Important steps towards completion of post-crisis regulatory reforms endorsed by Group of Governors and Heads of Supervision
12 January 2014
At its meeting in Basel today, the Basel Committee's oversight body, the Group of Governors and Heads of Supervision (GHOS), endorsed a number of important steps in the completion of the post-crisis reform agenda.
The GHOS today endorsed proposals from the Basel Committee on a common definition of the leverage ratio, which has been formulated to overcome differences in national accounting frameworks that have previously prevented ready comparison of bank leverage ratios across borders. The fully specified standard will be published by the Committee later today. A globally consistent measure of bank leverage and consistent disclosure standards are central components of the Basel III regulatory framework for internationally active banks. The leverage ratio is intended as a simple non-risk-based "backstop" measure that will reinforce the risk-based capital requirements.
The Committee will continue to monitor the implementation of the leverage ratio. The final calibration, and any further adjustments to the definition, will be completed by 2017, with a view to migrating to a Pillar 1 (minimum capital requirement) treatment on 1 January 2018.
The GHOS also endorsed proposed changes to the Net Stable Funding Ratio, on which the Basel Committee will shortly commence consultation. The NSFR is another important component of the Basel III framework; it complements the Liquidity Coverage Ratio and is designed to promote prudent funding structures by banks, with a particular focus on preventing over-reliance on short-term wholesale funding. At its meeting in January 2013, the GHOS noted that finalising the NSFR should be a priority for the Basel Committee during 2013 and 2014; the start of consultation on the proposed revisions to the NSFR is an important step towards finalising the framework in the year ahead. The Committee intends to release its consultative document shortly.
At its January 2013 meeting, the GHOS also asked the Committee to undertake further work in three areas related to the LCR: (i) disclosure requirements, (ii) the use of market-based indicators of liquidity to supplement existing measures and (iii) the interaction between the LCR and the provision of central bank facilities.
In relation to disclosure, the GHOS today endorsed Basel Committee proposals regarding minimum requirements for liquidity-related disclosures. The GHOS also endorsed the Committee's intention to publish further guidance on how national authorities can utilise market-based indicators of liquidity within their own frameworks for assessing whether assets qualify as High Quality Liquid Assets (HQLA) under the LCR.
The LCR is built on the principle that banks' first line of defence against liquidity shocks should be their own self-insurance, and that central banks should remain the lenders of last resort. Nevertheless, it is also the case that central banks may be the most reliable source of liquidity available to banks in times of stress. As a result, the Committee has reached the view, which the GHOS today endorsed, that Committed Liquidity Facilities of a type already recognised for jurisdictions with insufficient HQLA could have a role to play within the LCR. The inclusion of these facilities, which may be provided at the discretion of monetary authorities, would however be subject to a number of constraints designed to avoid undermining the principles noted above. The Committee will shortly release revisions to the LCR to give effect to this change.
Finally, the GHOS also reviewed and endorsed the Committee's strategic priorities for the next two years. Apart from completing the crisis-related policy reform agenda as a matter of priority, the Committee will focus on three other broad themes: continuing to deepen its programme of monitoring and assessing the implementation of the agreed reforms; further examining the regulatory framework's balance between simplicity, comparability and risk sensitivity; and improving effectiveness of supervision. All of these will involve significant work during 2014 and 2015.
Mario Draghi, Chairman of the GHOS and President of the European Central Bank, said "The finalisation of an internationally consistent measure of bank leverage is a significant step towards the full implementation of Basel III. The leverage ratio is an important backstop to the risk-based capital regime and, when coupled with the LCR and NSFR, provides a regulatory framework that should help to ensure that banks are much more resilient to financial shocks than was the case in the past."
Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, noted that "good progress is being made to conclude the ambitious reform agenda, and in ensuring its full and consistent implementation. There is more to be done, but the Committee is on track to complete the crisis-related reforms soon and, in doing so, to establish a stronger and more resilient banking system."