• Harvey Anderson
Financial
Regulations
• Oluwabusayo Awoyo
• Barakat Adeniran
• Annie Cherian
Content
• Basel I, II and III
• Insights
• South African context
• Challenges to compliance
• South African response
Introduction
• The Basel Committee on Banking
Supervision designed Basel III as a set of
globally agreed-upon policies in
response to the financial crisis of 200709. Basel III acceptance and
implementation is to:
• Increase the global financial system's
resiliency
• Increase trust in prudential ratios
• Encourage multinational banks to
operate in a predictable and
transparent regulatory framework.
Basel I, II, and
III
• These reforms, primarily through implementing higher
capital and liquidity requirements for commercial banks,
increase the bar of the supervisory system in comparison to
what was in place before to the global financial crisis (Basel
I and II).
• Although several non-member nations are striving to
implement the Basel standards, only members of the Basel
Committee on Banking Supervision are required to do so.
• As of 2015, 90 out of 100 non-members polled were
implementing or planning to implement elements of Basel
II, while 81 were implementing or planning to implement
portions of Basel III.
Basel I, II,
and III
In contrast
• In emerging nations, banks are the primary
sources of formal financing to consumers and
businesses, with financial markets and nonbank financial organisations playing just a
minor role.
• Basel III framework is created, in theory, for
globally active banks and hence is
incompatible with nations where most of the
banking system is made up of locally
established banks that are not internationally
active.
• Despite this, several African nations have
recently embraced it, while others are
proposing to implement a package of
regulatory changes to meet Basel III's
standards.
Key Insights
Insight 1: The Basel III regulations could lead
to negative effects on bank credit supply.
Insight 2: The
adverse effects
on bank lending
are likely to vary
substantially
across banks
and across
countries.
Pre-reform bank capital and
liquidity levels
The length of the transition
period
Monetary policy response
Banks' tactics for fulfilling the
new standards
Insight 3: There
are also
potentially
positive effects,
as well as
substitution
towards nonbank lending.
• Potentially positive effects on bank credit
Banks should become safer and more resilient
• Effects on non-bank credit
Shift from bank credit to non-bank lending, which
may partially compensate for the drop in bank credit.
How is
South Africa
complying
with the
main
elements of
Basel III?
• Risk Based Capital ((2013-2019)) - Final rule
published and implemented. Compliant
• Liquidity Coverage Ratio (LCR) ((2015-2019)) Final rule published and implemented. Compliant
• Requirements For SIBs ((2015-2019)) - Final rule
published and implemented.
• Large Exposures Framework (2019) - Final rule
published but not implemented, or draft regulation
published.
• Leverage Ratio (2018) - Final rule published and
implemented
• Net Stable Funding Ratio (NSFR) (2018) - Final rule
published and implemented
•Functional Challenges
What are the
challenges to
full
compliance?
•Technical Challenges
•Operational Challenges
Functional Challenges
● Adapting previous procedures to meet the needs of a new
regulatory involves a significant amount of effort, such as
identifying assets and liabilities to calculate funding and
liquidity in the form of Net Stable Funding Ratio and
Liquidity Coverage Ratio.
● The new requirement for balance sheet position
identification and under the Counterparty Credit Risk
framework, as well as the adjustment of the limit system
considering the new liquidity and capital requirements.
● It is critical to integrate new regulatory requirements into
existing capital and risk management to improve new ratios
such as the liquidity ratio, which may have a negative
impact on the current financial situation.
Technical Challenges
● In computing the new ratio, the quality of
data, completeness of data, availability of
data, and consistency of data are all key
issues.
● When calculating new ratios, the old risk
management system is disturbed by the
new demand for financial reporting
systems.
Operational
Challenges
● Stricter capital definitions provide an
operational problem for banks by lowering
the amount of capital accessible to them.
Aside from the risk weighted assets for
trading books positions, securitization, and
counterparty credit risk exposure are all
significantly raised.
● Due to Net Stable Funding Ratio, Liquidity
Coverage Ratio, and rigorous capital
requirements, banks are being compelled to
reorganise their liquidity positions.
● The bank's Return on Equity may be put
under strain because of higher capital and
liquidity costs.
● Group 1 banks may be unable to sustain the
newly imposed non-risk based leverage ratio
of 3%.
The Key areas of Basel I, II, and III
• Pillar I (Minimum Capital
Requirements)
• Pillar II (Supervisory Review
Process)
• Pillar III (Market Discipline)
Pillar I (Minimum Capital Requirements)
Capital requirements for
Market Risk

