by Rhoda Wilson, Expose News:
Yesterday, the Bank for International Settlements announced that its member jurisdictions have made significant progress in implementing the final elements of Basel III.
Basel III includes wide acceptance of bail-in as a way of rescuing failing banks. Unlike a bailout, which involves external assistance (often from taxpayers), a bail-in restructures the bank’s liabilities internally which includes taking the money you have on deposit and in savings accounts, as these form part of the bank’s liabilities, and converting them from cash you can use into something else, e.g. shares in the bank.
In other words, it is a bailout by the taxpayers but without the government as the middleman. As a depositor or saver, the bail-in conditions will not be negotiated with you.
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Established in 1930, the BIS is owned by 63 central banks, representing countries from around the world that together account for about 95% of world GDP. It has member jurisdictions from 28 countries. These member jurisdictions are represented by central banks and authorities with formal responsibility for supervising banking business.
Further reading: Bank for International Settlements: Overview, History, Investopedia, 12 August 2022
The Basel Committee on Banking Supervision (“BCBS”) is the primary global standard setter for the prudential regulation of banks, providing a forum for regular cooperation on banking supervisory matters. The Committee consists of representatives from 28 countries, based in Basel, Switzerland.
BCBS is one of the Bank for International Settlements’ (“BIS”) committees and associations that form part of its commitment to the Basel Process. The Basel Process is the name given to an international cooperation among central banks, except for the Central Bank of Russia whose membership has been suspended, and other financial authorities.
The Third Basel Accord or Basel III is a set of global banking regulations published by the BCBS in November 2010. A consortium of central banks from 28 countries devised Basel III in 2009, mainly in response to the financial crisis of 2007–2008 and the subsequent economic recession. Implementation of Basel III has been extended several times, initially scheduled from 2013 to 2015, then to 2022, and finally to 2023, due to the covid pandemic. Delays in Basel III’s implementation have also been due to banks calling for more time to adjust to and lobby against the new regulations.
The implementation of the final components of Basel III, known as Basel III Endgame in the United States, which began in 2017 is set to end in 2024 with the regulations to take effect in July 2025.
Basel II, published in 2004, was the previous set of global banking regulations. Basel III builds upon Basel II, refining the measurement framework for minimum capital requirements and introducing new requirements for liquidity and leverage. Basel II is now partially superseded by Basel III, with some of its provisions extended or modified.
Basel III Endgame includes updates to how banks calculate the risk of people not paying back their loans, how they use their own internal models to determine how much money they need to keep in reserve and how they should handle operational risks like fraud or system failures.
In a detailed article, Investopedia explains what Basel III is and what the effects might be for investors:
Critics of Basel III Endgame argue that the higher capital requirements would lead some banks to cut their lending activities, slowing economic growth in the short term. The thinking goes that they would need to keep more of their capital on hand, and thus, their lending would slow.
Lobbies like the Bank Policy Institute have taken to the airwaves and online, warning that the suggested regulations, which targeted only about 37 US banks with holdings of $100 billion in assets or more, would put young families’ dreams of homeownership and small businesses’ expansion plans at risk. The banks claim the reforms would not make them any more stable and would have knock-on effects on their ability to lend funds to those with less credit, including minorities who have historically faced problems obtaining credit from American financial institutions.
Proponents of the plan, however, have pointed to studies that show that banks might lend more with more of a cushion to backstop their lending activities, the same way having more savings might make you less reluctant to lend to a family member. Whether up or down, others say any influence would be modest at best.
While the Basel III Endgame rules primarily aim to strengthen the banking system, their effects would ripple through the entire economy.
While Basel III primarily targets very large, internationally active banks, critics charge that its regulations would also affect small and medium-sized banks.
Basel III: What It Is, Capital Requirements, and Implementation, Investopedia, 22 June 2024
Investopedia’s article focuses on investors. What about the effects on bank account holders?
Basel III introduces the “bail-in” of banks, representing a significant shift in banking regulation.
As Investopedia noted, bail-ins and bailouts are designed to prevent the complete collapse of a failing bank. The difference between the two lies primarily in who bears the financial burden of rescuing the bank.
In a bailout, the government injects capital into banks, enabling them to continue their operations. We saw this happen after the 2007-2008 financial crisis.
Bail-ins provide immediate relief when banks use money from their unsecured creditors, including depositors and bondholders, to restructure their capital. In other words, banks use the money from depositors and unsecured creditors to help them avoid failure. Depositors, the bank’s customers, include you, me and anyone who has money in a bank account.
