Context
In a victory for Wall Street banks the US Federal Reserve announced major changes to a proposal for stronger bank capital requirements known as the “Basel III endgame”.
About
- The Basel Committee on Banking Supervision is a panel convened by the Bank for International Settlements (BIS) in Basel, Switzerland.
- It aims to ensure that regulators globally observe comparable minimal capital requirements so that banks can survive loan losses during tough times.
- The committee’s “Basel III” standard was agreed after the 2007-09 global financial crisis and includes numerous capital, leverage and liquidity requirements.
- Regulators across the world have worked for years to enforce many of those requirements and the so-called “endgame” (agreed in 2017) is the final iteration.
The “Endgame” Proposal of the USA
-
- The “endgame” proposal (unveiled in July 2023 after the failure of three lenders in 2023) refines Basel’s approach to setting capital based on the riskiness of banks’ activities.
- The U.S. Idea might overhaul how banks gauge their risk, and in turn, how much capital they should set aside as a cushion against potential losses.
- The main areas of focus are –
-
- Credit chance: To gauge credit chance, regulators are seeking to end banks’ capability to use their own internal risk models when determining how much capital should be held against lending activities.
- Market chance: Similarly, the notion could set up new requirements for how banks gauge the risk posed by swings in the markets and potential losses from trading.
- Operational risk: This refers back to the potential losses banks could face from unexpected sources, such as failed internal policies, management mistakes, litigation costs or external events.
- The guidelines, which could be followed by banks with over $100 billion in property, could overhaul the manner the most important banks control their capital, with implications for lending and trading activities.
- However, banks say additional capital is unnecessary and will hurt the economy, and have aggressively lobbied against the project.
Why are Banks Upset with the “Endgame” Proposal of the US?
- While the regulations were years within the making, banks had been hoping that the U.S. regulators would provide alleviation some other place by adjusting existing capital necessities to assist offset the new hikes.
- They argue banks are well-capitalised, having withstood the COVID-19 pandemic and regularly clearing the Fed’s annual strain assessments, and any capital hikes are unjustified.
- Banks have also complained that regulators have now not provided enough data to justify the brand new increases, and feature even threatened to sue.
Decision to Make Major Changes in the “Endgame” Proposal
- Following months of criticism and pressure from the enterprise, U.S. Regulators are predicted to meaningfully reduce the impact of the inspiration in a vast rewrite.
- Such a step could ease industry complaints cases by giving them a chance to offer more feedback.
- But it might notably delay the effort and doubtlessly imperil it, as regulatory leadership could change following the November presidential election.
Source: The Hindu
UPSC Prelims Practice Question
Q.‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to: (2015)
(a) Develop national strategies for the conservation and sustainable use of biological diversity
(b) Improve banking sector’s ability to deal with financial and economic stress and improve risk management
(c) Reduce the greenhouse gas emissions but places a heavier burden on developed countries
(d) Transfer technology from developed countries to poor countries to enable them to replace the use of chlorofluorocarbons in refrigeration with harmless chemicals
Ans – “b”
.png)
