Article

Basel III and IFRS 9: A tightening of the regulations

Company: Royal Bank of Scotland (RBS)

Royal Bank of Scotland (RBS) case study

Category: Basel III

Published: 01 April 2011

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Overview

Back in 2009, in response to the financial crisis, the Basel Committee on Banking Supervision (BCBS) published two papers that set out major revisions and enhancements to the Basel II framework. These were followed in December 2009 by two consultation papers on capital and liquidity. In July 2010, following lobbying from the financial sector and a parallel impact study, high-level changes to the BCBS 2009 papers were agreed. In addition, the BCBS published a further consultative paper that laid out its proposal for a counter-cyclical capital buffer. These consultation papers were the foundation of what is now referred to as ‘Basel III’. In September 2010, the Group of Governors and Heads of Supervision – the oversight body for the BCBS – announced how the minimal capital requirements would be set and these were subsequently ratified by the Group of 20 in November 2010. In December 2010, the BCBS published finalised papers on both capital and liquidity, for implementation between 2013 and 2019.

While the December 2009 proposals created major challenges and uncertainty about the impact of Basel III, the new papers and announcements provide much-needed clarification. In essence, they address and mitigate some of the most contentious issues that were raised in the 2009 documents. They provide more detail in areas that were previously flagged up for increased regulation, offering formal guidance on proposed standards and how to apply them in practice. Key areas include a modified definition of capital, the introduction of a leverage ratio and counter-cyclical capital buffer, and the implementation of a global liquidity requirement. While implementation dates vary according to the specific regulatory areas, consensus is that the deadlines are demanding. The drafting and phasing-in of IFRS 9 also continues to move forward and, in this article, we examine the latest developments and their impact.


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