Keeping a ship on track is a complex affair. A skilled helmsman maintains a steady course, correctly executing each rudder order and using visual references, a magnetic and gyrocompass, and a rudder angle indicator. Just as the helmsman keeps a ship on track, so it is with Basel III and the banking sector.
Basel III is the third accord from the continuously-updated Basel Committee. This comprehensive set of reform measures was developed to strengthen regulation, supervision and risk management of the banking sector. The update was needed following the industry shockwaves caused during the subprime crisis of 2007. Consequently, Basel III’s aim was to improve the ability of banks to absorb shocks from financial/economic stress, improve risk management and governance, and strengthen banks’ transparency and disclosures.
However, the complete Basel accord is not directly applicable and only applies to internationally-active banks. An important part of it: the Capital Requirements Directive (CRD) IV, on the other hand, applies to all banks, including investment firms.
The Directive’s new capital buffers require financial institutions to hold more and higher-quality capital than under current Basel II rules. The new leverage ratio introduces a non-risk-based measure to supplement the risk-based minimum capital requirements. And the new liquidity ratios ensure that banks maintain adequate funding levels in the event of a severe economic crisis.
As you can tell from the explanation above, Basel III is wide ranging and covers a variety of banking functions. As a result, each sub-component of Basel has different implementation dates that you need to be aware of.
Believe it or not, the standards for Basel IV were finalised in December 2017, even before III had been fully implemented.
Basel, and all its requirements, can make one’s head spin. The good news is that SKT Consulting is here to stop the spinning by helping you implement Basel. After all, a skilled helmsman knows how to maintain a steady course… Get in touch for an initial discussion.