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Basel Framework

Background & Overview

The Basel Framework is an amalgamated set of global prudential standards developed by the Basel Committee on Banking Supervision (BCBS). The BCBS is a forum of supervisory authorities created by the central bank governors of Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the United States (G10), in 1974. Post the financial crisis, this group expanded to include Australia, Turkey and Spain, and as of 2021, currently has 45 members across 28 jurisdictions. This forum has revised the framework since the first issued guidance in 1975, to produce Basel I (the Capital Accord), Basel II (a new capital framework), and more recently Basel III as a response to the global financial crisis in 2008.

It now consists of 14 standards including:

  • Scope & definitions,
  • Definition of capital
  • Risk-based capital requirements
  • Large exposures
  • Calculation of RWA (Risk Weighted Assets) for credit risk
  • Calculation of RWA for market risk
  • Calculation of RWA for operational risk
  • Leverage Ratio (LR)
  • Liquidity Coverage Ratio (LCR)
  • Net Stable Funding Ratio (NSFR)
  • Margin requirements
  • Supervisory review process
  • Disclosure requirements
  • Core Principles for effective banking supervision

Aims & Objectives

The core purpose of the Basel Committee’s work is to discuss and establish practices for international banking supervision to the members, and to develop a global understanding of supervisory issues and provide guidance where necessary. The guidance aims to strengthen the risk management of banks to maintain financial stability. It is important to note that to date the BCBS committee has not published binding regulation, however proposes a common approach for minimum standards by which to comply to reduce global divergence. In March 2021, the European Banking Authority (EBA) announced that it will change the Basel III monitoring exercise from a voluntary nature to a mandatory requirement by December 2021, to ensure wider jurisdictions are following the standards and thus more credit institutions will be required to comply.


Scope

Members of the BCBS agree to implement the Basel Framework standards for their respective active international banks, within their jurisdiction. The standards are created as minimum requirements to be implemented however; national members may decide to publish further enhanced rules.


Impact on Securities Lending

At ISLA, our Regulatory Steering Group has been reviewing the most relevant aspects of the Basel Framework to securities lending and borrowing, which include minimum haircut floors for SFTs, and the standardised approach for credit risk for unrated counterparties. The standards for the calculation of RWA for credit risk (CRE56), include rules pertaining to the treatment of non-centrally cleared SFTs with certain counterparties, which aim to limit the build-up of leverage outside of the banking system. In its current form, this rule captures all SFTs and does not distinguish between transactions that are used for the purpose of creating leverage, and those that are used to source a security.

ISLA is currently advocating for the rules to be amended to exclude securities lending activity from the scope of the requirement. Managing RWA is a concern for securities lending participants as a result of the new Basel rules, and will not only affect regulated banks but also asset owners. The new rules limit the ability for banks to utilise internal rating models for RWA allocations, and unrated counterparties will now have a risk weight allocation of 100%.


Implementation Timeline & Key Dates

  • January 2021

    Updates to the framework for changes that the BCBS has published since December 2019 become applicable.

  • December 2021

    Basel III monitoring exercise becomes mandatory in the EU.

  • January 2023

    The Basel III standards, the Revised Market Risk framework & the revised Pillar 3 disclosure requirements become applicable

  • January 2028

    Accompanying transitional arrangements for the output floors become applicable.

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