Implementation status of final Basel III reforms varies across globe

The target timelines for implementation of the final Basel III—also called by some as Basel IV or Basel 3.1—reforms vary significantly worldwide. Although the Basel III standards that have been implemented so far are believed to have strengthened the resilience and stability of the global banking sector, the implementation of these reforms has been complex and multi-faceted across jurisdictions in many ways. The final Basel III reforms include the revised credit risk approaches, standardized operational risk approach, credit valuation adjustment framework, leverage ratio revisions, and an aggregate output floor. The Basel Committee on Banking Supervision (BCBS) had issued these final reforms in December 2017, followed by the final market risk capital requirements standard in January 2019 and the extension of the implementation date for these reforms by one year, to January 01, 2023, in the backdrop of the COVID-19 pandemic.

To date, regulatory jurisdictions like the European Union and the United Kingdom are still in the process of finalizing these rules and expect to implement these rules beginning from January 01, 2025, followed by a five-year phase-in period for output floor requirements. Switzerland, another European country, is also expected to finalize the Basel III rules this year. However, notably, the United States is one key jurisdiction that has yet to even start the consultation process for these final Basel III rules. Recently, speaking at the Peterson Institute for International Economics, the Federal Deposit Insurance Corporation (FDIC) Chair Martin J. Gruenberg noted that Basel III finalization and implementation is a top priority for the FDIC and all of the other federal banking agencies. In the near term, the federal banking agencies are expected to issue a notice of proposed rulemaking to seek public comment on changes to the U.S capital framework to consider the best way to incorporate the finalization of Basel III. The FDIC Chair mentioned that a key consideration with respect to these revisions is the scope of application. Influenced by the recent experience with three bank failures of institutions with assets between USD 100 billion and USD 250 billion, the agencies are considering whether the proposals should apply to banks with assets over USD 100 billion.

* Expected Basel timeline based on consultations
** Provisional agreement reached on June 27, 2023

In addition to the ongoing work on the implementation of final Basel III reforms in the above-mentioned geographies, the overall status of Basel III implementation in Latin American countries, such as Argentina, Brazil, and Chile, also varies significantly. Brazil, which comes closest to the final Basel reform implementation, expects the operational risk capital requirements to enter into force on January 01, 2024 while the standardized credit risk approach could be in force by July 01, 2023. In general, the countries in this region lag behind those in other regions in their implementation of such financial reforms. However, the latest Latin American country to adopt Basel III standards is Peru.

In December 2022, the banking sector regulator in Peru (known as Superintendencia de Banca, Seguros y AFP or SBS in short) published six resolutions with respect to the introduction of Basel III standards for banking sector (Financial System Law 26.702). Peru has four government-owned banks and 16 commercial banks while the Basel rules are intended for all banking institutions in the country. A few days ago, the banking regulator SBS postponed the deadline for the full implementation of Basel III capital requirements in Peru from March 2024 to September 2024. The rules stipulate the minimum regulatory capital requirement of 10%, with the requirement expected to increase to 12.5% of risk-weighted assets once the capital conservation buffer is fully phased in by 2027. Moody’s research notes that if the new rules were to be fully implemented with immediate effect, instead of the phasing-in by 2027, only four of the 53 financial entities in Peru would not meet the minimum Tier 1 capital requirement of 8.5% of risk-weighted assets and 14 would fall short of the fully phased-in total regulatory capital requirement of 12.5% of the risk-weighted assets.

References:

• Moody’s research