Prudential regulation of banks

The mandate of the Basel Committee on Banking Supervision (BCBS) is to “strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability.” The Basel framework sets out the prudential regulatory standards for banks, including requirements relating to capital and liquidity.

Background to the Basel framework

The BCBS published the first Basel Accord in 1988 which laid down the initial set of minimum capital requirements for internationally active banks. Introducing the concept of the minimum capital ratio, it provided a more consistent measure of capital adequacy across financial institutions.

The framework underwent minor amendments until 2004, when Basel II, or the “Revised Capital Framework”, was published. This Accord split supervisory expectations into three key areas of focus (i.e., “pillars”) - minimum capital requirements, supervisory review and public disclosures. This Accord was designed to better capture underlying risks in capital requirements estimation, and to better address recent financial innovation.

In the wake of the global financial crisis, it became apparent that weaknesses remained in the framework that needed to be addressed in order to develop a more resilient banking system. BCBS published the first set of reforms to Basel II in 2010 (Basel III) with the intention that it evolve and be augmented over time. More stringent capital rules were introduced. The concept of the Leverage Ratio was created to discourage excess leverage and the first set of minimum liquidity requirements were proposed. Also importantly, specific requirements for “systemically important banks” were set.

Over a span of several years, the Basel framework continued to undergo revisions, notably the introduction of the Liquidity Coverage Ratio (2013) and the Net Stable Funding Ratio (2014).

In December 2017, the final Basel III reforms were published. These include enhancements to the calculations and processes for Standardised and IRB Approach for Credit Risk, Credit Valuation Adjustment (CVA), securitisation, operational risk and counterparty credit risk. A target implementation date of 1st January 2022 has been proposed.

Throughout the development of the Basel framework, the banking industry has primarily been challenged in the following areas:

  • Capital adequacy – ongoing management of the balance sheet to ensure that sufficient capital is held at both Group and subsidiary levels to meet requirements
  • Models and calculations – development, implementation, and ongoing validation of the models required to calculate capital and liquidity
  • Systems and data – developing the technology to support reliable and timely reporting, as well as data sourcing and reconciliation to ensure accuracy and completeness of data

Why Deloitte?

Our experts have decades of experience supporting Basel implementation programmes for institutions of all sizes in almost all geographies where the framework is applied.

Deloitte has a global network of specialised subject matter experts to support you.

How Deloitte can help

Deloitte can help you to:

  1. Understand and interpret the requirements including those introduced under the 2017 Basel III reforms
  2. Quickly identify areas of significant impact for your businesses
  3. Design a clear a strategic approach for your firm, including programme design and investment prioritisation
  4. Develop methodologies and models to calculate capital under all approaches and risk types
  5. Deliver a compliant solution with transparency over all underlying changes
  6. Building and embedding an effective governance and operating model for ongoing compliance