Credit Risk
Advanced Measurement
Approaches

Standardised Approach

Standardised Approach
- Capital Conservation Buffer

Foundation Internal Rating

Internal Value at Risk Models
- Liquidity Ratio
Based Approach
Operational Risk

Liquidity Coverage Ratio
Advanced Internal Rating

Basic Indicator Approach

Net Stable Funding Ratio
Based Approach

(Alternative) Standardised
- Capital charge on off Balance
Approach
sheet items

Pillar II (Supervisory Review Process)
Regulatory framework for banks
Internal Capacity Adequacy
Assessment Process (ICAAP)
Risk Management
Supervisory framework
Evaluation of Internal systems of banks
Assessment of risk profile
Review of compliance with all regulation
Supervisory measures
Leverage Ratio
MIS as a Major Management Tool
Stress Tests
Countercyclical Capital Buffer
Pillar III (Market Discipline)
Disclosure requirements of banks
Enhanced comparability of banks
Transparency for market
participants concerning the bank’s
risk position (scope of application,
risk management, detailed
information on own funds, etc)
Compensation Policy Disclosure
Corporate Governance Practices
Pressure to fully implement Pillar 3
and IFRS 7
Does your country/region intend to comply
fully with the rules?
• YES!
• South Africa's ongoing implementation of Basel III and
global regulatory reforms
• On 1 January 2013 South Africa implemented amended
Regulations which, in line with the Basel III framework,
essentially address both bank-specific and broader,
systemic risks
How?
Raising the quality of capital, with a focus on common
equity and the quantity of capital to ensure banks are
better able to absorb losses.
Enhancing the risk coverage of the regulatory
framework, including exposures related to
counterparty credit risk.
Raising standards for supervision and risk
management (Pillar 2) and public disclosures (Pillar 3).
Introducing the monitoring of proposed minimum
liquidity standards to improve banks’ resilience to
acute short-term stress and to improve longer-term
funding; and
Introducing capital buffers which should be built up in
prosperous times so that they can be drawn down
during periods of stress.
Introducing additional capital buffers for the most
systemically important institutions to address the
issue of such institutions being ‘too big to fail’.
Introducing a leverage ratio to serve as a backstop to
the risk-based capital requirement and to prevent the
build-up of excessive leverage in the financial system.
Basel III in South
Africa
• Subsequent to the implementation of Basel III in
South Africa, the Basel Committee issued various
further or revised requirements in respect of a
wide range of matters that required
amendments to local Regulations, including:
Capital disclosure
requirements
Revisions to the Liquidity
coverage ratio (LCR)
Requirements related to a
restricted version of a CLF
(RCLF)
Liquidity disclosure
requirements (LCR-related
disclosures)
Requirements related to
intraday liquidity
management
Public disclosure
requirements related to
the leverage ratio
Update on Global
Basel III Compliance
in South Africa
Raising the quality of capital, with a
focus on common equity and the
quantity of capital to ensure banks
are better able to absorb losses.
Enhancing the risk coverage of the
regulatory framework, including
exposures related to counterparty
credit risk.
Introducing capital buffers which
should be built up in prosperous
times so that they can be drawn
down during periods of stress.
• South Africa's ongoing implementation of Basel III and global regulatory
reforms
• On 1 January 2013 South Africa implemented amended Regulations
which, in line with the Basel III framework, essentially address both bankspecific and broader, systemic risks by:
Introducing a leverage ratio to
serve as a backstop to the riskbased capital requirement and to
prevent the build-up of excessive
leverage in the financial system.
Raising standards for supervision
and risk management (Pillar 2)
and public disclosures (Pillar 3).
Introducing the monitoring of
proposed minimum liquidity
standards to improve banks’
resilience to acute short-term
stress and to improve longer-term
funding; and Introducing additional
capital buffers for the most
systemically important institutions
to address the issue of such
institutions being ‘too big to fail’.
South Africa
• The implementation period for several of the Basel III requirements that were incorporated into the
Regulations commenced on 1 January 2013 and includes transitional arrangements which will be phased
in until 1 January 2019. The transitional arrangements are available to give banks time to meet the higher
standards while still supporting lending to the economy. For further details please refer to Directive 5 of
2013.
• Subsequent to the implementation of Basel III in South Africa, the Basel Committee issued various further
or revised requirements in respect of a wide range of matters that required amendments to local
Regulations, including:
o
Capital disclosure requirements
o
Revisions to the Liquidity coverage ratio (LCR)
o
Requirements related to a restricted version of a CLF (RCLF)
o
Liquidity disclosure requirements (LCR-related disclosures)
o
Requirements related to intraday liquidity management
o
Public disclosure requirements related to the leverage ratio
In addition, amendments to the Regulations were required because of the 2015 RCAP process​ and the
supervisory review processes and participation in various international forums.
References
•
Basel III: international regulatory framework for banks. (n.d.). Retrieved March 8, 2022, from
https://www.bis.org/bcbs/basel3.htm?m=3_14_572
•
Chabanel, P.-E. (2012, June). Retrieved March 18, 2022, from Moody’s Analytics, Inc.: https://www.moodysanalytics.com//media/presentation/before-2011/2012-13-06-Basel-III-Regulatory-Update.pdf
•
Global bank regulation: potential effects on access to finance in Africa | GlobalDev | Supported by GDN and BMGF. (n.d.). Retrieved
March 8, 2022, from http://globaldev.blog/blog/global-bank-regulation-potential-effects-access-finance-africa
•
Scribd, C. (2014, February 23). Slide Share. Retrieved March 18, 2022, from Slide Share: https://www.slideshare.net/dhruvt35/bazel3?next_slideshow=31532198
•
South Africa’s implementation of Basel II and Basel III. (n.d.). Retrieved March 4, 2022, from https://www.resbank.co.za/en/home/what-wedo/Prudentialregulation/Sector_data/south-africa-s-implementation-of-basel-ii-and-basel-iii