirements up to 13%. These updates strengthened banks’ ability to absorb losses and improved overall financial stability.

What Would Basel IV Do?

As Basel III was being finalized, the BCBS introduced further updates that some call Basel IV. William Coen, the Basel Committee’s secretary general in 2016, noted that these changes weren’t big enough to deserve a new Roman numeral.

Whether considered part of Basel III or a new phase, Basel IV is set to start on January 1, 2023. Its main aim is to make the calculation of risk-weighted assets (RWAs) more reliable and to improve the comparability of banks’ capital ratios.