The new regulatory environment in the banking system. The importance of Basel III in preventing future crisis.

Abstract

The G20 endorsed the new ‘Basel 3’ capital and liquidity requirements at their November 2010 Summit in Seoul. There are many areas of detail needing further development and worldwide debate and lobbying will inevitably continue - most notably in relation to the whole issue of systemically important financial institutions (SIFIs). The core principles, however, are set.The focus of attention is now shifting to implementation – progressing action on the business implications and planning for compliance. There are strong indications that the convergence in principle will become divergence in practice. Although the transitional period appears long, the 2019 deadline to complete implementation should not distract institutions from the need to demonstrate capital and liquidity resilience much sooner, and meet interim deadlines along the way. Despite a lack of absolute clarity, there is no time to waste. Experience from Basel 2 proved that early analysis, strategic evaluation and robust planning are all crucial to success. Firms must also remain flexible to adapt to subsequent changes and developments, with a number of other parallel policy initiatives being put in place, notably Recovery and Resolution Plans (RRPs), enhanced college of regulator arrangements and continuing uncertainty over tax. Changes in any of these will impact a Basel 3 response plan.