What’s in Basel

Basel III is the policy response
from global regulators to the financial crisis, but what are the
main changes and what will it mean for private bankers?

Many of the measures that have been
discussed in the past two years by regulators, bankers, politicians
and others have been included in the amended Basel Accord and will
be implemented worldwide.

So, what is Basel III comprised of?
Some of the key points include:

• Tightening up the definition of
capital so that common equity or readily convertible instruments
are now the cornerstone of regulatory capital.

• The minimum amount of the highest
quality capital to support a firm’s business has been increased
from 2% to 4.5%. Tier 3 capital has been abolished.

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• Regulators have also added
capital buffers, ensuring that firms will have to hold capital over
and above the minimum requirements. There are two types of

  1. Firms will have to hold 2.5% of their risk
    weighted assets (RWAs) over and above the minimum calculated
  2. The second is a countercyclical buffer. In
    each jurisdiction regulators may vary the amounts of additional
    capital firms must hold up to 2.5% of RWAs. The purpose of this
    buffer is to provide national regulators with tools to manage
    economic bubbles.

• Firms must review their liquidity
reporting, systems and control framework under Basel III. Liquidity
must also be accompanied with a full, ongoing and robust stress
testing programme. Firms are required to carry an adequate buffer
of liquid instruments, and have a full liquidity contingency
funding plan. There are also new global metrics for firms including
a Liquidity Coverage Ratio and a Net Stable Funding Ratio.


Private bankers

With these measures being
introduced between January 2013 and January 2019, the Basel III
accord will present private bankers with much to consider.

The increase in capital and
liquidity requirements will make certain business lines more

Many private banks may need to
carefully consider the impact on their business models.

The reporting infrastructure needs
to ensure the governing body, senior management and line management
has relevant, up to date and consistent information describing the
risk and financial issues that impact the whole enterprise in an
understandable way.

This reporting must also have
adequate detailed focus on the key issues arising.

In addition, there is a requirement
for firms to have comprehensive firm-wide stress testing which is
able to consider capital, liquidity, cash flow and profitability in
a coherent way.

Firms must also be able to
demonstrate that the results from stress testing are understood,
taken into account and acted upon.



Perhaps one of the most dramatic
impacts is the implied future behaviour of our regulators and the
impact this will have on the financial industry.

Regulators around the world have
vowed to be tougher and more intrusive in the regulation of

In addition, they have to take on a
wider systemic regulatory role responsible for the system as a

The result will be that individual
firms will not have enough information internally to be comfortable
that they can predict the regulator’s response with the same degree
of certainty.

So, for example, it will be
possible that a particular product line within a bank is seen to be
performing well, but from the regulators’ viewpoint that bank is
actually participating in a unsustainable economic bubble.

The regulator’s response will be to
act against this bubble and its actions may not have been seen by
the participants.

This feature will mean that
regulation is likely to become much more volatile going forward,
with more ad hoc analysis and information requests than before.

Private banks need to be prepared
for interesting times.

Selwyn Blair-Ford is head of
global regulatory policy at FRSGlobal