Basel III – Will it Ever Happen?
We are now some 16 years+ on from the financial crisis of 2008-9. However, Basel III - which is aimed to be a comprehensive set of international banking reforms designed off the back of the lessons learned from the crisis to fortify banks against future shocks - is still seemingly a big distance away from being fully implemented.
We've seen a stream of heavy criticism from the largest U.S. banks - those with assets over $100 billion or more - that the new capital requirements will hit them disproportionately, consequently leaving them requiring 30% more capital than European peer banks, even when operating within the United States. Critics say it will make them no more financially stable, while at the same time making it less economical to lend to small businesses and to those with poorer credit ratings.
It remains unclear to many what global regulators want as a "Basel III endgame". To quote Jamie Dimon, CEO JPMorgan Chase, "if the regulators don’t want the likes of mortgages or leveraged finance in the banking system, just dictate it".
The final regulations are supposedly set to be released in the U.S. to take effect on July 1, 2025, but there are significant doubts that that will occur, particularly following a speech given to a room full of American bankers by U.S. Treasury Secretary, Scott Bessent in April. He said that one goal for the current administration was to modernise ‘outdated’ capital instruments. Bessent added ‘We need to take a different approach [to the Biden administration]. We should not outsource decision making for the United States to international bodies. Instead, we should conduct our own analysis from the ground up to determine a regulatory framework that is in the interest of the United States. To the extent that the endgame standards can provide inspiration, we could borrow selectively from them. But this should only be done to the extent that we can independently validate the underlying rationale and then make the rationale available for public comment.’
The Bank of England also announced in January 2025 that it intended to push back implementation of the rules in the U.K. until January 2027 to see whether the U.S. administration would change its stance under President Trump and this now looks almost certain following Secretary Bessent’s comments.
American capital requirements are not the only area of uncertainty. The Basel III market risk framework, known as the Fundamental Review of the Trading Book (FRTB), is also presenting problems as most regulators have deviated from the global standards when drafting their rules, both in implementation date and the content of the rules. This, according to ISDA, suggests there may be flaws in its original calibration.
In response the European Commission (EC) has conducted a consultation to gather feedback on possible changes to the FRTB to analyse the FRTB’s drafting and to rectify those flaws where they are identified. Citing the need to avoid penalising internationally active banks and to retain their ability to compete with third-country banks, the EC has been consulting on three possible options:
1. implementing the FTRB as it stands,
2. delaying implementation by one year to the start of 2027, or
3. applying a set of ten targeted possible changes to the FRTB’s standardised and internal models approaches for a three-year period.
The aim remains to improve the risk sensitivity of the framework and to result in more appropriate capital requirements.
Among the other amendments the EC has proposed are that the profit and loss attribution test under the internal models approach could be used as a monitoring tool until the start of 2029, which would allow data to be collected initially so that the impact can be carefully assessed. The EC has also recognised the punitive impact of the additional capital charge for non-modellable risk factors and has proposed the application of a discount factor over a three-year period. Further analysis will be needed to assess if the discount is then appropriately calibrated or whether an alternative solution is needed, but in the interim it would certainly reduce the punitive capital impact of non-modellable risk factors.
The EC also proposes to assign a 0% risk weighting to sovereigns in the default risk charge for both the standardised and internal model approaches, subject to supervisory approval. This would remove the disproportionate treatment of sovereigns when using internal models and reduce one of the obstacles to banks using their own models to calculate market risk capital.
The EC consultation, which has closed for responses, has been commended for its willingness to revisit the standards and the results of its consultation are now awaited.
But, in reality, are events in Washington driving the global agenda? The recent remarks of Treasury Secretary Bessent clearly suggests so and if an American re-write of Basel III results in material changes and gives the larger American banks a competitive advantage where will that leave non-American jurisdictions? Would that outcome be accepted or will Basel have to then consider rewriting its own Accord to maintain competitiveness?
In conclusion, it appears to us that Basel III looks likely to still be some years away before it is universally accepted and adopted, if it ever is.
For further discussion and initial consultation please contact FMCR at contact@fmcr.com.