Introduction

Basel 3.1 is a highly debated topic in finance, poised to change the banking system significantly. Its impact on lending, economic growth, and bank resilience has been the subject of much discussion.

Highlights of Basel 3.1

Credit Risk Approach

1. Risk-sensitive recalibration of the standardised approach with higher risk weights for riskier borrowers.
2. Reduced reliance on external ratings, emphasising internal credit risk assessment.
3. Minimised risk weight variability for easier capital requirement comparison.
4. Diminished scope of the Internal Ratings-Based Approach (IRBA).

Credit Risk Mitigation

1. Introduction of a framework for credit risk mitigants to reduce required capital for credit exposures.
2. Focus on consistent and risk-sensitive usage of credit risk mitigants.

Market Risk

1. Increased capital requirements for market risk using more conservative measurement methods.
2. Implementation of stress testing to manage market risk under adverse conditions.
3. Enhanced disclosures on market risk exposures.

Credit Valuation Adjustment and Counterparty Credit Risk

1. A simplified and risk-sensitive standardised approach for Credit Valuation Adjustment (CVA).
2. Introduction of incremental risk charge for Counterparty Credit Risk (CCR).

Operational Risk

1. The advanced Measurement Approach (AMA) was replaced with a more straightforward Standardised Approach (SA).
2. Use of Business Indicator Component (BIC) for operational risk capital requirement calculation.
3. Removal of adjustments based on historical loss data.

Capital Flooring

1. Implementation of a capital floor of 72.5% to ensure consistent risk-weighted assets (RWAs) across banks.
2. Phased introduction over five years, starting at 50% in 2023 and reaching 72.5% in 2028.
3. Aims to enhance the comparability of capital requirements between banks.

Conclusion

Basel 3.1 represents a significant overhaul of global banking regulations, aiming to strengthen bank resilience and mitigate future financial crises. While the implementation process is complex, its importance for the global financial system cannot be overstated.