Basel Committee updates G20 leaders ahead of summit

The Basel Committee on Banking Supervision has today published a report for the G20 Leaders at their summit in Hamburg on 7-8 July. The report is an update on the implementation of Basel III regulatory reforms since the last progress report in August 2016.

Overall, we learn that further progress has been made in implementing Basel III standards. The implementation of capital and liquidity standards has generally been timely and consistent, and banks continue to build higher and better capital and liquidity buffers.

Member jurisdictions continue their efforts to implement other Basel III standards, with good progress in some areas, such as margin requirements for non-centrally cleared derivatives and the Net Stable Funding Ratio (NSFR).

Challenges persist

However, there are challenges in other areas, such as the standardised approach for measuring counterparty credit risk (SA-CCR) and capital requirements for exposures to central counterparties (CCPs).

This news echoes the reports by the Basel Committee on Banking Supervision reported here yesterday on the implementation of the liquidity coverage ratio (LCR) in China, the European Union and the United States.

Overall, the LCR regulations in China and the United States are assessed as “compliant” with the Basel framework. This is the highest of the four grades. The EU LCR regulations are found to be “largely compliant”, one notch below.

Other high level reports are available

Other high level reports on the international financial services industry already this week include two from the Financial Stability Board.

The FSB's assessment of the evolution of shadow banking activities and risks since the global financial crisis highlights the belief that the aspects of shadow banking considered to have contributed to the global financial crisis have declined significantly.

Generally they no longer pose financial stability risks. The assessment also describes how, since the financial crisis, policies have been introduced to address financial stability risks from shadow banking.

System-wide supervision

Authorities are establishing system-wide supervision and monitoring frameworks to assess the financial stability risks from shadow banking, so that appropriate policy measures can be taken.

Authorities have acted to reduce liquidity and maturity mismatches, and also leverage in the shadow banking system, including through regulatory reforms of money market funds and recommendations on securities financing transactions.

National and regional reforms have been undertaken to address incentive problems and opaqueness associated with securitization, alongside increases in capitalisation of banks’ securitisation-related exposures.

However

However, a rise in assets held in certain funds has increased the risks from liquidity transformation, says the FSB.

These developments underscore the importance of effective operationalisation and implementation of its January 2017 policy recommendations to address structural vulnerabilities from asset management activities.

To these ends FSB member authorities have agreed the following recommendations to enhance system-wide supervision of shadow banking and policy responses to address the identified risks by

• establishing a systematic process for assessing financial stability risks from shadow banking, and ensuring that any entities or activities that could pose material financial stability risks are brought within the regulatory perimeter
• addressing identified gaps in risk-related data
• removing impediments to cooperation and information-sharing between authorities

Mark Carney speaks

Mark Carney, chairman of the FSB and governor of the Bank of England, said: “This assessment confirms the extent of the transformation of shadow banking into resilient market-based finance.”

The FSB also published a Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms. The framework will guide analyses of whether the G20 reforms are achieving their intended outcomes.