12 November 2014

BCBS: Information on national discretions published by the Basel Committee

The Basel Committee on Banking Supervision is today publishing the findings of a review of its members' implementation of national discretions within the Basel capital framework. 

The Basel capital framework contains a number of national discretions to allow the standards to be implemented differently by authorities in different jurisdictions. In practice the Committee recognises that the use of national discretions can also impair the comparability of implementation across jurisdictions, particularly if supervisors do not implement them with the same conservatism. This was highlighted by three recent studies on the variation of risk-weighted assets in the banking book and trading book.

In July 2013, the Basel Committee published a discussion paper on risk sensitivity, simplicity and comparability. It discussed the use of national discretions and recommended a review of how current national discretions are used by members. As a first step, the Basel Committee conducted a survey of members later in the year. This report summarises the results of that survey and shows the current use of national discretions included in the Basel capital framework by all 27 Basel Committee members.

The survey results should be read in conjunction with the International Convergence of Capital Measurement and Capital Standards: A revised framework (Basel II) and Basel III: A global regulatory framework for more resilient banks and banking systems. For example, “54 (claims on sovereign or central bank)” refers to paragraph 54 of the Basel II accord which defines a national discretion regarding these sorts of claims:

“54. At national discretion, a lower risk weight may be applied to banks’ exposures to their sovereign (or central bank) of incorporation denominated in domestic currency and funded in that currency. Where this discretion is exercised, other national supervisory authorities may also permit their banks to apply the same risk weight to domestic currency exposures to this sovereign (or central bank) funded in that currency.”

Most terms used in the tables in this report are straightforward: “Yes” means a discretion is used by the jurisdiction; “No” means it is not. “n/a” means “not applicable” rather than “not available.” Other terms like “Option 1”, “Option 2”, “Explicit or Implicit”, “Market or Both”, “Simple Risk Weighted Assets (RWA)” or “Both” and “Deduction (Ded) or Risk Weighted (RW)” are defined in the respective paragraphs of the Basel standards.

The results of the survey are presented below in two series of tables, seven summary tables and seven main tables with one summary table for each main table. The summaries simply count the number of members who use a particular discretion. The main tables detail use of discretions by individual Basel Committee member jurisdictions. These are presented in separate tables for the European Union (EU) and non-European Union (non-EU) jurisdictions to accommodate the fact that in the EU, the Basel framework is implemented partially at the regional level directly and partially at the member state level, so some of the responses are common across EU members. The footnotes to each of the main tables explain specific details of individual country responses.

The Basel Committee has begun analysis of these discretions to understand how much they contribute to unwarranted variations in capital standards. The Committee will then consider which of the discretions should be eliminated from the framework, which would serve to increase the comparability of implementation of the standards across jurisdictions. This process to consider eliminating certain discretions will begin in 2015.

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