Implementation of Basel III Proceeding Globally But in Varying Degrees

While implementation of Basel III is proceeding globally, notable differences are evident between jurisdictions in a host of areas, such as pace, the degrees of strictness relative to Basel Committee guidance, and the resulting challenges banks face.

Moody's Investors Service views the key requirements being implemented as part of Basel III as credit positive, addressing many of the deficiencies in banks' pre-crisis management of risk, capital, liquidity and funding and leverage.

Moody's also argues, however, that it is apparent that some of the weaknesses associated with Basel II have not been sufficiently addressed and that it is too soon to say that the industry has so far achieved fundamentally stronger creditworthiness as a result of Basel III.

Banks have made substantial improvements in their fundamentals, including reductions in leverage, the implementation of firm-wide stress testing, and the formation of more robust liquidity and funding profiles.

Yet, many banks remain challenged in meeting full Basel III requirements while, at the same time, sustaining profitable business models under these more stringent regulatory constraints.

For those systems where the banks already hold high levels of capital and liquidity -- such as in Asia Pacific, the Middle East, and Latin America -- authorities are imposing higher, "super-equivalent" requirements, and maintaining the liquidity and capital in their systems, a credit positive.

In this case, a key challenge for banks will be the replacement of non-qualifying instruments through organic capital generation or issuance of new Tier 1 and Tier 2 instruments.

Continuing on its themes of the differences between jurisdictions, the report notes that in some countries, including the UK, Canada, and in Asia, implementation is stricter than the Basel Committee for Banking Supervision (BCBS) guidance so as to avoid regulatory "back-stepping" -- that is, capital or liquidity requirements were already stricter than the requirements of previous regimes, such as Basel II.

Many jurisdictions are also implementing stricter requirements for their larger banks, including higher minimum capital levels, or accelerated phase-in of capital and liquidity requirements.

For example, US systemically important banks are subject to a Tier 1 capital leverage buffer of at least 2% of total leverage exposure above the 3% minimum.

Moody's also observes that the Basel III framework does not address some Basel II weaknesses, including comparability of risk-weighted assets and inconsistent use of and disclosure of Pillar 2 assessments.

Given the differences in implementation requirements and schedules, users of banks' financial disclosures should be aware that transitional capital and leverage ratios are not directly comparable without taking account of accelerated or "super-equivalent" local rules, according to the report.

Once fully implemented, the Basel III framework will improve banks' resilience to asset and liquidity stresses and shocks, but it is also too soon to conclude -- as indicated -- that the industry has achieved stronger creditworthiness.

Read more on

Suggested Articles

Some of you might have already been aware of the news that Questex—with the aim to focus on event business—will shut down permanently all media brands in Asia…

Some advice for transitioning into an advisory role

Global risks are intensifying but the collective will to tackle them appears to be lacking. Check out this report for areas of concern