Basel III

European Parliament Adopts Resolution on Finalization of Basel III

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On November 23, 2016, the European Parliament published a provisional version of the text of the resolution it has adopted on finalization of Basel III.

Among other things, in the resolution, the Parliament:

  • Underlines the importance of sound global standards and principles for the prudential regulation of banks and welcomes the post-crisis work of the Basel Committee on Banking Supervision (“BCBS“) in this area. The Parliament notes the BCBS’ ongoing work to finalize the Basel III framework and underlines the need for greater transparency and accountability to enhance the legitimacy and ownership of the BCBS’ deliberations.
  • Stresses that the current revision should respect the principle of not significantly increasing overall capital requirements, while at the same time strengthening the overall financial position of EU banks. The Parliament also underlines the equally important principle to be respected of promoting the level playing field at the global level, by mitigating rather than exacerbating the differences between jurisdictions and banking models, and by not unduly penalizing the EU banking model.
  • Is concerned that early analysis of recent BCBS drafts indicates that the reform package at its current stage might not comply with the principles mentioned above. As a result, the Parliament calls on the BCBS to revise its proposals accordingly, and calls on the European Central Bank (“ECB“) and the Single Supervisory Mechanism (SSM) to ensure respect of the principles in finalizing and monitoring the new standard. The Parliament underlines that this approach would be instrumental in ensuring consistent implementation of the new standard by the Parliament as co-legislator.
  • Calls for dialogue and an exchange of best practices among regulators concerning the application of the principle of proportionality to be established at EU and international levels.
  • Calls on the European Commission to prioritize work on a “small banking box” for the least risky banking models. The Parliament also calls on the Commission to extend this work to an assessment of the feasibility of a future regulatory framework consisting of less complex and more appropriate and proportional prudential rules specifically adapted to different types of banking models.
  • Stresses the importance of the role of the Commission, the ECB and the EBA in engaging in the BCBS’ work, and in providing transparent and comprehensive updates on developments in the BCBS’ discussions. The Parliament calls for this role to be given stronger visibility during meetings of the European Economic and Financial Affairs Council (ECOFIN), and for enhanced accountability to its Economic and Monetary Affairs Committee (ECON).

The Parliament has instructed its President to forward the resolution to the Commission.

FDIC Gives Guidance to S-Corporation Banks Regarding Dividends under Basel III

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On July 21, the FDIC clarified how it will evaluate requests by S-Corporation Banks to make dividend payments that would otherwise be prohibited under the Basel III capital conservation buffer.  New Basel III capital rules include a capital conservation buffer which prohibits or limits the dividends a bank can pay when its risk-based capital ratios fall below certain thresholds.  If an S-corporation bank has income but is limited from paying dividends as a result of the new rules, its shareholders may have to pay taxes on their pass-through share of the S-corporation’s income from their own resources.  To avoid this problem, a bank may request approval from their primary federal regulator to make a dividend payment that would not otherwise be permitted.  Absent serious safety-and-soundness concerns about the requesting bank, the FDIC generally would expect to approve such requests by well-rated S-corporation banks that are limited to the payment of dividends to cover shareholders’ taxes on their portion of an S-corporation’s earnings.  Press Release.  Financial Institution Letters.

Federal Reserve Board Issues Interim Final Rules Clarifying How Basel III Reforms Should be Incorporated into Capital and Business Projections

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On September 27, the Federal Reserve Board issued two interim final rules that clarify how companies should incorporate the Basel III regulatory capital reforms into their capital and business projections during future capital plan submissions and stress tests.  Press Release.  Rules.

FCA Launches Consultation on Implementation of CRD IV

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On July 31, the UK’s Financial Conduct Authority (FCA) published a consultation paper on proposals for implementing CRD IV for investment firms (CP13/6).

CRD IV is a package of reforms intended to address issues arising during the 2007/8 financial crisis and replaces the existing 2006 Capital Requirements Directive.  The principal aim of CRD IV is to implement the Basel III reforms but the package contains other prudential requirements for credit institutions and investment firms and CP13/6 includes proposals on capital buffers, common reporting, remuneration and existing FCA rule waivers.

The closing date for responses to CP13/6 is September 30.  The Prudential Regulation Authority (PRA) is publishing a separate consultation on CRD IV as it applies to its authorised firms (banks and building societies and designated investment firms).  Consultation Paper.

Basel III Implementation in the U.S.

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 On July 2, the Fed finalized a rule to implement Basel III in the U.S.  The Fed has indicated that the rule will help ensure banks maintain strong capital positions that will enable them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns.  Fed Release.  Federal Register Notice.  Community Bank Guide.

UK Financial Policy Committee (FPC) Issues New Recommendations on Banks

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In its latest Financial Stability Report, the FPC (a committee of the Bank of England) set out recommendations for the UK’s new regulator – the Prudential Regulation Authority – to improve the stability of the UK banking sector, including:

  • using the Basel III liquidity coverage ratio to assess liquidity;
  • increasing the consistency and comparability of Pillar 3 disclosures; and
  • calculating regulatory capital ratios under end-point Basel III definitions using the standardised approach to credit risk.  Report.

Basel Committee on Banking Supervision Endorses Revised Basel III Liquidity Standards for Banks

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It was announced on January 6, that the Basel Committee on Banking Supervision’s (BCBS) Group of Governors and Heads of Supervision (GHOS) has endorsed revised Basel III liquidity standards for banks.  This was later welcomed in a statement made by Michael Barnier of the European Commission on January 8.

The revised liquidity standards relate to the formulation of liquidity coverage ratio (LCR), which is an essential part of the reforms being made by Basel III.  The package of amendments, which is summarised in a document headed Annex 1, comprises of four elements as follows:

    • revisions to the definition of high quality liquid assets and net cash outflows;
    • a timetable for phasing in the standard;
    • a reaffirmation of the usability of the stock of liquid assets in periods of stress (including during the transition period); and
    • an agreement that the Basel Committee will conduct further work on the interaction between the LCR and the provision of Central Bank Facilities.

In addition to the revised liquidity standards, the GHOS also reiterated the importance of full and timely implementation of the Basel III standards.  It also endorsed a new charter for the BCBS in order to enhance understanding of its activities and decision-making processes, and identified that a review of the net stable funding ratio would also be a priority over the next few years.

Basel Committee on Banking Supervision FAQs on Basel III Counterparty Credit Risk and Exposures to Central Counterparties

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On December 28, 2012, the Basel Committee on Banking Supervision published an updated version of its frequently asked questions on the Basel III rules relating to counterparty credit risk and exposures to central counterparties. The update includes new questions and answers on the rules text of Basel III relating to: 

  • Advanced credit valuation adjustment capital charge;
  • Eligible hedges; and
  • Treatment of incurred credit valuation adjustment.

In addition, a new section of questions and answers has been added to assist with the interpretation of the rules text on the capitalisation framework for bank exposures to CCPs.   

Extended Comment Period for Basel III NPRs

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On August 8, the Fed, the FDIC, and the OCC extended the comment period for the three notices of proposed rulemaking from June 7 to revise and replace current capital rules.  Comments originally due on September 7 are now due on October 22.  Fed Release. 
Basel III NPR.  Standardized Approach NPR.  Advanced Approaches and Market Risk NPR.