Evaluation of implemented Basel III standards

The Committee established its evaluation programme in mid-2020 to assess if and to what extent the already implemented Basel III reforms have addressed their overarching objective of increasing the banking sector's resilience. The Committee Task Force on Evaluations (TFE) was set up at the same time to lead the evaluation analysis of the Basel III reforms already implemented by most member jurisdictions. The overall goal is to assess if the reforms have contributed to higher banking sector resilience from financial and economic stress and some potential unintended effects.

Following the onset of the Covid-19 pandemic, the TFE was first tasked to draw early lessons from the pandemic period as to the effect of Basel standards. The TFE then followed up on a few areas identified for further analysis before pursuing a more holistic evaluation of the impact of reforms since their introduction during the past decade. The approach in each report is agnostic, reflective of other relevant evaluation work and empirically based, leveraging regulatory bank data at the jurisdictional and Committee aggregated level.

The three evaluation reports are:

  • Early lessons from the Covid-19 pandemic on the Basel reforms (July 2021): 
    The first report, using primarily vendor data and jurisdictional data, found that the increased quality and higher levels of capital and liquidity held by banks have helped them absorb the initial impact of the Covid-19 pandemic. It found that banks maintained lending and other critical services and also pointed to some areas where the reforms may not function as intended such as the use of capital and liquidity buffers, the potential sources of cyclicality in the framework, and the treatment of central bank reserves in the leverage ratio.
  • Buffer usability and cyclicality in the Basel framework (October 2022):
    The second report, leveraging Committee bank-level data and several analyses of jurisdictional data, further investigated topics raised in the first report. The report found some indications of a positive relationship between banks' capital headroom and lending and that temporary reductions in capital requirements supported lending during the Covid-19 pandemic. There was limited evidence though that banks' reluctance to use liquidity buffers has affected their lending and market activity, and little sign of procyclical effects on lending during the pandemic related to the introduction of the expected credit loss (ECL) framework. However, the evidence was not very conclusive in part because it is difficult to distinguish between the effects of the Basel reforms and those of the extensive support measures undertaken by authorities to address the economic impact of the pandemic.
  • Evaluation of the impact and efficacy of the Basel III reforms (December 2022):
    The third and broader report, focused primarily on the Committee's data, demonstrates that, since the implementation of the Basel reforms, the overall resilience of the banking sector has increased, which is partly attributable to the reforms rather than the general post-crisis recovery trend. The attribution is made by leveraging the difference in bank's capital and liquidity strength just prior to the introduction of the reforms in member jurisdictions, which shows that banks with a weaker initial position see a greater improvement in regulatory ratios. Some market measures of resilience such as CDS spreads show that tendency as well and similarly market measures of systemic risk also decrease post reforms. These resilience gains did not come at the expense of banks' funding cost, as banks more heavily impacted by the reforms also saw a greater decrease in their cost of capital and debt during the post implementation period. While there is some indication that banks with weaker initial capital or liquidity position had lower loan growth than their peers, this evidence is not robust. The report also does not reveal redundancies or conflicts across the various elements of the Basel III reforms. While the Basel III framework appears more complex than Basel II, the evidence supports the value of the individual standards and the multi-dimensional framework that in turn has added complexity.

The main take away from the third report and all three reports together is that while a few components of the Basel Framework might not be always functioning fully as intended, the banking system has become more resilient thanks to the strengthened Basel III capital standards and added liquidity requirements.

Based on the progress made in implementing the outstanding Basel III standards, the Committee will continue to pursue its work programme on evaluating the impact and efficacy of Basel III in the medium term according to the 2023-24 work programme.