Basel II & Basel III Regulations

What are the Basel Regulatory Frameworks?

Basel III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision. The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. In Basel III, a more formal scenario analysis is applied.

Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. Basel II, published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks face.

Who is impacted by the Basel II and Basel III Accords?

All financial institutions, but the impact may differ by jurisdiction, types and size. Global Systemic Important Banks (G-SIBs) will be subject to higher core tier 1 capital requirements. There are currently 29 G-SIBs.

How do the Basel III Accords impact financial institutions in the United States?

The Basel Regulatory Framework will be implemented in the United States beginning on January 1, 2014 with the largest financial institutions, and then it will be phased in beginning January 1, 2015 for all other financial institutions. The rule will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. In addition, for the largest, most internationally active banking organizations, the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures.   On the quality of capital side, the final rule emphasizes common equity tier 1 capital, and implements strict eligibility criteria for regulatory capital instruments. The final rule also changes the methodology for calculating risk-weighted assets to enhance risk sensitivity.

How Can Experian help my financial institution with Basel II and III?

Experian can review and assess the bank’s portfolio(s) and provide a gap analysis and project design that meets Basel III requirements, followed by data prep, development, integration, and validation of loss projections using the following models:

  • Probability of Default (PD)
  • Loss Given Default (LGD)
  • Exposure at Default (EAD)

Additionally, evaluate strategic initiatives to help offset the potential impact by optimizing risk-weighted assets (RWA) strategies and capital usage.

Stress Testing and Capital Assessment

Experian understands the importance of measuring capital adequacy, stress testing and loss reserve estimation reporting and brings an extensive background in modeling, banking, risk management and simulation to our clients. Click the button below to learn more about our stress testing and capital assessment services and analytics.

Get More Information

Would you like to talk to someone at Experian about consulting services? Please submit the form below and we’ll be in touch with you soon.

  • Submit

Compliance As A Differentiator

Contact Us

Call us at 1 888 414 1120 or submit the form below to request more information.