What is Basel III Aiming At?

In 1974，the failure of the Herstatt Bank of Germany and the Franklin National Bank of the United States directly gave rise to the establishment of the Basel Committee on Banking Supervision and the birth of the first Basel Accord. Basel Accord I was formed in 1988 after two amendments.

The bankruptcy of Barings Bank and the Asian financial crisis in 1997 were important events leading to Basel II. After the outbreak of the US subprime crisis in 2007，the Basel Committee on Banking Supervision introduced Basel III at the end of 2010. After seven years of research and discussion，the Basel Committee issued in December of 2017 Basel III: Final Plan for the Post-crisis Reform and it will be officially implemented in 2022.

What are the new regulatory trends that have been communicated to us in the latest effort known as Basel III: Final Plan for Post-Crisis Reform?

Each financial crisis reveals different financial risks. In terms of micro-prudential supervision，the Basel Committee found that in the US subprime crisis in 2007 the system’s liquidity had been exhausted，at least momentarily. This reminded the supervisory authorities of the importance of strengthening supervision from the perspective of liquidity risk. Judging from the scope of regulatory indicators，regulators in various countries tend not to rely solely on capital as an indicator of financial strength. Regulators tend to look at financial security under extreme pressures as well as in normal market conditions. Therefore，the micro-prudential supervision has mainly been improved from the aspects of capital quality，transparency and risk coverage，leverage ratio and liquidity requirements. The improvement in macro prudential supervision is mainly reflected in two dimensions. First，it deals with the overall risk of the financial system over time，emphasizing the pro-cyclicality of the financial system. Second，it looks across the sector. It studies how risk is distributed among institutions within the financial system at a certain point of time，as well as relevant bankruptcy risks.

Yin Hong，deputy director of the Urban Finance Institute of Industrial and Commercial Bank of China (ICBC)，told reporters that the Final Plan for  Post-crisis Reform has two other areas that deserve attention. First，is that the concept of capital constraint has been further strengthened. Basel I，II and III are centered around capital supervision. Banks are operating with risks. The failure of dealing with the risks in a proper way will result in huge losses，including anticipated losses and unanticipated losses. Anticipated losses can be absorbed through provisioning，but unanticipated losses can only be absorbed through capital. Therefore，the core principle of Basel III is capital supervision which strengthens the concept of capital constraint. Second，it is necessary to pay more attention to the promotion of banks and the construction of regulatory risk management systems through capital management. Yin Hong had this to say: "The risk management system includes the risk management framework，system，processes，information，internal supervision and external supervision，which can continuously optimize the banks’ risk management capabilities and continuously improve the supervision of the banks by regulatory agencies."

Is the Entire Global Banking Industry Under the Same Pressure?

The issuance of the Final Plan for Post-crisis Reform marks the completion of the Basel Committee's reforms in three basic elements of capital adequacy ratios supervision，namely the capital instruments eligibility criteria，risk-weighted asset measurement methods，and regulatory requirements for capital adequacy ratios. Moreover，it means the end of reform in the international rules of capital supervision in the post-crisis period. Then，how will the implementation of the plan affect the operation of the global banking industry?

Lu Zhengwei，chief economist at Industrial Bank Co. Ltd.，said that generally speaking，every revision of the Basel Accord brings a new round of adjustment to the risk system，including a new round of establishing risk management systems and data collection systems. Compared to the banking sector in emerging economies and developing countries，the banking sector in developed economies has better data accumulation with more comprehensive types of financial products. This strengthens their discourse power in the international arena. However，the Basel Accord's framework for risk management objectively provides a shortcut for emerging economies to quickly adjust their risk management levels to the advanced levels.

Ding Zhijie，vice president of the University of International Business and Economics，maintains that the Final Plan for Post-crisis Reform is conducive to fair competition among banks. He explained that the revision of the plan is mainly to improve the measurement of risk assets. In response to the differences between the past internal model methods and the standard methods，the internal model methods were regulated to deal with the arbitrage problem of the capital adequacy ratio measurement. In the past，the big banks used their own internal model methods because the risk assets calculated by such modeling were lower than those of the standard method，which was favorable to large banks. In addition，the differences calculated by the banks' internal model in different regions was huge. In view of this，the 2017 edition of Basel III stipulates that the results of risk-weighted assets calculated by banks’ internal modeling must not be lower than 72.5% of the results calculated by the standard method. Thus，it will facilitate the promotion of fair competition among banks of different scales in different regions.

In contrast，Yin Hong contends that the Final Plan for Post-crisis Reform has little impact on China's commercial banks in the short term. Because the banking business structure in China is fairly simple and the capital adequacy ratio is relatively high，it is not difficult to meet the requirements of Basel III. However，the long-term impact of the new rules on commercial banks in China cannot be underestimated. The profit model of China's commercial banks is mainly based on the income relying on the interest margin brought by the growth in the scale of business. The domestic capital market is not yet well-developed; the continuous economic growth and structural transformation of the economy relies heavily on bank credit. But regulatory requirements are becoming stricter. Therefore，the Chinese banking industry's need for capital will only become stronger. Ba Shusong，chief China economist of the Hong Kong Stock Exchange，also pointed out that for the Chinese banking industry，the convergence of Core Tier 1 Capital，Tier 1 Capital and capital has always been one of the characteristics of the capital structure. This is largely due to the lack of effective innovation tools，which，in the long term，will directly increase the pressure on bank capital.

Can Basel III Deal with All Risks?

Before Basel III，since the 1980s until now，two Basel accords have been put forward and the supervision of the global banking industry has been continuously strengthened. However，阅读全部文章，请登录数字版阅读账户。 没有账户？ 立即购买数字版杂志