By size, Basel is the third-largest city in Switzerland (the two largest are Zürich and Geneva, while the capital, Bern, ranks fourth). It has an enviable geographic position in Europe, situated on the banks of the Rhine River, at the border formed by Switzerland, Germany and France. And it´s the birthplace of the best tennis player ever, Roger Federer, who holds the record for most grand slams won, with a total of 16.
When the word Basel is mentioned in the financial markets, it refers to the various banking regulation agreements made by the Basel Committee for Banking Supervision, which is been meeting in that city since late 1974. The financial institution responsible for the Basel Committee is the Bank for International Settlements, founded in 1930, which serves as the seat of international cooperation among central banks, as well as the most active proponent of the agreements reached.
Is The Basel Committee a Regulatory Authority?
The Basel Committee is not formally considered an international supervisory authority, and the agreements it reaches are not legally binding as bank regulations. It is expected, however, the regulatory authorities of each country will take the necessary measures to introduce the general guidelines and best practice recommendations from the Committee into their financial systems.
The Committee also presents a report on the agreements reached in its sessions (it meets four times a year) to central bank governors and the heads of banking supervision in each of the member countries (in Mexico, both Banco de Mexico and the National Banking and Securities Commission), with the idea that these institutions will follow up on its recommendations.
Specifically, one of the the Committee’s goal is to close the gap between different banking supervisory systems around the globe, and avoid allowing a bank to evade supervision in its country of origin or any other country where it operates. The Basel Committee is also a forum for international cooperation on various issues relating to banking regulation, in order to improve the quality of oversight and supervision throughout the world.
The exchange of information among the heads of central banks and regulatory authorities enhances the technical capacity of member countries and generates consistent guidelines for the control of banking institutions; specifically, the Committee sets standards for effective banking supervision principles, capital sufficiency requirements and agreements on international banking supervision.
According to the CNBV, Mexico’s participation in the Basel Accords has allowed it to learn from the experiences of other countries, incorporate the lessons learned from the 1994 crisis into the Committee’s recommendations, and guarantee that the new international regulatory framework takes into account the needs and interests of emerging economies with financial systems open to foreign direct investment (like Mexico).
The Basel Committee for Banking Supervision is made up of four sub-committees: The Standards Implementation Group, the Policy Development Group, the Work Group for Accounting Rules, and the Basel Consulting Group. Its 27 member countries are Argentina, Australia, Belgium, Brazil, Canada, China, England, France, Germany, Holland, Hong Kong, India, Indonesia, Italy, Japan, Luxembourg, Mexico, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, and the United States.
Basel III and Mexico
When the terms Basel I, Basel II and Basel III are heard in the deliberations of a bank’s credit committee or risk committee, they refer to the various recommendations made by the Basel Committee over the years.
In 1988, the Basel I Accords on minimum capital requirements for the banking sector were published, with a suggested implementation date of late 1992. These agreements (better known as the Basel Capital Accord) focus on the credit risk that banks confront in their activities and suggested actions to mitigate it. In particular, the Accord recommends that an international bank have a minimum regulatory capital equivalent to at least 8% of the total risk assets on its balance sheet, applicable to any banking institution.
Over the course of time, and due to the limitations identified in prior documents, the Committee came out with the Basel II Accords in 2004, including recommendations on operational risks and long-term capitalization and solvency of banking institutions, with an estimated implementation date of late 2006. In these agreements, Committee members intended to set an international standard that would serve as a reference for bank regulators, based on three pillars: minimum capital requirements, regulatory processes and market discipline.
The 2008 international financial crisis prompted the Committee to review its previous Accords. Thus, in 2009, Basel III was published, with an estimated application date of 2013. These agreements strengthen capital requirements, improve risk management, establish additional capital conservation buffers, and introduce new concepts for regulating bank liquidity and leverage.
One of the most important lessons of the recent crisis in the financial industry was that even with adequate capitalization and solvency levels, banking institutions were unable to contend with short-term liquidity problems under stressed situations. Thus, Basel III recommended improving conditions for the banking industry to be able to absorb the negative impact of unfavorable financial and economic conditions, fine-tune banks’ risk management and corporate governance, and strengthen transparency and disclosure of information published by those institutions.
