Basel III Banking Regulations

Basel, Switzerland is the home of the Bank of International Settlements, known as the central bankers’ central bank.[1] While the Federal Reserve is the most influential central bank, Basel, Switzerland is where international banking regulations are set.

Basel III is the most recent set of banking regulations. [2]

Below are some excerpts from the Basel Committee on Banking Supervision’s regulations: Basel III: Finalising post-crisis reforms. Notably, gold is considered to be on par with cash per paragraphs 96 and 148 (b). That probably has something to do with why central banks have been net buyers of gold since 2008 for the first time since 1987.[3]

Pg. 1

Introduction

4. The revisions to the regulatory framework set out in this document will help restore credibility in the calculation of RWAs [Risk Weighted Assets] by: (i) enhancing the robustness and risk sensitivity of the standardised approaches for credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios; (ii) constraining the use of internally-modelled approaches; and (iii) complementing the riskweighted capital ratio with a finalised leverage ratio and a revised and robust capital floor. An accompanying document summarises the main features of these revisions.1

8. While the revised framework will continue to permit the use of internally-modelled approaches for certain risk categories (subject to supervisory approval), a jurisdiction which does not implement some or all of the internal-modelled approaches but instead only implements the standardised approaches is compliant with the Basel framework. More generally, jurisdictions may elect to implement more

[…]

Standardised approach for credit risk

Introduction

1. The Committee permits banks to choose between two broad methodologies for calculating their risk-based capital requirements for credit risk. The first, the standardised approach, assigns standardised risk weights to exposures as described in paragraphs 4 to 97. To determine the risk weights in the standardised approach for certain exposure classes, in jurisdictions that allow the use of external ratings for regulatory purposes, banks may, as a starting point, use assessments by external credit assessment institutions that are recognised as eligible for capital purposes by national supervisors, in accordance with paragraphs 98 to 116. Under the standardised approach, exposures should be risk-weighted net of specific provisions (including partial write-offs).

[…]

(Pg. 4)

A.      Individual exposures.

[…]

(Pg. 28)

14. Other assets

95. The standard risk weight for all other assets will be 100%, with the exception of exposures mentioned in paragraphs 96 and 97.

96. A 0% risk weight will apply to (i) cash owned and held at the bank or in transit; and (ii) gold bullion held at the bank or held in another bank on an allocated basis, to the extent the gold bullion assets are backed by gold bullion liabilities.

97. A 20% risk weight will apply to cash items in the process of collection.

[…]

Eligible financial collateral under the simple approach

148. The following collateral instruments are eligible for recognition in the simple approach:

(a) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) on deposit with the bank that is incurring the counterparty exposure.

(b) Gold.

(c) In jurisdictions that allow the use of external ratings for regulatory purposes:

(i) Debt securities rated by a recognised ECAI where these are either:

- at least BB- when issued by sovereigns or PSEs [non-central government Public Sector Entities] that are treated as sovereigns by the national supervisor; or

- at least BBB- when issued by other entities (including banks and other prudentially regulated financial institutions); or

- at least A-3/P-3 for short-term debt instruments

(ii) Debt securities not rated by a recognised ECAI where these are:

- issued by a bank; and − listed on a recognised exchange; and

- classified as senior debt; and

- all rated issues of the same seniority by the issuing bank are rated at least BBB- or A3/P-3 by a recognised ECAI; and

- the bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB- or A-3/P-3 (as applicable); and

- the supervisor is sufficiently confident that the market liquidity of the security is adequate.

(d) In jurisdictions that do not allow the use of external ratings for regulatory purposes, the following securities will be eligible provided that the supervisor is sufficiently confident that the market liquidity of the security is adequate:

(i) Debt securities issued by sovereigns or PSEs that are treated as sovereigns by the national supervisor;

(ii) Debt securities issued by banks assigned to Grade A under the SCRA;

(iii) Other debt securities issued by “investment grade” entities as defined in paragraph 197, and

(iv) Securitisation exposures with a risk weight of less than 100%.

(e) Equities (including convertible bonds) that are included in a main index.

(f) Undertakings for Collective Investments in Transferable Securities (UCITS) and mutual funds where:

• a price for the units is publicly quoted daily; and

• the UCITS/mutual fund is limited to investing in the instruments listed in this paragraph.71

 

[1] https://www.bis.org/about/index.htm?m=1%7C1

[2] https://www.bis.org/bcbs/publ/d424.pdf

[3] https://www.cnbc.com/2019/01/31/world-gold-council-central-banks-buy-most-gold-since-1967-.html