The Basel 3 “Endgame” Explained – Not the RV/GCR Event We’ve Been Led to Believe
On July 28, 2023
There’s been much hype in GCR Land about the Basel 3 “Endgame”. It’s been framed as a turning point in Our GCR as much as SOFR and FedNow were. Yet here we are, still waiting for anything significant to change.
Unfortunately, and with much disservice to our GCR Land community, many RV/GCR “information providers” throw these terms and events out there with little explanation or context. In the end, all this does is place additional confusion and anxiety onto an already difficult GCR landscape. This is unfortunate, so let’s figure this out together without the Hopium or hype.
So What is the Basel 3 “Endgame” All About?
Regulatory agencies have recently unveiled a proposal to fortify the banking system by making modifications to capital requirements for large banks. This substantial endeavor, known as the Basel III endgame, seeks to increase the strength and resilience of the financial sector. By better reflecting underlying risks and enhancing risk measurement consistency, the proposal aims to safeguard against future turmoil and ensure a more stable banking environment.
Why the Word “Endgame”?
The term “endgame” is used to describe the final phase or iteration of the Basel III regulatory framework. It signifies that the proposed changes represent the culmination of a long process that began after the global financial crisis of 2007-2009.
The initial Basel III standards were implemented to address weaknesses in the banking system that were exposed during the crisis. Over the years, regulators have worked to refine and enhance these standards, leading to the development of the Basel III endgame.
The term “endgame” suggests that the proposed changes in the endgame phase are the last set of modifications needed to achieve the desired objectives of Basel III. It signifies that regulatory agencies believe the proposed adjustments will provide the necessary strength and resilience to the banking system, effectively concluding the regulatory efforts that started after the financial crisis.
In essence, “endgame” is a term used to indicate that the proposed changes represent the final stage of a comprehensive regulatory process, aimed at solidifying the banking system and reducing the likelihood of future financial crises.
The Basel 3 Endgame has had a Long Timeline
- 2007-2009: The global financial crisis occurs, prompting the need for regulatory reforms.
- 2017: The final iteration of Basel III, known as the Basel III endgame, is agreed upon.
- 2018-Today: Proposal Comment Period: Stakeholders and the public have an opportunity to provide comments on the proposal, allowing for feedback and refinement. Regulatory agencies collect data and analyze feedback to further refine and assess the impact of the proposed changes.
- November 30, 2023: The comment period for the Basel III endgame proposal closes, marking the deadline for submitting comments.
- 2023-2025: Banks start preparing for the implementation of the proposed changes, ensuring compliance with the new requirements.
- July 1, 2025: Large banks begin transitioning to the new framework outlined in the Basel III endgame proposal.
- July 1, 2028: Full compliance with the new framework is expected to be achieved by this date, marking the completion of the Basel III endgame.
The Basel 3 Endgame in Non-Financial Terms
In simpler terms, the Basel III endgame proposal is a comprehensive plan to strengthen the banking system and make it more resilient. By implementing modifications to capital requirements and risk measurement, regulators intend to ensure that banks are better prepared to weather financial downturns. The proposal aims to create a safer financial environment, reducing the likelihood of future banking crises and promoting stability in the global economy.
By adhering to a standardized framework and considering the risks associated with various activities, regulators aim to create a more stable banking environment, ultimately benefiting the overall economy and safeguarding against future financial turmoil.
Sidebar: Basel 3 General Details
The Basel III endgame is the final iteration of the Basel III regulatory framework, which was established by the Basel Committee on Banking Supervision following the global financial crisis of 2007-2009. Here are key details about the endgame proposal:
- Purpose: The proposal aims to increase the strength and resilience of the banking system by modifying large bank capital requirements to better reflect underlying risks and improve risk measurement consistency.
- Applicability: The proposed changes primarily apply to banks with $100 billion or more in total assets, while community banks are exempt.
- Capital Framework Standardization: The proposal seeks to standardize aspects of the capital framework related to credit risk, market risk, operational risk, and financial derivative risk.
- Inclusion of Unrealized Gains and Losses: Banks would be required to include unrealized gains and losses from certain securities in their capital ratios.
- Supplementary Leverage Ratio and Countercyclical Capital Buffer: The proposal introduces the supplementary leverage ratio and the countercyclical capital buffer, if activated.
- Estimated Impact: The proposed improvements are estimated to result in an aggregate 16 percent increase in common equity tier 1 capital requirements for affected bank holding companies. The effects would primarily affect the largest and most complex banks, with variations based on their activities and risk profiles.
- Transition Provisions: The proposal includes transition provisions to allow banks sufficient time to adapt to the changes while minimizing adverse impacts.
Now you know – and knowledge is Power.
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