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Overview of the Basel Committee's Efforts in Strengthening Global Banking Standards

This document outlines the Basel Committee's evolution since its establishment in 1974, focusing on its pivotal role in standard-setting for effective banking supervision. It highlights the Committee's main objectives, including enhancing banking supervision quality, promoting corporate governance, and ensuring a sound banking system. Furthermore, it discusses the implementation of Basel II, which introduced new capital adequacy requirements aimed at fostering risk management and market discipline. The necessity for cooperation among global jurisdictions for successful implementation is also emphasized.

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Overview of the Basel Committee's Efforts in Strengthening Global Banking Standards

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  1. The Basel Committee’s Approach Measures taken by International Organisations and Central Banks to establish a sound banking system Damascus 2 July 2005 Karl F. Cordewener Deputy Secretary General

  2. Basel Committee – an overview • Established at the end of 1974 by Central Bank Governors of G10 • Committee started as forum for discussion and information-sharing among banking supervisors • Over time, it has become standard setter • Most noticeable when 1988 Capital Accord was published

  3. Basel Committee – its main goals • Improve the quality of banking supervision worldwide • Promote more effective corporate governance • Close gaps in international supervisory coverage • Level the playing field among international banks • Establish a safer and sounder banking system as a precondition for sustainable growth of an economy

  4. Committee‘s worldwide focus • Committee tries to address issues relevant for all jurisdictions worldwide • Committee has developed over time close cooperation with non-members • Core Principles Liaison Group (16 jurisdictions, IMF, WB) • Sixteen Regional Groups of Banking Supervisors • International Conferences of Banking Supervisors (ICBS)

  5. Principal policies developed by the Committee • Core Principles for Effective Banking Supervision • Capital Adequacy Framework • Principles for sharing supervisory responsibility for banks’ foreign establishments • Many other policy papers, e.g. risk management guidelines, on the Committee’s website (www.bis.org/bcbs)

  6. Core Principles • Committee released in 1997 a set of Core Principles for Effective Banking Supervision • Developed in close cooperation with supervisors from non-member countries • Comprehensive set of supervisory guidelines • Methodology issued in 1999 • IMF and World Bank monitor implementation

  7. Capital Adequacy • 1988 Capital Accord established minimum capital requirements for banks • In 1998, Committee started revising the 1988 Accord, in order to make • It more risk sensitive and • More consistent with current best practice in banks’ risk management Capital Risk weighted assets Minimum ratio:  8 %

  8. What are the basic aims of Basel II? • To provide the right incentives for sound risk management • To deliver a prudent amount of capital in relation to the risk that is run • To maintain a reasonable level playing-field for all banks to operate in

  9. Main elements of Basel II • Based on three pillars • Specific minimum capital requirements • Supervisors‘ evaluation of banks‘ own assessment of risks • Disclosure requirements to foster market discipline • Revised capital requirements for credit risk, new ones for operational risk, and hardly changed ones for market risks • Menu of approaches for the measurement of risks • Introduction of increasingly reliable estimates of the drivers of credit risk • More emphasis on operational risk

  10. Pillar 2 – Supervisory review process • Pillar 2 is based on four key principles: • Banks‘ own assessment of capital adequacy • Supervisors‘ review of banks‘ capital adequacy assessment • Supervisory response • Capital above regulatory minima • Supervisory intervention

  11. Pillar 3 – Market discipline • Another lever to strengthen the safety and soundness of the system • Complements regulatory capital requirements and the supervisory review process • Reliable and timely information allowing well founded counterparty risk assessments • Strong incentive for banks to conduct business in a safe, sound and efficient manner

  12. End 2006 End 2007 2007 - ? Committee member implementation of simpler approaches Committee member implementation of advanced approaches Extended transition period for other countries Implementation - the current process • Implementation means • transforming the framework into enforceable rules and • adjust it to national circumstances • Time schedule for implementation

  13. Time schedule for implementation • When should Basel II be implemented? • Only national authorities can answer this question • Timing should be determined by a country‘s own circumstances • Basel II may be a lesser priority compared to other efforts • For a successful implementation, greater cooperation among supervisors across jurisdictions is necessary

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