Basel’s history in the US and what it means to community banks

By Tara Heusé Skinner, SAS Risk Research & Quantitative Solutions

The Basel Accord’s history spans forty years, dating to the Bank Herstatt settlement risk incident in 1974. When the bank failed and was subsequently liquidated by its German regulators, cross‐jurisdictional implications came to the forefront, showed that just a single bank failure had global consequences. So the Basel Committee on Bank Supervision (BCBS) was formed by the G-10 countries, which includes the US.

The BCBS coordinated work on the worldwide implementation of Real Time Gross Settlement Systems, which ensures that payments between banks are executed in real-time and are considered final. It then authored and launched the 1988 Basel Accord (also known as Basel I), prescribing minimum capital standards for all banks and concentrating credit risk and risk-weighted assets (RWA).

The US Basel III Final Rule marks the first time that the US regulatory system is adjusted to the size of the bank.

Revisions and delays

The first overhaul of the 1988 Accord, identified as Basel II, appeared in 2004. Through it, the BCBS sought to make a bank’s capital commensurate with its risk-taking and added market and operational risks to the mix, joining credit risks and RWA. Because of its alleged complexity and perceived implementation costs, all but the largest US banks were exempt.

The compliance date for the US version of Basel II (April 2008) was delayed because of the 2007-2008 financial crisis, and in some cases, waived altogether.

In response to the crisis, the BCBS revised Basel II (calling it Basel 2.5) to deal with credit risk in the trading book. US regulators wanted to adopt Basel 2.5 by 2011, but their final rule was issued in 2012, only six months before the new Basel III framework was to become effective. Enactment of Basel 2.5 was then delayed another year.

Since the Basel III framework is broader in scope than Basel I and II, US regulators issued their final rule with regard to Basel III compliance, encompassing the work from before. Basel III adds to, and not supersedes, Basel I and II. It is intended to increase a bank’s liquidity while decreasing its leverage, further strengthening bank capital.

The way it stands today

In July 2013,US regulators issued the US Basel III Final Rule. It adapts the international Basel III framework to the Dodd-Frank Act and particularly, to its “Collins Amendment” (Section 171). The Collins Amendment specifies that all insured financial institutions with assets of greater than $500 million must respect basic minimum capital rules; larger banks are subject to additional capital requirements as well as disclosure requirements. The US Basel III Final Rule marks the first time that the US regulatory system is adjusted to the size of the bank.

Read the entire Point of View paper, “Does Basel III Apply to the Community Bank?” to learn how this regulation applies to your organization and what you can do to ensure compliance.


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Read the entire Point of View paper, “Does Basel III Apply to the Community Bank?” to learn how this regulation applies to your organization and what you can do to ensure compliance.

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