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Gleeson on the International Regulation of Banking, 3rd Edition by Gleeson, Simon (30th August 2018)

The Basel Accords—A Note on Terminology

From: Gleeson on the International Regulation of Banking (3rd Edition)

Simon Gleeson

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 12 December 2018

The Bank for International Settlements provides the base for the Basel Committee on Banking Supervision (BCBS). The original Accord was published in 1988. For reasons that do not need to be considered here it was designated Basle I. In 1996 Basle I was amended to assess market risks more precisely, but the resulting amended Accord continued to be referred to as Basle I. Its successor, published in 2004 and amended in 2005, was known as Basel II. The financial crisis of 2008 hit before Basel II was fully implemented, but it was felt that the crisis had revealed significant flaws in the Basel architecture, and the G20 delivered a clear mandate to the Committee to revise the Accord. This revision occurred in three stages.

Basel 2.5

Basel 2.5 was an immediate response to the crisis. It appeared in 2009 in the form of two documents, the ‘Revisions to the Basel II Market Risk Framework, Guidelines for Computing Capital for Incremental Risk in the Trading Book’, and ‘Enhancements to the Basel II Framework’ (collectively, the 2009 revisions).

Basel III

These were followed by a more comprehensive document, entitled ‘Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems’ (Basel III), published by the BCBS in December 2010.

Basel III final (‘Basel IV’, Basel 3.5)

The Basel III document turned out to be the beginning of an extended debate between bank regulators. In particular, whereas Basel 2.5 and the original Basel III document had been focused on the immediate shortcomings identified in the crisis, the debate around the final form of Basel III ranged beyond the specifics of the crisis and focused on macroeconomic issues as to what the incentives that (p. x) the regulatory system provided to the banks should be. The final Basel III document ‘Basel III: Finalising post-crisis reforms’ was therefore not published until December 2017.

Bank regulators will generally observe if challenged that the changes made to the aggregate capital requirements of banks by the Basel III final document are minimal compared with those imposed by the Basel 2.5 and Basel III, and that as a result the Basel III final terms should not be regarded as a ‘Basel IV’. However this term is frequently encountered, and at the moment the terms ‘Basel III final’ and ‘Basel IV’ are used interchangeably.

The Basel III final document was heavily negotiated, and its structure betrays compromise. Part of this compromise was the exceptionally long lead times agreed before its provisions were to come fully into force. Thus although the provisions of the Basel III agreement have been in force for some years, the measures set out in the Basel III final terms will in general not come into force until 2022.

This means that this book must address both the world as it is today and the world as it will be when the Basel III final terms are put into effect. It should be noted that this may in practice be considerably earlier than 2022—one of the phenomena observed when the Basel 2.5 and Basel III measures were introduced was that although regulators were prepared to grant extensive lead-in periods, the enthusiasm of banks to be able to inform shareholders and potential investors that they were already compliant with the new standards meant that in practice banks managed themselves to the new requirements almost as soon as they could. It will be interesting to see whether the same phenomenon will be observed with regard to the Basel III final terms.