At its September 28, 2011 meeting, the Basel Committee (the “Committee) approved a range of measures aimed at finalizing the Committee’s July 2011 consultative document,
“Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.” The document sets out the Committee’s proposal on the assessment methodology for (1) determining global systemic importance, (2) determining the magnitude of additional loss absorbency that global systemically important banks should have, and (3) proposes the arrangements by which the methodologies will be phased in.
Systematic Importance Methodology
The Committee reviewed the public comments it received on the document, and at the September 28 meeting agreed to:
- finalise the assessment methodology for global systemically important banks (G-SIBs); and
- retain the proposed calibration for the additional loss absorbency requirement, which will range from 1% to 2.5% Common Equity Tier 1 (CET1) depending on a bank's systemic importance, with an empty bucket of 3.5% CET1 as a means to discourage banks from becoming even more systemically important.
Reacting to
some commenters, the Committee also agreed to propose, in conjunction with the Financial Stability Board, some changes to certain indicators to improve the methodology for identifying G-SIBs (subject to additional testing by March 2012 using updated bank data). These revised G-SIB rules as well as a summary and evaluation of the public comments will be issued before the November 2011 meeting of the G20 Leaders.
The Committee also announced that it would continue to improve the quality and transparency of the data underlying the assessment methodology with an eye on the implementation January 1, 2016 implementation deadline.
Central Counterparty Exposure
The Committee discussed
comments on its proposal to introduce capital requirements for banks' exposures to central counterparties (CCPs). The objective of these requirements is to promote greater use of CCPs while simultaneously better ensuring that banks are appropriately capitalized against the risks they assume.
In reaction to
certain comments, the Committee agreed to a number of changes to the treatment of banks' exposures to a CCP default fund. The Committee will issue a new consultation piece including these changes in the coming weeks.
Liquidity Standards
The Committee also reviewed its work to finalize the
liquidity standards over the ensuing observation period. In its second consultation paper, ‘
International framework for liquidity risk measurement, standards and monitoring’, the Committee had proposed a strengthened liquidity framework, which (along with the qualitative ‘
Principles for Sound Liquidity Risk Management and Supervision’ issued in 2008), introduces quantitative standards for funding liquidity: (1) a 30-day liquidity coverage ratio designed to ensure short-term resilience to liquidity disruptions and (2) a longer-term structural liquidity ratio to address liquidity mismatches and promote the use of stable funding sources.
The observation period for these new standards commenced as of the end of 2010, and the period for the Liquidity Coverage Ratio (LCR) extends until mid-2013. These standards mark the first time that specific global quantitative minimum standards for liquidity have been introduced. They push banks toward holding greater levels of government bonds and liquid corporate debt instruments, resulting in potentially increased costs to banks resulting from likely increases in overall demand for highly liquid instruments. In addition, some commenters noted that too restrictive a definition of eligible instruments could also result in pricing anomalies, particularly in government bond markets.
The Committee agreed to accelerate its review in order to make any significant or key adjustments necessary to provide greater market certainty about the final technical details and calibration of the LCR well in advance of the mid-2013 deadline.
The Committee will continue to evaluate the Net Stable Funding Ratio over the observation period, and invites the industry to provide comments and informed analysis.
Monitoring Implementation of Basel Framework
In accordance with its commitment under Basel III, the Committee, in coordination with the Committee's Standards Implementation Group, has a employed a peer review framework to monitor its members' implementation of the Basel regulatory capital reforms. The Committee announced that it will publish the status of members' adoption of the capital framework and will update the findings of its ongoing monitoring on a regular basis.
The Committee also announced that it will pay special attention to inconsistencies developing in members' legislation or regulations in relation to the international minimum standard to identify differences that could raise concerns about a level playing field. In addition, the Committee agreed to survey the measurement of risk-weighted assets in both the banking book and the trading book from jurisdiction to jurisdiction, to ensure that the outcomes of the new rules are consistent in practice across banks and jurisdictions.