About
The Basel Framework is a set of international banking standards developed by the Basel Committee on Banking Supervision (BCBS, est. 1974), a committee of the Bank for International Settlements (BIS, est. 1930). These standards aim to stabilize the global financial system by monitoring the activities of banks and ensuring they have enough capital to cover their risks.
The framework has evolved over time1History of the BCBS, with each iteration patching issues in the previous version.
- Basel I was published in 1988 and implemented by 1992 in the Group of Ten (G-10) countries, in response to the liquidation of Herstatt bank in 1974.
- Basel II, the first change to the accords, was initially proposed in 1999 and published in 2004.
- Basel III was published in 2010, partially in response to the ’07 – ’08 financial crisis, but also to patch issues that were identified before the collapse.
Further changes have since been made to Basel III, referred to as the “Endgame reforms” or informally as Basel IV, which were finalized in 2017.
Since 2019, Basel III, Endgame and other revisions have been consolidated into a single “Basel Framework”, which comprises all current standards and future changes.
Status
The Basel Framework is currently active. You can browse the full standard and upcoming changes on the BIS Website.
The BCBS also publishes an implementation dashboard that shows the regulatory status of each member country since 2011.
Jurisdiction
The BCBS does not have any regulatory authority over its members. The Basel Framework is a set of standards that its members agree to implement as regulations within their own jurisdictions.
- Basel I and II were proposed and implemented by the Group of Ten (G-10) countries.
- BCBS expanded membership in 2009 and 2014.
- Today, the BCBS membership list comprises 45 members from 28 jurisdictions.
Structure
The Basel Framework
The current Basel Framework is comprised of 14 standards. Each is divided into chapters that contain definitions and requirements.
| Acronym | Standard name |
|---|---|
| SCO | Scope and definitions |
| CAP | Definition of capital |
| RBC | Risk-based capital requirements |
| CRE | Calculation of RWA for credit risk |
| MAR | Calculation of RWA for market risk |
| OPE | Calculation of RWA for operational risk |
| LEV | Leverage ratio |
| LCR | Liquidity Coverage Ratio |
| NSF | Net Stable Funding Ratio |
| LEX | Large exposures |
| MGN | Margin requirements |
| SRP | Supervisory review process |
| DIS | Disclosure requirements |
| BCP | Core Principles for Effective Banking Supervision |
To understand this structure, its helpful to start with its origins in Basel III and the Endgame Reforms.
Basel III Pillars
Basel III is comprised of three “pillars” which describe the requirements of banks and their supervisors:
- Regulatory Capital: Banks must hold enough “high-quality” capital to cover their risk exposure.
- Supervisory Review: Banks must assess their own risk management and capital requirements and supervisors must evaluate the quality of these assessments.
- Market Disclosure: Banks must disclose comprehensive information about their capital adequacy and risk management practices.
These standards set the groundwork to address problems with capital, leverage, supervision, and disclosure in the banking industry.
Endgame Reforms
As the crisis continued to unfold, deficiencies in the Basel III standards began to show2see the BCBS report – Finalizing Basel III for details:
- Insufficient Risk Visibility: Basel III didn’t have consistent measurements for market, credit, and operational risks. This is because RWAs were calculated differently by each bank, making it difficult to compare capital ratios between banks.
- Internal Model Risk: Banks were using internal models to calculate capital requirements, causing significant variation in risk assessments and introducing incentives to minimize risk weights.
Given these issues, the 2017 Endgame reforms were created to “restore credibility in the calculation of risk-weighted assets (RWAs) and improve the comparability of banks’ capital ratios.”
Endgame proposed the following changes3see the BCBS report – Finalizing Basel III for details:
- Standardized Calculation of RWAs: New standard approaches for calculating credit risk, market risk, Credit Valuation Adjustment and operational risk.
- Internal model constraints: New constraints on how internal models can be used, including the introduction of an output floor to limit the benefits banks can derive from using internal models.
- G-SIB Leverage: Applied higher leverage ratio requirements to Globally Systemic Banks (G-SIBs).