By: Udaibir Das and Wayne Byres
This article originally appeared in the OMFIF on April 26, 2024.
The crucial role of implementing Basel standards
The Basel Committee implementation programme has been integral to international financial architecture. Having celebrated its 50th anniversary on 24-25 April, the Basel Committee on Banking Supervision has journeyed from a humble forum for G7 bank supervisors to a titan among global financial standard-setting bodies.
Its standards and principles – especially the Basel framework, and the core principles for effective banking supervision – remain critical at a time when a wide range of risks, vulnerabilities and transformation impacts the global banking system. Now with a membership of 45 members from 28 jurisdictions, the BCBS oversees over 90% of global banking assets.
The BCBS’s co-operative arrangement with its members has broadly proven effective. Its standards and guidelines are globally recognised and implemented by member (and many more non-member) countries. Importantly, the implementation process is carried out in a proportional manner, tailored to align with the unique legal, institutional and structural realities of each country. This approach ensures that the BCBS’s standards not only enhance global financial stability but also respect and accommodate the diverse contexts within which its members operate.
Answering the call for robust governance
The BCBS fortified its standards after the 2008 financial crisis. Since then, it has established a mechanism to ensure their effective implementation. At a time when the validity of risk-based capital ratios was seriously questioned, a mechanism was needed to reinforce the complete, timely and consistent implementation of the Committee’s post-crisis reforms.
In response to calls for trust and confidence in banking oversight, the BCBS created the Regulatory Consistency Assessment Programme in 2012. This programme – founded on the principle of prompt reform and rectification of regulatory shortfalls – requires member jurisdictions to undergo periodic peer assessments on three levels. These are the timeliness of reforms, consistency of implementation and outcomes from applying standards to individual banks. A key component was to evaluate the divergence in intended regulatory outcomes from applying Basel regulatory standards to individual banks.
Establishing the RCAP
Setting up an objective and fair global assessment programme like the RCAP was however no small feat. It marked a significant expansion of the Committee’s activities. The BCBS had never previously subjected its member jurisdictions to peer review. Instead, it left implementation to each jurisdiction’s discretion and assessments to banking and financial sector supervisory reviews by the International Monetary Fund and the World Bank.
The BCBS had to navigate a labyrinth of technical and design challenges, such as diverse regulatory environments and the timely adoption of Basel standards, all against the backdrop of an evolving financial landscape. Over time, the RCAP’s focus expanded from risk-based capital to include Basel III standards on liquidity, leverage and systemically important banks.
Resistance and pushback
The Basel Committee assessments were also occasionally met with resistance due to several challenges. First, national interests. As the impact of the 2008 financial crisis faded, some jurisdictions resisted certain aspects of the Basel III standards due to national interests or the specific characteristics of their domestic financial systems.
Some also distanced themselves as implementing Basel III standards could be perceived as increasing the regulatory burden on banks, leading to resistance from the banking industry.
Another challenge was the perceived rigidity of assessments. Some jurisdictions questioned whether the evaluation was an overly mechanical exercise that should apply more nuanced judgments. From then, various ambiguities were identified during the RCAP, leaving some of the Committee’s standards open to interpretation.
Despite these challenges, the Basel Committee – supported by the Bank for International Settlements – established the RCAP across its member jurisdictions. The leadership of Stefan Ingves, the then-BCBS chair, and Jaime Caruana, the then-BIS general manager, played a key role in this process.
Commitment and transparency
Members of the BCBS must commit to implementing BCBS decisions and under the RCAP, they are required to demonstrate to their peers, markets, and other stakeholders that they have done so. As a way of promoting transparency, this is achieved through the publication of various assessments, regulatory rectifications made and follow-up.
Today, the RCAP is a pivotal governance tool. It fosters confidence in the prudential policies adopted across member jurisdictions. The RCAP purposefully promotes reliable capital and liquidity ratios, higher-quality capital and effective oversight. It bolsters the credibility of the BCBS’s commitments by transparently reporting on the national implementation of the Basel standards, including where the departures exist.
Broadening the scope
The RCAP has broadened its focus from risk-based capital to include Basel III standards on liquidity, leverage and systemically important banks. It has also scrutinised differences in the implementation of standards between individual banks – identifying areas where consistent domestic standards may yield materially divergent measures of financial soundness.
Focusing on material gaps and shortcomings has proven to be an effective strategy for promoting standards’ complete, timely and consistent implementation. This approach has been so successful that several other financial sector standard-setters have adopted the RCAP model.
After 50 years, the Basel Committee’s standards are crucial for maintaining global financial stability. However, well-designed global standards will not achieve their objectives if they are not implemented with equal rigour.
With the post-crisis reforms now primarily implemented and assessed, one might consider the need for the RCAP diminished. This would be a colossal mistake. Instead, the RCAP needs to evolve in response to the evolution of banking and regulation and should continue to serve as the platform through which the Committee reinforces the strong foundations of the regulatory framework.
Beyond this, the RCAP not only facilitates open financial borders, a level playing field and sensible risk-taking incentives, it can also provide early alerts for policy gaps, allowing it to lead rather than react. The programme could also be used to monitor regulatory rollbacks and help foster regulatory coordination where the Basel standards efficiency requires regulatory co-operation. However, as it stands, the RCAP continues to shed light on areas needing attention and evaluates the reliability of banks’ reported prudential ratios.
Throughout its history, the RCAP continues to serve as a technical appraisal and a communication exercise to inform and explain BCBS standards, their meaning and their impact on the safety and surety of Basel standards and their implementation. A revamped and purposeful RCAP can continue to play a crucial role in ensuring comprehensive and consistent implementation of the agreed-upon Basel standards – fostering confidence in the prudential policies adopted across various jurisdictions.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Senior Adviser of the International Forum for Sovereign Wealth Funds, and a Distinguished Fellow at the Observer Research Foundation America and Wayne Byres is former Secretary General of the Basel Committee and former Chair of the Australian Prudential Authority.