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.

The final components of Basel III were concluded in 2017 and include new standardised approaches for credit risk and operational risk, and a revised market risk and CVA risk framework. It also introduced rules to reduce the variability of risk weighted assets between banks via an ‘output floor’, where a bank’s aggregate RWA calculated with the benefit of internal models cannot be lower than 72.5% of the RWA as calculated under the standardised framework.

These final Basel III reforms are now being implemented in member jurisdictions.

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 would 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 have been 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%. Read our series of Basel discussion papers to find out more.