Finance

BCBS and Primary Areas of Risk Addressed by BCBS

What is BCBS?

Basel Committee on Banking Supervision (BCBS) is a global standard setter for the regulation of banks and provides a forum for regular cooperation on banking supervisory matters. BCBS has its genesis set in 1973 at Bretton Woods during the financial turmoil that followed after the breakdown of managed exchange rates.

As of 2019, it has 45 members, from 28 jurisdictions – consisting of Central Banks and other Banking Regulatory Authorities. Basel Committee is an international committee but not a multilateral organization since it doesn’t have a founding treaty. The core purpose is to provide a forum for communication and cooperation between banking regulatory and supervisory authorities to enhance the quality of banking supervision around the world and improve understanding of important issues in the banking supervisory sphere.

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Need for BCBS

The main intent behind the formation of BCBS is to solve the problems that existed prior to the formation of the organization due to the lack of a global regulator to accompany globalization in banking and financial markets. This lack of a global regulator meant that National Regulators were the most important actors in banking practice, but had a capacity and information problem.

Hence the main purpose of BCBS is to encourage convergence to common approach and standards.

Through Basel Consultative Group, BCBS its activities with non-members authorities by gathering senior representatives from various countries, international institutions, and regional groups of banking supervisors that are not members of the Committee.

Since the rules agreed in BCBS have a strong impact on subsequent legislative processes, not by law but by de facto

Risk Mitigation Tools used by BCBS

The main tool used by BCBS to mitigate risk is through Basel Accords, which are essentially a series of highly influential policy recommendations which, even though are not legally binding do provide a basis for setting the capital requirements for the banks in countries. These accords ensure that the banks actually have enough capital to meet their obligations and keep a check on their risks.

Currently, there are 3 Basel Accords.

  1. Basel 1, issued in 1988 focused on capital adequacy and categorization of assets of financial institutions into five categories. It had 3 pillars, namely:
    • Minimum Capital Requirements
    • Supervisory Review Process
    • Disclosure and Market Discipline
  2. Basel 2, issued in around 2004, build upon and enhanced the foundations set by Basel 1. An important introduction was of the credit risk of assets held by financial institutions to determine regulatory capital ratios.
  3. Basel 3, started developing around 2008 amidst the collapse of 2008. It was initially agreed upon in 2011 and scheduled to be implemented by 2015, but the implementation has been extended repetitively and is now expected to be completed in around 2022.

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Effect of BCBS regulation on the Market

BCBS since its inception has had a number of roles. Through its efforts put into improving cooperation and banking supervision as a whole, it launched a trend towards increasing risk modeling research and encouraging banks to continue the refinement of risk and capital. This in itself increases the confidence of the public in regard to the stability of banks, and hence of the economy in general. The Basel I, for example, was far from sufficient enough accord and suffered from many problems, but it’ll remain as the first international instrument assessing the importance of risk in relation to capital, and is seen as a milestone in finance and banking history.

 

Author: Aman 

About the Author:

Aman is an Economics and Finance graduate with a budding interest in Strategic Management and Investment. An avid reader of all things Behavioral and Data Science –I strongly believe in solving problems with creative solutions backed up by quantitative rigor.

 

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