The Basel Committee‘s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), has endorsed the outstanding Basel III post-crisis regulatory reforms. Separately, the federal banking agencies announced their support for the conclusion of efforts to reform the international bank capital standards initiated in response to the global financial crisis.

The revised standards will take effect from January 1, 2022 and will be phased in over five years. The Committee has established a program to evaluate its post-crisis reforms and will actively participate in the Financial Stability Board’s efforts to evaluate the effects of reforms.

“Today’s endorsement of the Basel III reforms represents a major milestone that will make the capital framework more robust and improve confidence in banking systems,” said Mario Draghi, chairman of the GHOS and president of the ECB. Draghi added: “The package of reforms endorsed by the GHOS now completes the global reform of the regulatory framework, which began following the onset of the financial crisis.”

Stefan Ingves, chairman of the Basel Committee and governor of Sveriges Riksbank, said: “These reforms will help reduce excessive variability in risk-weighted assets and will improve the comparability and transparency of banks’ risk-based capital ratios. Now that the Basel III regulatory reform agenda is complete, we must focus on the important task of ensuring the standards are implemented consistently around the world. The Committee, through its Regulatory Consistency Assessment Programme, will therefore continue to monitor closely the implementation of the Basel III standards.”

The FDIC noted in a news release that the Basel III agreement, which was designed for internationally active banks, was introduced in 2010 and was instrumental in establishing revised minimum standards that increased both the quality and quantity of regulatory capital. The reforms finalized today are intended to improve risk sensitivity, reduce regulatory capital variability, and level the playing field among internationally active banks.

The agencies will consider how to appropriately apply these revisions to the Basel III reform package in the United States and any proposed changes based on this agreement will be made through the standard notice-and-comment rulemaking process.

The reforms endorsed by the GHOS include the following elements:

• A revised standardized approach for credit risk, which will improve the robustness and risk sensitivity of the existing approach.
• Revisions to the internal ratings-based approach for credit risk, where the use of the most advanced internally modeled approaches for low-default portfolios will be limited.
• Revisions to the credit valuation adjustment (CVA) framework, including the removal of the internally modeled approach and the introduction of a revised standardized approach.
• A revised standardized approach for operational risk, which will replace the existing standardized approaches and the advanced measurement approaches.
• Revisions to the measurement of the leverage ratio and a leverage ratio buffer for global systemically important banks (G-SIBs), which will take the form of a Tier 1 capital buffer set at 50% of a G-SIB’s risk-weighted capital buffer.
• An aggregate output floor, which will ensure that banks’ risk-weighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel III framework’s standardized approaches. Banks will also be required to disclose their RWAs based on these standardized approaches.