Basel Committee on Banking Supervision is an international committee
established by the Bank for International Settlements to formulate
policy on prudential standards and best practices among financial
In September 2011, the Basel Committee revised its capital standards in
what is referred to as Basel III. While Basel II was about the
risk-weighting of assets, Basel III is about tightening the definition
of capital and requiring more of it. Some of the key elements of Basel
III affecting credit unions include:
Learn more about the International Regulatory Framework for Banks (Basel III)
- Introduction of a 2.5% capital conservation buffer on top of the 8%
risk-weighted assets capital requirement. If an institution fails to
have this buffer, its ability to pay dividends and discretionary bonuses
is proportionally constrained.
- Introduction of a 3% leverage ratio by 2019.
- Introduction of a countercyclical capital requirement. If a country
enters a credit bubble, supervisors can require firms to hold an
additional countercyclical capital buffer of up to 2.5%. This framework
is in the Dodd-Frank Act and applies to all U.S. depository
institutions except credit unions because of the recognition that they
do not present the same systemic risk concerns.
- Membership shares in credit unions can be counted as tier-1 capital
if the shares meet covenants regarding permanency and have the ability
to absorb losses.
- Basel III calls for legislative changes to be made at national
levels between now and 2013 to enable implementation. The
implementation will start in 2013 and will not be complete until 2019.
Basel I and Basel II
The Basel Committee implemented the first Basel
Capital Accord in 1988. Originally developed for internationally active
banks in G10 countries, the Accord has now been implemented in over
100 countries for both large and small financial institutions, including
In 2000, the Basel Committee began consulting
the financial services industry on a revision to the Basel Capital
Accord. The purpose of the revision was to provide a more risk sensitive
approach to capital adequacy.
On June 26, 2004, the Basel
Committee on Banking Supervision issued its revised framework,
International Convergence of Capital Measurement and Capital Standards,
a Revised Framework. This framework reflects the committee’s
modifications, albeit limited in number, made in the Consultative Paper
(CP3) issued in April 2003.
Within this final Basel Accord,
the committee acknowledges that the adoption of the revised framework
may not be the first priority in all non-G10 countries to strengthen
supervision. Rather, the Basel Committee encourages each national
supervisor to consider carefully the benefits of the revised framework
with respect to the country’s banking system and then develop a plan to
implement the revised framework. Consequently, the committee realizes
implementation will most likely occur beyond the prescribed
implementation dates. As a result, the committee urged supervisors to
consider implementing key elements of the supervisory review and market
discipline components of the revised framework, even if Basel II
minimum capital requirements were not fully established by the
In order to assist national
supervisors responsible for implementation of the revised framework,
the Basel Committee convened a working group in early 2003 to assess
the issues involved in implementing Basel II. The working group,
comprised of mainly members from non-G10 countries, provides practical
suggestions supervisors may adapt for use in different jurisdictions for transition to the revised framework.