Ahead of the meeting of G-20 Finance Ministers and Central Bank governors at Gyeongju , South Korea , the Basel Committee on Banking Supervision met in Seoul
In a statement, the Chairman of the Basel Committee and President of the Netherlands Bank, Mr Nout Wellink, said that “the Basel Committee reforms address the identified weaknesses of the pre-crisis banking sector, thus delivering on the G-20 mandate given at the Pittsburgh
The new global standards to address both firm-specific and broader systemic risks have been referred to as ‘Basel III.'
The building blocks of Basel III include higher quality of capital to ensure that banks can better absorb the types of losses such as those associated with this past crisis, better coverage of risk, especially for the capital market activities, an internationally harmonised leverage ratio to constrain excessive risk-taking and to serve as a backstop to the risk-based capital measure.
Capital buffers that should be built in good times to be used in periods of stress, minimum global liquidity standards and stronger standards of supervision, public disclosure and risk management, are some of the other facets.
Mr Wellink added that these fundamentals “will substantially reduce the probability and severity of banking crises in the future and help safeguard the financial stability and economic growth and reduce the exposure to the public sector and the taxpayers.”
The Finance Minister, Mr Pranab Mukherjee, and the Reserve Bank of India Governor, Dr D. Subbarao, will attend the G-20 Finance Ministers and central bank governors meeting on October 22-23 in South Korea
The report said the depth and severity of the crisis were amplified by weaknesses in the banking sector such as excessive leverage, inadequate and low-quality capital and insufficient liquidity buffers. It said the crisis was exacerbated by “a procyclical de-leveraging process and the inter-connectedness of systemically important financial institutions.”
In response, the Committee's reforms seek to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy.
The proposed reforms, the report said, strengthen bank level or micro-prudential regulation, which would help raise the resilience of individual banking institutions in periods of stress.
The reforms also have a macro-prudential remit, addressing system-wide risks, which can build up across the banking sector, as well as the procylical amplification of these risks over time. “Clearly, these micro and macro prudential approaches to supervision are inter-related, as greater resilience at the individual bank level reduces the risk of system wide shocks,” the report stated.
As the Committee's reforms would transform the global regulatory framework and promote a more resilient banking sector, it has undertaken a comprehensive assessment of Basel III's potential effects, both on the banking sector, and on the broader economy.
This work corroborates that the transition to stronger capital and liquidity standards is expected to have “a modest impact on economic growth,” while the long-run economic benefits substantially outweigh the costs associated with higher standards, the report said.
Going forward, the Basel Committee will focus its efforts on the implementation of the Basel III framework and related supervisory sound practice standards.
Alongside, it is also conducting work in areas covering review of the trading book, the use and impact of external ratings in the securitisation capital framework, policy response to systemically-important banks and the treatment of large exposures and enhanced cross-border resolution.
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