At the heart of global financial stability, the Basel Committee is a key body, albeit one that is often misunderstood by the general public. Born of a desire for international cooperation in the face of crises, its influence on banking practices is considerable. It is one of the pillars of international financial institutions which work to regulate and stabilise the system. Understanding its role, its missions and the scope of its famous agreements is essential for all economic players, as the rules it lays down have a direct impact on the conditions of access to credit and the soundness of the banks with which companies work on a daily basis. This article provides a detailed analysis of this organisation and its impact on the banking sector.
Birth and development of the Basel Committee
The Basel Committee was not born out of theory, but out of practical necessity in the face of very real financial shocks. Its history is one of continuous adaptation to the turbulence and innovations of the global banking sector.
Creation and original functions: response to bank failures
The Basel Committee dates back to 1974. Its creation by the central bank governors of the G10 countries was a direct response to a series of resounding bank failures that shook the international financial system. Failures such as those of Bankhaus I.D. Herstatt in Germany and Franklin National Bank in New York highlighted the dangers of purely national supervision in an increasingly interconnected world. These bankruptcies, exacerbated by the 1973 oil crisis, were also the result of imprudent management and excessive risk-taking. The Committee's first task was therefore to improve the quality of banking supervision on a global scale and to fill the gaps in cross-border supervision.
Composition and gradual expansion
Initially, the Committee was a restricted forum made up of representatives of the banking supervisory authorities and central banks of the G10 countries, plus Luxembourg and Switzerland. This original composition reflected the main financial centres at the time. Aware that financial stability is a global concern, the Committee has gradually opened up to better represent the global economy. It now has 28 members, including representatives from all the G20 countries, which has considerably strengthened its legitimacy and the scope of its work.
Main tasks: strengthening the soundness of the global banking sector
The Basel Committee's fundamental mission is to strengthen the soundness and reliability of the banking system. To achieve this, it has no formal legal powers of constraint, but its influence is exerted through a number of key functions that make it a de facto authority that cannot be ignored.
Logistical support for national banking supervisors (forum for exchange and discussion)
The Basel Committee is first and foremost a permanent forum for cooperation and dialogue. It provides a forum where banking supervisors from around the world, such as theACPR in FranceThese regular meetings, held in Basel at the headquarters of the Bank for International Settlements (BIS), are essential for forging a common supervisory culture and improving coordination in the face of the activities of international banking groups. These regular meetings, held in Basel at the headquarters of the Bank for International Settlements (BIS), are essential for forging a common supervisory culture and improving coordination in the face of the activities of international banking groups. This constant exchange helps to anticipate risks and harmonise approaches in a pragmatic way.
Supervision of the global banking sector (monitoring and evaluation of transpositions)
Producing standards is not enough; it is necessary to ensure that they are properly applied. Since 2012, the Committee has set up a specific programme, the Regulatory Consistency Assessment Programme (RCAP), to monitor and assess the implementation of its standards by member countries. The programme has two objectives. Firstly, it verifies that the requirements of the Basel agreements have been fully and consistently transposed into national regulations. Secondly, it analyses the effectiveness of the standards in practice and identifies any undesirable effects, enabling the regulatory framework to be adjusted if necessary.
Rapid adaptation to financial changes (e.g. environmental and digital transition)
The Basel Committee's evaluation and monitoring work enables it to remain relevant in the face of an ever-changing financial sector. It constantly analyses new sources of risk. Its strategic priorities for 2023-2024 are a perfect illustration of this ability to adapt. They focus on major emerging issues, such as the financial risks associated with climate change and the challenges posed by the digital transformation of the banking sector, including the rise of crypto-assets and cybersecurity issues. This forward-looking approach is crucial if prudential regulation is not to be overtaken by innovation.
Standard-setting: the Basel agreements (Basel i, ii, iii, iv)
The Basel Committee's best-known activity is its standard-setting, embodied in the "Basel Accords". These texts form the basis of the prudential regulations applied to banks throughout the world. Although they have no binding legal force under international law, their adoption by national jurisdictions gives them an almost universal scope.
