Basel II/III Frequently Asked Questions

1) What is the Basel Committee on Banking Supervision (BCBS)?
The BCBS is the primary global stand setter for the prudential regulation of banks and provides a forum for cooperation on banking supervision matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. The BCBS therefore encourages banks to ensure that they have adequate risk controls in place and maintain sufficient capital to cover their risks. The BCBS is headquartered at the Bank of International Settlements, Basel and its membership consists of organisations with direct supervisory authority and central banks from different jurisdictions globally.


2) What are the Basel Accords?
The Basel Accords (Accords) are international standards developed by the BCBS to assess the capital adequacy of banks. Regulators in different jurisdictions, implement the Accords to regulate the capital levels of banks and to ensure stability of their banking system. So far, the BCBS has issued three (3) Accords named Basel I, Basel II and Basel III. Each Accord improves upon the previous one to strengthen the supervision of banks globally in light of the dynamic business environment. Basel I was issued in 1988 and established a minimum ratio of capital to banks´ credit risk with an amendment in 1996 to include market risk. Basel II was established in 2004 to further strengthen the minimum capital requirement with the inclusion of an operational risk capital requirement and a supervisory review of the bank’s capital adequacy. Basel III was released in 2010 in response to the financial crisis of 2007-09, builds on the three pillars of Basel II and introduced new regulatory requirements on bank liquidity and bank leverage.


3) What is Basel II?
Basel II is an extension of the regulations for minimum capital requirements as defined under Basel I. The Basel II framework operates under three mutually reinforcing pillars:
a. Pillar 1 (Minimum Capital Requirements) establishes minimum capital requirements for three major components of risk that a licensee faces: credit risk, market risk and operational risk.
b. Pillar 2 (Supervisory Review Process) requires supervisory oversight to ascertain whether licensees:
       -Have adequate risk management systems in place; and
       -Maintain sufficient capital to cover other risks not specifically covered under Pillar I.
c. Pillar 3 (Market Discipline) improves transparency and requires licensees to publicly provide details of their risk management activities and greater insight into the adequacy of their capital.

 

4) What is bank capital?
Bank capital is an an accumulation of financial resources that a bank holds as a cushion or shock absorber to protect against unexpected losses. Bank capital is the difference between a bank's assets and its liabilities, and it represents the net worth of the bank or its equity value to investors. The asset of a bank include cash, securities and interest-earning loans (e.g. mortgages). The liabilities of a bank include deposits and any debt. Put simply, capital is the difference between what is owned by the bank and what is owed by the bank.


5) Why is the ECCB moving from Basel I to Basel II/III?
The ECCB is moving from Basel I to Basel II/III, to address issues stemming from the lack of risk sensitivity of Basel I. Currently, banks are only required to hold capital for credit risk, however they encounter other risks such as market, operational and liquidity risks. Basel II/III allows the ECCB flexibility to tailor it to meet the ECCU´s unique circumstances. Once implemented, Basel II/III is expected to result in better capitalised banks, a more resilient financial system and enhancement of the ECCU’s reputation as a financial jurisdiction.


6) What is meant by the ECCB’s Basel II/III hybrid framework?
The ECCB has developed a hybrid approach for Basel II/III implementation as follows:
a) Basel II- adoption of the three interlocking pillars to measure, manage and monitor risk. This includes use of the Standardised Approach to calculate the capital charge for credit risk and market risk, respectively and the Basic Indicator Approach for calculating the capital charge for operational risk.
b) Basel III- adoption of the revised definition of capital due to its many enhancements over previous accords, such as the stricter definition of capital, Capital Conservation Buffer and liquidity ratios. The ECCB is considering adopting the capital conservation buffer and subsequently modified versions of the liquidity ratios.


7) Who are the key stakeholders involved in the ECCB’s implementation of Basel II/III?
The main stakeholders include the ECCB, banks, the external auditors of banks, customers, credit rating agencies, the Caribbean Regional Technical Assistance Centre, among others.

8) What is the ECCB’s approach to Basel II/III implementation?
The ECCB will apply a phased approach to the implementation of Basel II/III. The three phases correspond with the three pillars of Basel II as follows:
1. Phase one (Pillar 1): Measures risk in three key risk areas - credit, market and operational risk and calculates the minimum capital requirements for these risks.
2. Phase two (Pillar 2): Involves an Internal Capital Adequacy Assessment Process by banks followed by a Supervisory Review and Evaluation Process, by the ECCB.
3. Phase three (Pillar 3): Facilitates enhanced minimum disclosures where stakeholders are expected to exert market discipline on banks.


9) What are some of the key requirements for successful implementation of Basel II/III?
Some of the requirements for successful implementation of Basel II/III include:
a) ECCB:
       - Plan of action with timeframes for implementation of activities;
       - Adequate supervisory capacity for implementation in a timely manner; and
       - Ongoing training and collaboration with other key stakeholders.
b) Banks:
       - Commitment to the implementation process;
       - A good corporate governance framework including effective board and senior management oversight and robust risk management systems; and
     - A Basel II/III implementation plan including a dedicated implementation team and budgetary allocation for the investment in human/technological resources.


10) To which financial institutions is the ECCB applying Basel II/III?
The ECCB is applying Basel II/III to 14 commercial banks, along with a non-bank financial institution which is the subsidiary of a bank.


11) Which departments are responsible for Basel II/III implementation?
The Bank Supervision Department is responsible for the implementation of the ECCB’s Basel II/III framework, in collaboration with the Statistics Department. A Basel Implementation Team comprising representatives from both departments spearheads implementation activities.


Click here for more information about the ECCB’s Basel II III implementation. 

Requests for additional information can be sent to: info@eccb-centralbank.org.

For information on the BCBS and on the Basel framework in general, please visit: https://www.bis.org/bcbs .

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