The International Regulatory Framework for Banks (Basel III)
The origins and aims of Basel III
In 1974, in response to disruptions in the international financial markets, the central bank governors of the G10 countries established a Committee on Banking Regulations and Supervisory Practices, later renamed as the 'Basel Committee on Banking Supervision' (BCBS). The Committee was designed as a forum for regular cooperation between its member countries on banking supervisory matters. Its aim was and is to enhance financial stability by improving supervisory knowhow and the quality of banking supervision worldwide.
The Basel Committee today
After starting life as a G10 body, the Committee expanded its membership in 2009 and now includes 27 jurisdictions. The Committee now reports to an oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), which comprises central bank governors and (non-central bank) heads of supervision from member countries.
The Committee's decisions have no legal force. Rather, the Committee formulates supervisory standards and guidelines and recommends statements of best practice in the expectation that individual national authorities will implement them.
Basel III capital and liquidity standards
Following on from the capital adequacy frameworks announced in 1988 and 1999 (Basel I and Basel II respectively), in September 2010, the GHOS announced higher global minimum capital standards for commercial banks ('Basel III'). In November 2010, the new capital and liquidity standards were endorsed at the G20 Leaders Summit in Seoul.
Basel III is a comprehensive set of reform measures, developed to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to:
- Improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source
- Improve risk management and governance
- Strengthen banks' transparency and disclosures
The reforms target:
- Bank-level, or micro-prudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress.
- Macro-prudential, system-wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time
These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks.
The Bank for International Settlements has listed the Compilation of documents that form the global regulatory framework for capital and liquidity.
In the European Union, Basel III has been implemented via the CRD IV package.
Last updated: 9 July 2015