What we find, however, is that some of the situations arising from the current global crisis had already been seen in Mexico during the 1994 crisis. Since then, Mexico has introduced stricter controls for banking supervision, with the intent of improving loan delinquency rates, coverage, liquidity, solvency and capitalization throughout the banking industry.
The central agreements that came out of Basel III are higher capital requirements and new liquidity rules for banks, as well as additional measures (creation of buffers, among others) to soften cyclical fluctuations in the financial system, introduce market discipline among all institutions in the industry and intensify oversight. Fortunately for the Mexican banking industry, the crises of the past, the measures taken by the regulatory authorities, and the capital sufficiency indexes that most banks maintain today, place our country in a privileged position with respect to the Basel III Accords. This means that this year Mexico could be the first country to fully apply the recommendations of the Basel Committee for Banking Supervision.
Toward the Future
The Basel III Accords comprise a series of prudential recommendations for financial systems to introduce more solid regulation by year-end 2013. The current economic situation and the incentives needed to turn that situation around create attractive scenarios for many investors who have historically found growth opportunities in crisis situations such as the one the world is currently experiencing.
In conclusion, Basel offers a series of accords that serve to strengthen bank balance sheets: short-term liquidity, long-term solvency, creation of reserves during periods favorable to the firm and adequate capitalization, among others, in addition to improved banking supervision throughout the globe. Furthermore, corporate governance and risk management should play a fundamental role in decision-making by financial institutions in coming years.
Mexico is in a privileged position to apply the recommendations of the Committee, and investors should not fail to take advantage of conditions created by specific situations affecting this country since 2008. Although economic crises are often unpredictable, financial systems can prepare themselves to deal with them through appropriate banking regulation. At the same time, investors should be prepared to take advantage of the opportunities opened by crisis. It is a call to all the visionaries and entrepreneurs of this country.?
Where is Basel?
The European City
By size, Basel is the third-largest city in Switzerland (the two largest are Zürich and Geneva, while the capital, Bern, ranks fourth). It has an enviable geographic position in Europe, situated on the banks of the Rhine River, at the border formed by Switzerland, Germany and France. And it´s the birthplace of the best tennis player ever, Roger Federer, who holds the record for most grand slams won, with a total of 16.
When the word Basel is mentioned in the financial markets, it refers to the various banking regulation agreements made by the Basel Committee for Banking Supervision, which is been meeting in that city since late 1974. The financial institution responsible for the Basel Committee is the Bank for International Settlements, founded in 1930, which serves as the seat of international cooperation among central banks, as well as the most active proponent of the agreements reached.
Is The Basel Committee a Regulatory Authority?
The Basel Committee is not formally considered an international supervisory authority, and the agreements it reaches are not legally binding as bank regulations. It is expected, however, the regulatory authorities of each country will take the necessary measures to introduce the general guidelines and best practice recommendations from the Committee into their financial systems.
The Committee also presents a report on the agreements reached in its sessions (it meets four times a year) to central bank governors and the heads of banking supervision in each of the member countries (in Mexico, both Banco de Mexico and the National Banking and Securities Commission), with the idea that these institutions will follow up on its recommendations.
Specifically, one of the the Committee’s goal is to close the gap between different banking supervisory systems around the globe, and avoid allowing a bank to evade supervision in its country of origin or any other country where it operates. The Basel Committee is also a forum for international cooperation on various issues relating to banking regulation, in order to improve the quality of oversight and supervision throughout the world.
The exchange of information among the heads of central banks and regulatory authorities enhances the technical capacity of member countries and generates consistent guidelines for the control of banking institutions; specifically, the Committee sets standards for effective banking supervision principles, capital sufficiency requirements and agreements on international banking supervision.
According to the CNBV, Mexico’s participation in the Basel Accords has allowed it to learn from the experiences of other countries, incorporate the lessons learned from the 1994 crisis into the Committee’s recommendations, and guarantee that the new international regulatory framework takes into account the needs and interests of emerging economies with financial systems open to foreign direct investment (like Mexico).
