The stricter banking standards set under the global Basel III framework has made a positive impact on banks’ resiliency, but it is too early to conclude the global banking industry has achieved stronger creditworthiness, credit rating agency Moody’s Investors Service said.
In its latest report titled “Basel III Implementation in Full Swing: Global Overview and Credit Implications,” Moody’s said that while implementation of Basel III is proceeding globally, notable differences are evident between jurisdictions in a host of areas such as pace, the degrees of strictness relative to Basel Committee guidance, and the resulting challenges banks face.
Moody’s views the key requirements being implemented under Basel III as credit-positive, addressing many of the deficiencies in banks’ pre-crisis management of risk, capital, liquidity and funding and leverage.
The Basel III framework, which was introduced in 2010, is the latest bank capital framework produced by the Basel Committee on Banking Supervision, and provides the basis for significant bank capital reforms, which are now being implemented globally. The reforms aim to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, reducing the risk of spillover from the financial sector to the real economy.
However, the report observes that the Basel III framework does not address some Basel II weaknesses, including comparability of risk-weighted assets and inconsistent use of and disclosure of Pillar 2 assessments.
“Given the differences in implementation schedules
highlighted in this report, users of bank financial disclosures should be aware that transitional capital and leverage ratios are not directly comparable without taking into account accelerated or ‘super-equivalent’ local rules,” Moody’s stated.
Once fully implemented, the Basel III framework will improve banks’ resilience to asset and liquidity stresses and shocks, but it is also too soon to conclude—as indicated—that the industry has achieved stronger creditworthiness, it said.
The report notes that banks have made substantial improvements in their fundamentals, including reductions in leverage, the implementation of firm-wide stress testing, and the formation of more robust liquidity and funding profiles.
Yet, many banks remain challenged in meeting full Basel III requirements while, at the same time, sustaining profitable business models under these more stringent regulatory constraints.
“While banks have made progress in implementing stress testing, improving liquidity frameworks and reducing leverage, many remain challenged in meeting full Basel III requirements and sustaining profitable business models under these more stringent regulatory constraints,” it stated.