Streamlining Basel III: Harmonizing Global Banking Regulations for Stability and Resilience

Finance Watch, a European non-profit association, has called for greater harmonization and standardization in the global implementation of the Basel III regulatory framework. The organization's report, "Momentum: The Evolution and Challenges of Basel," emphasizes the need for renewed political commitment to improve the framework and ensure its overall effectiveness.

Strengthening the Global Banking Regulatory Landscape

Simplifying the Complex Regulatory Framework

The report from Finance Watch highlights the need to simplify the complex regulatory landscape surrounding Basel III. The current framework has become overly intricate, with a wide scope for national deviations and a lack of uniform rules. This complexity has undermined the framework's effectiveness and created an uneven playing field for internationally active banks. To address this, the report recommends streamlining the regulations, reducing the scope for national variations, and enforcing uniform rules to establish a level playing field for banks worldwide.

Transitioning from Internal Models to Standardized Approaches

The report suggests that a more harmonized approach to Basel III implementation will ensure greater consistency and comparability across jurisdictions. This includes phasing out the use of internal model-based approaches in favor of standardized, risk-sensitive methods. Internal risk models used by banks have been found to project a false sense of predictability and continue to distort competition in favor of the largest institutions. By transitioning to standardized approaches, the framework can become more transparent and equitable, promoting a level playing field for all banks.

Strengthening Bank Supervision and Reporting

Finance Watch's report also emphasizes the need to strengthen bank supervision by developing global frameworks and standards for real-time prudential reporting and supervisory bank access. This will enhance the ability of regulators to monitor and respond to emerging risks in the banking sector. Additionally, the report suggests that policymakers should reduce the involvement of bank supervisors in the pre-approval of internal risk models, allowing them to focus their limited expert resources on core supervisory tasks.

Integrating Climate Risk into Banking Regulations

The report from Finance Watch also highlights the importance of integrating climate risk into banking regulations. This is crucial to address the financial threats posed by stranded fossil fuel assets and prevent significant future losses. By incorporating climate-related risks into the regulatory framework, policymakers can ensure that banks are better equipped to manage and mitigate the potential impact of climate change on their operations and portfolios.

Renewing Commitment to the Basel Process

Finance Watch's report indicates that the complexity of the current Basel III framework may undermine its overall effectiveness. The organization calls upon European policymakers to strengthen their commitment to the Basel process and actively re-engage with their international partners, particularly in the United States, to avoid a regulatory "race to the bottom." This renewed commitment and collaboration will be crucial in driving the necessary changes and ensuring a more harmonized and effective implementation of Basel III globally.Christian M. Stiefmüller, senior research and advocacy advisor at Finance Watch, emphasizes the need for this renewed commitment, stating, "Instead of making it easier for jurisdictions to buy into a global consensus, the excessive complexity of Basel III seems to have had the opposite effect. Major jurisdictions, including the EU, seem to be moving away from even the modest achievements under the Basel III agreement."