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Basel III: international regulatory 

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What is Basel III?

Due to the international financial crisis that occurred between 2007 - 2009 and the effects it had on the world economy, the Basel Committee on Banking Supervision signed in December 2010 a set of measures to strengthen regulation, supervision and risk management in banks.

These measures are known as Basel III and are promoted by the G-20 and the Financial Stability Council (CEF), an international body that aims to maintain the efficiency and stability of the financial system.

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What does Basel III say?

In general, Basel III seeks that banks have sufficient funds to improve their response capacity to situations of economic and financial disturbance, in order to have greater global stability. For this reason, among others, it requires having:

  • More capital and higher quality; thanks to this, it is expected that the banks will have the solvency they need to face the risks they assume.
  • A capital conservation buffer, that is, entities must have resources and reserves constantly, both in cycles of economic growth and in adverse situations or recession.
  • Effective measures to avoid systemic or contagion risk.

Basel III is a much more demanding regulation unlike the provisions of Basel I, which was signed in 1988 and established the principles on which banking should be based, and Basel II, signed in 2004 and it allowed banks to apply risk ratings based on their internal models.

The agreement determines:

  • The introduction of a new leverage ratio to complement the solvency ratio and thus be able to stop the large indebtedness in the financial system.
  • The creation of a new liquidity standard based on two new ratios: one for short-term liquidity coverage and the other for long-term structural liquidity. In this way, banks can ensure they have sufficient liquidity to deal with unfavorable situations.
  • Additional control measures regarding risk management, corporate governance, the valuation of financial instruments, among others.

Basel III post-crisis reforms

In December 2017, the Basel Committee on Banking Supervision approved some reforms to the Basel III framework to respond to the deficiencies identified by the global financial crisis and "lay the regulatory foundations for a resilient banking system that supports the real economy".

According to the Committee, the main objective of these reforms is "to restore the credibility of the calculation of risk-weighted assets (RWA) and to improve the comparability of bank capital ratios".

Therefore, taking into account that risk-weighted assets are "an estimate of risk that determines the minimum level of regulatory capital that a bank must maintain in order to face unexpected losses", the Basel III reforms consisted of:

  1. Improve the robustness and risk sensitivity of standard methods for credit risk, credit valuation adjustment risk (CVA) and operational risk.
  2. Restrict the use of internal model-based methods, by introducing limits on some of the parameters used to calculate capital requirements in the internal ratings-based method (IRB) for credit risk, and by eliminating the use of credit risk-based methods. internal models for CVA risk and operational risk.
  3. Introducing a leverage ratio cushion to further limit leverage in Global Systemically Important Banks (G-SIBs).
  4. Replace the current Basel II output floor with a more robust risk-sensitive floor based on the revised Basel III standard methods.

The maximum date for implementation of these new provisions by banking entities with international activity is January 1, 2022.

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How do we support banking entities?

With Pirani Riskment Suite pwe allow banks to manage their operational and credit risks in a different and simpler way in order to comply with the provisions of a framework such as Basel III, which ultimately seeks to ensure that, in situations of economic stress, entities have a way to respond.

Banco de Bogotá strengthens in-house risk management with Pirani solutions

"Pirani has helped me comply with a standard, because it is the right tool that provides support from the beginning and supports the process of concept maturing alongside the management task."

Nohora Betty Muñoz
Operational risk manager and internal control system at Banco de Bogotá
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