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The Basel regulatory framework comprises a set of minimum global standards that are designed, in principle, for internationally active banks. As such, national authorities have the flexibility to determine the regulatory requirements for non-internationally active banks operating in their jurisdictions. In practice, Basel standards are imposed on a wider set of banks in many jurisdictions.
Following the financial crisis, the Basel Committee on Banking Supervision (BCBS) revamped the international regulatory framework by introducing additional measures to strengthen the resilience of the global banking system. While this has resulted in a more risk-sensitive framework, it has also increased complexity. In this context, many non-BCBS jurisdictions have been grappling first, to understand the numerous changes made to the prudential framework; and second, to determine what aspects of the revised rules are the most applicable for their jurisdiction-specific circumstances.
The lack of global prudential standards for non-internationally active banks has led national authorities to implement a range of proportionality approaches. While all jurisdictions oversee at least a subset of banks that are not internationally active, the policy challenge of devising an appropriate rule book for these banks is more critical in non-BCBS member jurisdictions, where the bulk of the banking system may consist of locally incorporated banks that are not internationally active.
Of the Pillar 1 requirements, most of the surveyed jurisdictions have adopted the RBC regime in various forms, the Liquidity Coverage Ratio (LCR) and some version of the large exposures standard. All 100 jurisdictions have adopted some iteration of the RBC regime (Basel I, II or III), while 81 countries reported the adoption of either the LCR (54) or domestic liquidity rules (27). Similarly, 91 jurisdictions have adopted the large exposures rule, based on either the 2014 large exposures standard (14), some variation of the 1991 standard (38) or their own domestic large exposure rule (39).
Little progress has been made on adopting the leverage ratio, the Net Stable Funding Ratio (NSFR) and the latest large exposures standard. Despite its relative simplicity, the leverage ratio has been adopted by only 16 surveyed jurisdictions, with another four countries applying a domestic leverage rule. Similarly, the NSFR has been adopted by 15 jurisdictions. In addition, while some form of a large exposures rule has been adopted by most countries, only 14 jurisdictions have introduced the 2014 large exposures standard.
The implementation of various Pillar 1 requirements, particularly the RBC regime, differs across jurisdictions. This is due to a combination of factors, including the adoption of different versions of the RBC regime across jurisdictions and variations in how proportionality is applied. Of the 100 jurisdictions that have adopted the RBC regime, 60 have adopted key elements of Basel III, 10 are using Basel II, while 30 remain under Basel I.
These differences are accentuated by the numerous proportionality approaches taken in nearly all countries. Virtually all (97 of 100) jurisdictions apply proportionality to the RBC regime, with the type and materiality of their modifications varying across jurisdictions. As jurisdictions migrate to the Basel III RBC regime, proportionality strategies become more nuanced. This is driven largely by the number of new elements that have been added to the numerator, the denominator, and applicable RBC ratios.
In practice, jurisdictions follow one or a combination of three proportionality strategies with respect to the Basel III RBC regime. Some jurisdictions segment their banks and apply the Basel III RBC regime to their larger banks, while applying different rules to different types of smaller institutions. Others tend to focus on applying proportionality to specific rules and exempt banks that meet prespecified thresholds from certain requirements (eg the market risk capital charge). A third approach consists of applying a modified version of some aspects of the RBC regime (eg minimum capital ratios) to all banks in the system.
Within the RBC regime, the market risk capital requirement is most often subject to a proportionate approach. The perceived complexity of the market risk framework has led many countries to either exempt all banks from the market risk capital requirements (Basel I countries) or to exempt banks with small trading books from the market risk capital charge (Basel III countries).
With respect to the LCR and large exposures, the primary proportionality approach taken for both standards is the application of simplified domestic rules. When domestic rules are imposed in lieu of relevant Basel standards, they generally apply to all banks in a given jurisdiction.
Proportionality is generally associated with simplifying rules for smaller or less complex banks. Nevertheless, many jurisdictions also exert “conservative” proportionality by imposing more stringent rules in all Pillar 1 requirements. In several jurisdictions, the relaxation of a particular aspect is often accompanied by tightening of rules for another element of the same prudential standard.
There is demand from non-BCBS jurisdictions for the international community to provide some clarity on the application of proportionality. On the one hand, national authorities have latitude to tailor the Basel standards to the risk characteristics of non-internationally active banks in their jurisdictions. On the other, they need to ensure that their regulatory framework is perceived internationally as being sufficiently rigorous. Therefore, some direction at the international level on the application of proportionality may help individual jurisdictions to address the relevant trade-offs when designing their prudential framework.