Definition of minimum requirements and best practice
The Committee defines the minimum requirements, or "standards", that banks must meet, mainly in terms of capital and liquidity. This is a regulatory floor that national jurisdictions are free to exceed if they deem it necessary. These standards are often supplemented by more detailed documents, the "Guidelines", which specify how they are to be applied. At the same time, the Committee publishes "best practices" that list the best supervisory methods observed around the world, thereby encouraging an upward convergence of supervisory standards.
History of the agreements: from the composition agreement to capital requirements
The Committee's standard-setting action began even before the famous agreements on capital adequacy. In 1975, it published the "Concordat", a founding text that established the principles for sharing supervisory responsibilities between a bank's home country and the host country of its branches. The aim was simple: to ensure that no banking institution escaped proper supervision. It was only later, in response to the rise in credit risks in the 1980s, that the Committee turned its attention to the question of the adequacy of banks' capital.
Basel i, Basel ii, Basel iii and Basel iv: developments and impacts
The series of Basel agreements illustrates the increasing complexity of banking regulation, with each version attempting to respond to the weaknesses of the previous one and the new realities of the markets.
Basel I (1988) : In response to the debt crisis in developing countries, this first agreement introduced a simple, universal rule: the Cooke ratio. It requires banks to hold a minimum amount of capital equivalent to 8% of their assets, weighted according to their level of credit risk. The aim was twofold: to strengthen the soundness of banks and to establish a more level playing field.
Basel II (2004) : After several years of consultation, a new version is now available to provide a better understanding of the diversity of risks. Basel II is based on three pillars:
1. More risk-sensitive minimum capital requirements, allowing the largest banks to use their own internal valuation models.
2. A process of prudential supervision by national regulators to ensure that banks have sufficient capital beyond the regulatory minimum.
3. Market discipline reinforced by transparency and disclosure requirements.
Basel III (2010) : The 2008 financial crisis revealed the shortcomings of Basel II. Basel III is a far-reaching reform designed to correct these weaknesses. Its main contributions are the strengthening of the quality and quantity of capital (with an emphasis on "hard" capital or CET1), the introduction of liquidity ratios (LCR and NSFR) to ensure that banks can withstand liquidity shocks, and the introduction of additional capital "cushions" for systemically important banks.
Basel IV (2017): This unofficial term refers to the latest reforms finalising Basel III. The aim is to restore credibility to the calculation of risk-weighted assets by limiting the use of internal models by banks, which led to excessive variations. In particular, these agreements introduce an "output floor", which prevents capital requirements calculated using an internal model from falling below a certain percentage of those calculated using the standardised approach. They also refine the measurement of market and operational risks.
Criticism and lack of legitimacy
Despite its central role, the Basel Committee is the subject of recurrent criticism. One of the main criticisms concerns its lack of democratic legitimacy. As an informal technical body, its decisions, which have major economic and social consequences, are taken outside any traditional parliamentary framework. It has also been criticised for a lack of transparency in its decision-making processes and for a lack of interaction with all stakeholders, particularly civil society and representatives of non-member countries. Some economists have also pointed the finger at the potentially pro-cyclical nature of its rules, which could amplify recessions by forcing banks to reduce their lending at a time when the economy needs it most.
Solent Avocats' support in meeting Basel requirements
The regulations issued by the Basel Committee, transposed into European law and then into national law, form a highly complex body of rules. For players in the financial sector, complying with these rules is a constant challenge that requires specialised legal and regulatory expertise. Navigating between capital requirements, liquidity ratios, reporting obligations and governance arrangements requires a detailed analysis of the texts and their practical application. Sound advice is essential if you are to anticipate regulatory changes and structure your activities with complete legal certainty. Our law firm, with its wealth of experience, is at your disposal to help you understand and implement these requirements. If you would like an analysis of your situation and tailored advice, please contact our team of lawyers.banking and finance lawyers.
Sources
- Basel Committee on Banking Supervision, Report on the supervision of banks' foreign establishments - Concordat, 1975
- Basel Committee on Banking Supervision, International convergence of capital measurement and capital standards, 1988 (Basel I)
- Basel Committee on Banking Supervision, Basel II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework, 2004 (Basel II)
- Basel Committee on Banking Supervision, Basel III: A global regulatory framework for more resilient banks and banking systems, 2010 (Basel III)
- Basel Committee on Banking Supervision, Basel III: Finalising post-crisis reforms, 2017 (Finalising Basel III)
- Charter of the Basel Committee on Banking Supervision
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