What is Basel III Endgame?

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What is Basel III Endgame? Blog Image

What’s in today’s article?

  • Why in News?
  • What is Basel III and ‘Basel III Endgame’?
  • The “Endgame” Proposal of the US
  • Why are Banks Upset with the “Endgame” Proposal of the US?
  • Decision to Make Major Changes in the “Endgame” Proposal

Why in News?

In a victory for Wall Street banks that have fought an unprecedented campaign to weaken the rule, the US Federal Reserve announced major changes to a proposal for stronger bank capital requirements known as the "Basel III endgame".

What’s in Today’s Article?

  • What is Basel III and ‘Basel III Endgame’?
  • The “Endgame” Proposal of the US
  • Why are Banks Upset with the “Endgame” Proposal of the US?
  • Decision to Make Major Changes in the “Endgame” Proposal

What is Basel III and ‘Basel III Endgame’?

  • The Basel Committee on Banking Supervision is a panel convened by the Bank for International Settlements (BIS) in Basel, Switzerland.
    • It aims to ensure that regulators globally apply similar minimum capital standards so that banks can survive loan losses during tough times.
  • The committee’s “Basel III” standard was agreed after the 2007-09 global financial crisis and includes numerous capital, leverage and liquidity requirements.
  • Regulators across the world have worked for years to implement many of those standards and the so-called “endgame” (agreed in 2017) is the final iteration.

The “Endgame” Proposal of the US:

  • The “endgame” proposal (unveiled in July 2023 after the failure of 3 lenders in 2023) refines Basel’s approach to setting capital based on the riskiness of banks’ activities.
  • The U.S. proposal would overhaul how banks gauge their risk, and in turn, how much capital they should set aside as a cushion against potential losses.
  • The main areas of focus are -
    • Credit risk: To gauge credit risk, regulators are seeking to end banks’ ability to use their own internal risk models when determining how much capital should be held against lending activities.
    • Market risk: Similarly, the proposal would establish new requirements for how banks gauge the risk posed by swings in the markets and potential losses from trading.
    • Operational risk: This refers to the potential losses banks could face from unexpected sources, such as failed internal policies, management mistakes, litigation costs or external events.
  • The rules, which would apply to banks with over $100 billion in assets, would overhaul the way the biggest banks manage their capital, with implications for lending and trading activities.
    • However, banks say additional capital is unnecessary and will hurt the economy, and have aggressively lobbied against the project.

Why are Banks Upset with the “Endgame” Proposal of the US?

  • While the rules have been years in the making, banks had hoped that U.S. regulators would offer relief elsewhere by adjusting existing capital requirements to help offset the new hikes.
  • They argue banks are well-capitalised, having withstood the COVID-19 pandemic and regularly clearing the Fed’s annual stress tests, and any capital hikes are unjustified.
  • Banks have also complained that regulators have not provided sufficient data to justify the new increases, and have even threatened to sue.

Decision to Make Major Changes in the “Endgame” Proposal:

  • Following months of criticism and pressure from the industry, U.S. regulators are expected to meaningfully reduce the impact of the proposal in a broad rewrite.
  • Such a step -
    • Could ease industry complaints by giving them a chance to offer more feedback,
    • But would significantly delay the effort and potentially imperil it, as regulatory leadership could change following the November presidential election.

Q.1. What is the Bank for International Settlements (BIS)?

The BIS is an international financial institution which is owned by member central banks. Its primary goal is to foster international monetary and financial cooperation while serving as a bank for central banks.

Q.2. Is Basel III implemented in India?

The RBI has introduced norms on the Basel III capital framework, fund raising, exposure guidelines, and norms on classification and valuation of investment portfolios for All India Financial Institutions (AIFIs), which will come into effect from April 2024.