News Column

Moody's global review of Basel III implementation highlights progress made and jurisdictional differences

August 12, 2014

Moody's Investors Service says that while implementation of Basel III is proceeding globally, notable differences

are evident between jurisdictions in a host of areas, such as pace, the

degrees of strictness relative to Basel Committee guidance, and the

resulting challenges banks face.

Moody's views the key requirements being implemented as part of Basel III

as credit positive, addressing many of the deficiencies in banks'

pre-crisis management of risk, capital, liquidity and funding and


Moody's also argues, however, that it is apparent that some of the

weaknesses associated with Basel II have not been sufficiently addressed

and that it is too soon to say that the industry has so far achieved

fundamentally stronger creditworthiness as a result of Basel III.

Moody's conclusions were contained in a just-released report titled

"Basel III Implementation in Full Swing: Global Overview and Credit

Implications". The report -- co-authored by Laurie Mayers and Meredith

Roscoe -- reflects contributions from Moody's banking analysts worldwide,

and brings together assessments on the progress of implementation of

Basel III in the Americas, Middle East & Africa, Asia Pacific, and

Europe, or a total of 38 jurisdictions.

Themes include implementation trends and credit implications, the

implications for banking industry strength, and the background to Basel

III. In particular, Moody's discusses how the Basel III framework

addresses the deficiencies of previous frameworks which became apparent

as a result of the global financial crisis. The report also contains

tables and exhibits analyzing and comparing the situation in each


For those systems where the banks already hold high levels of capital and

liquidity -- such as in Asia Pacific, the Middle East, and Latin America

-- authorities are imposing higher, "super-equivalent" requirements, and

maintaining the liquidity and capital in their systems, a credit


In this case, a key challenge for banks will be the replacement of

non-qualifying instruments through organic capital generation or issuance

of new Tier 1 and Tier 2 instruments.

Continuing on its themes of the differences between jurisdictions, the

report notes that in some countries, including the UK, Canada, and in

Asia, implementation is stricter than the Basel Committee for Banking

Supervision (BCBS) guidance so as to avoid regulatory "back-stepping" --

that is, capital or liquidity requirements were already stricter than the

requirements of previous regimes, such as Basel II.

Many jurisdictions are also implementing stricter requirements for their

larger banks, including higher minimum capital levels, or accelerated

phase-in of capital and liquidity requirements. For example, US

systemically important banks are subject to a Tier 1 capital leverage

buffer of at least 2% of total leverage exposure above the 3% minimum.

The report further observes that the Basel III framework does not address

some Basel II weaknesses, including comparability of risk-weighted

assets and inconsistent use of and disclosure of Pillar 2 assessments.

Given the differences in implementation requirements and schedules, users

of banks' financial disclosures should be aware that transitional capital

and leverage ratios are not directly comparable without taking account of

accelerated or "super-equivalent" local rules, according to the report.

Once fully implemented, the Basel III framework will improve banks'

resilience to asset and liquidity stresses and shocks, but it is also

too soon to conclude -- as indicated -- that the industry has achieved

stronger creditworthiness.

The report notes that banks have made substantial improvements in their

fundamentals, including reductions in leverage, the implementation of

firm-wide stress testing, and the formation of more robust liquidity and

funding profiles. Yet, many banks remain challenged in meeting full Basel

III requirements while, at the same time, sustaining profitable business

models under these more stringent regulatory constraints.

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Source: EMBIN (Emerging Markets Business Information News)

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