On Friday, January 23, 2015, the Basel Committee published its regulatory work program for 2015 and 2016, summarizing the policy initiatives the Committee is expected to undertake as it continues to propose and finalize the remaining elements of its Basel III regulatory reform agenda. The Committee’s work program is organized around the following four themes:
- Developing and finalizing specific policy measures from the Committee’s post-crisis reform agenda;
- Assessing the Basel III framework’s overall balance between simplicity, comparability and risk sensitivity;
- Monitoring national regulators’ implementation of the Basel III framework; and
- Improving the effectiveness of banking supervision.
Based on this updated work program and the Basel Committee’s November 2014 report to the G20, we have identified and organized the specific policy measures likely to appear on the Committee’s agenda for 2015 and beyond, with a focus on those initiatives relating to regulatory capital and liquidity standards.
Coherence and Calibration
With the majority of the groundwork on the Basel III framework behind it, the Committee’s agenda will turn in 2015 toward improving the coherence and calibration of the post-crisis framework. The focus of this group of initiatives will be on the interactions between the framework’s multiple metrics, including the risk-weighted capital ratios and buffers, Basel III leverage ratio, liquidity coverage ratio, net stable funding ratio, large exposure limits, and the upcoming total loss-absorbing capacity requirements for global systemically-important banking organizations (“G-SIBs”) in resolution.
- Capital Floor Based on the Standardized Approaches: The Committee is expected to finalize by the end of 2015 its proposed capital floor framework. In December 2014, the Committee proposed a redesigned capital floor based on the standardized approaches under Basel III. The proposal would replace the existing interim capital floor based on the Basel I framework.
- Calibration of the Basel III Leverage Ratio: In January 2014, the Committee finalized revisions to the denominator of the Basel III leverage ratio. The international standard calls for implementation beginning in Q1 2018, preceded by a disclosure-only regime beginning in Q1 2015. While the minimum Basel III leverage ratio initially has been set at 3% under the standard, the Committee has committed to monitoring banking organizations’ ratios and to assessing whether the calibration of the ratio at this level is appropriate over a full credit cycle. We earlier discussed the Committee’s plans to address the calibration of the Basel III leverage ratio here.
Finalizing Revisions to Risk-Weighted Assets
The Committee seeks to continue revising the measurement of risk-weighted assets under the Basel III framework, under both the standardized approaches and internal models-based approaches (i.e., the “advanced approaches”).
- Standardized Approaches:The Committee made progress in 2014 on a set of initiatives aimed at improving the standardized approaches for measuring general credit risk, counterparty credit risk, market risk and operational risk. Many of these initiatives are still in the proposal stage and are expected to be finalized in 2015.
- General Credit Risk: The Committee is expected to continue work on its proposed revisions to the standardized approach for credit risk, which the Committee proposed in December 2014. These revisions are expected to be finalized by the end of 2015.
- Counterparty Credit Risk: In March 2014, the Committee published a final standard on the standardized approach to measuring counterparty credit risk exposures, which we discussed here. The final standard will become effective on January 1, 2017.
- Market Risk: In December 2014, the Committee published a second consultative document on its fundamental review of the trading book. The latest proposal would further refine the market risk framework, under both the standardized and advanced approaches, in addition to the revisions originally proposed in October 2013. These revisions are expected to be finalized by the end of 2015.
- Operational Risk: In October 2014, the Committee proposed revisions to the standardized approach for measuring operational risk. These revisions are expected to be finalized in mid-2015.
- Advanced Approaches: The Committee expects to continue work in 2015 on the advanced approaches for both credit risk and market risk.
- Credit Risk: The Committee is expected to propose in 2015 revisions to the credit risk measurement framework under the advanced approaches. These revisions are expected to include constraints on certain parameters of internal credit risk models, such as certain loss given default parameters.
- Market Risk: As noted above, the Committee is expected to finalize in 2015 its revisions to the market risk framework for both the standardized and advanced approaches.
Other Agenda Items
- Total Loss-Absorbing Capacity: The Committee in 2015 will continue its work with the Financial Stability Board on the total loss-absorbing capacity of G-SIBs.
- Sovereign Risk: The Committee will undertake a new initiative in 2015 related to the treatment of sovereign risk under the Basel III framework.
- Stress Testing: The Committee has recognized the increasing importance of stress testing as a component of the regulatory capital framework. In 2015, the Committee is expected to undertake a new initiative assessing the role of national stress testing requirements in the overall stress testing framework, particularly as they relate to Pillar 1 (e., minimum requirements).