Retouching Reforms – IQ November 2024

In an increasingly diverse and complex financial system, the process of implementing new regulations can take a long time and involve many stages.

Basel III is a fitting example. In response to the global financial crisis, the Basel Committee on Banking Supervision set about raising standards for banks around the world with a wide-ranging package of reforms. More than 16 years on, the financial system is more resilient, thanks in part to higher levels of capital held by banks, but the final parts of the Basel III framework have still to be fully implemented.

While adoption of the final Basel III measures is at varying stages around the world – with the US still to issue final rules – national regulators have taken different approaches to certain parts of the framework. Some degree of variation is to be expected to account for the specificities of individual countries, but there is mounting pressure on the Basel Committee to revisit those areas where there is more significant and widespread divergence and correct any flaws in the original calibration.

One of the hallmarks of Basel III is a more stringent approach to the use of internal models to calculate capital requirements. In response to perceived failings in banks’ models, policymakers have set higher standards that would need to be satisfied for the use of internal models, while also increasing the risk sensitivity of standardised models. But recent analysis by ISDA has shown the use of internal models for market risk could decline more significantly than expected, suggesting the framework should be revised to ensure sufficient incentives are in place for banks to continue using internal models where appropriate.

Much now rests on the Basel Committee’s willingness to review standards it finalised years ago, at a time when it is already focusing on other projects. One example is a new set of proposed guidelines for counterparty credit risk management, published for consultation earlier this year. These guidelines span a range of areas and could be beneficial in setting best practices, but market participants have called for flexibility in the application of the guidelines, taking into account the different levels of counterparty risk generated by specific entities and businesses.

Documents (1) for Retouching Reforms – IQ November 2024

ISDA Publishes Updated ISDA SIMM Governance

ISDA has published an updated version of the ISDA SIMM® Governance Framework, which sets out the principles under which the ISDA Standard Initial Margin Model® operates and the process through which it will be reviewed and amended on a consistent...

ISDA Response to PRA IMA Consultation

On September 18, ISDA, the Association for Financial Markets in Europe, the Institute of International Finance and UK Finance submitted a joint response to the UK Prudential Regulation Authority consultation on adjustments to the internal model approach (IMA) for the...

Calibration Test – IQ September 2026

Calibrating capital requirements is a highly complex undertaking and getting it wrong can have serious consequences. Too much lenience might lead to banks holding insufficient capital to mitigate their risks. But excess conservatism can put balance sheets under strain, forcing...