Critical focus on liquidity coverage, net stable funding ratio

MANILA, Philippines - The Basel Committee on Banking Supervision has agreed in its meeting last Nov. 30 and Dec. 1, on the details of the Basel III rules text, which includes global regulatory standards on capital adequacy and liquidity.

The liquidity coverage ratio and the net stable funding ratio will be subject to an observation period and will include a review clause to address any unintended consequences.

The committee’s oversight body of Central Bank Governors and Heads of Supervision reached agreement on the Basel III regulatory framework in July and September 2010. The G20 Leaders at their Seoul summit in November had also agreed on the framework.

The Basel III rules text will be published by the end of this year.

A summary of the results of its comprehensive quantitative impact study (QIS) will likewise be made public. The results of the QIS and the committee’s economic impact assessment analyses were important factors in designing and calibrating the Basel III framework.

The Basel committee reviewed issues related to globally systemic banking institutions. Such banks should have loss-absorbing capacity beyond the Basel III standards and work on this topic continues in the Committee and the Financial Stability Board (FSB).

In a statement, the Committee said it reviewed a provisional methodology comprising both quantitative and qualitative indicators to assist national authorities in assessing the systemic importance of financial institutions at the global level. It will send a paper on these topics to the FSB by the end of this year for its review.

To be completed by the end of the first semester next year a study of the magnitude of additional loss absorbency that global systemically important banks should have. It is also assessing the extent of going-concern loss absorbency that could be provided by different instruments. This review will be completed by mid-2011.

Taking account of comments received during a recent public consultation, the committee agreed on key elements of the proposal to ensure the loss absorbency of regulatory capital at the point of non-viability and will elaborate the rules concerning transitional arrangements and grandfathering.

It also discussed cross-border banking resolution, and agreed to undertake further work to evaluate progress in national and multinational efforts to adopt improvements that enhance authorities’ capability to manage and resolve distressed banking institutions in a manner that minimizes disruptions to the financial system.

This work should assist national authorities in their national reforms and to promote greater convergence of bank crisis management powers between home and host supervisors, which is an important element in achieving effective cross-border crisis resolution. This work is being undertaken in close coordination with the FSB.

The Basel Committee has made significant progress in updating its rules for the capitalization of bank exposures to central counterparties and will issue by year end a consultation paper on this topic.

It will also conduct an impact study on these proposed rules with the goal of finalizing the rules in 2011. A paper on Sound Practices for Operational Risk and another on Operational Risk - Supervisory Guidelines for the Advanced Measurement Approaches will likewise be issued. Both papers will be published for consultation in the coming days.

As requested by the G20 Leaders, the Committee will also evaluate the impact of the regulatory regime on trade finance in the context of low-income countries.