The Basel Committee for Banking Supervision is made up of four sub-committees: The Standards Implementation Group, the Policy Development Group, the Work Group for Accounting Rules, and the Basel Consulting Group. Its 27 member countries are Argentina, Australia, Belgium, Brazil, Canada, China, England, France, Germany, Holland, Hong Kong, India, Indonesia, Italy, Japan, Luxembourg, Mexico, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, and the United States.
Basel III and Mexico
When the terms Basel I, Basel II and Basel III are heard in the deliberations of a bank’s credit committee or risk committee, they refer to the various recommendations made by the Basel Committee over the years.
In 1988, the Basel I Accords on minimum capital requirements for the banking sector were published, with a suggested implementation date of late 1992. These agreements (better known as the Basel Capital Accord) focus on the credit risk that banks confront in their activities and suggested actions to mitigate it. In particular, the Accord recommends that an international bank have a minimum regulatory capital equivalent to at least 8% of the total risk assets on its balance sheet, applicable to any banking institution.
Over the course of time, and due to the limitations identified in prior documents, the Committee came out with the Basel II Accords in 2004, including recommendations on operational risks and long-term capitalization and solvency of banking institutions, with an estimated implementation date of late 2006. In these agreements, Committee members intended to set an international standard that would serve as a reference for bank regulators, based on three pillars: minimum capital requirements, regulatory processes and market discipline.
The 2008 international financial crisis prompted the Committee to review its previous Accords. Thus, in 2009, Basel III was published, with an estimated application date of 2013. These agreements strengthen capital requirements, improve risk management, establish additional capital conservation buffers, and introduce new concepts for regulating bank liquidity and leverage.
One of the most important lessons of the recent crisis in the financial industry was that even with adequate capitalization and solvency levels, banking institutions were unable to contend with short-term liquidity problems under stressed situations. Thus, Basel III recommended improving conditions for the banking industry to be able to absorb the negative impact of unfavorable financial and economic conditions, fine-tune banks’ risk management and corporate governance, and strengthen transparency and disclosure of information published by those institutions.
What we find, however, is that some of the situations arising from the current global crisis had already been seen in Mexico during the 1994 crisis. Since then, Mexico has introduced stricter controls for banking supervision, with the intent of improving loan delinquency rates, coverage, liquidity, solvency and capitalization throughout the banking industry.
The central agreements that came out of Basel III are higher capital requirements and new liquidity rules for banks, as well as additional measures (creation of buffers, among others) to soften cyclical fluctuations in the financial system, introduce market discipline among all institutions in the industry and intensify oversight. Fortunately for the Mexican banking industry, the crises of the past, the measures taken by the regulatory authorities, and the capital sufficiency indexes that most banks maintain today, place our country in a privileged position with respect to the Basel III Accords. This means that this year Mexico could be the first country to fully apply the recommendations of the Basel Committee for Banking Supervision.
Toward the Future
The Basel III Accords comprise a series of prudential recommendations for financial systems to introduce more solid regulation by year-end 2013. The current economic situation and the incentives needed to turn that situation around create attractive scenarios for many investors who have historically found growth opportunities in crisis situations such as the one the world is currently experiencing.
In conclusion, Basel offers a series of accords that serve to strengthen bank balance sheets: short-term liquidity, long-term solvency, creation of reserves during periods favorable to the firm and adequate capitalization, among others, in addition to improved banking supervision throughout the globe. Furthermore, corporate governance and risk management should play a fundamental role in decision-making by financial institutions in coming years.
Mexico is in a privileged position to apply the recommendations of the Committee, and investors should not fail to take advantage of conditions created by specific situations affecting this country since 2008. Although economic crises are often unpredictable, financial systems can prepare themselves to deal with them through appropriate banking regulation. At the same time, investors should be prepared to take advantage of the opportunities opened by crisis. It is a call to all the visionaries and entrepreneurs of this country.?
References
http://www.bis.org/bcbs/
http://www.cnbv.gob.mx
http://www.myswitzerland.com/en/basel.html
http://www.rogerfederer.com/en/rogers/history.html
http://www.financialstabilityboard.org/