Responding to the COVID-19 pandemic, the Basel Committee on Banking Supervision (BCBS) agreed to delay the implementation of the revised Basel III standards by one year, to 1 January 2023.

Commenting on the decision, BCBS Chairman and Governor of the Bank of Spain, Pablo Hernández de Cos, said that these measures: “will free up operational capacity for banks and supervisors as they respond to the economic impact of COVID-19”. 

What this means for banks

While the BCBS delay will come as welcome respite for the banking sector, we do not see this announcement as grounds for a significant deceleration in the sector’s work to prepare for Basel III implementation.

Many of the Basel III changes carry significant benefits that institutions will still want to deliver for their shareholders. For example, the implementation of collateral management solutions is critical for successfully transitioning to the new credit risk framework while managing the capital stack appropriately. Also, certain elements of the framework, including the output floor, market risk and CVA, will require improvements to IT infrastructure and data management that could be both costly and time-consuming to implement. Any delay to these improvements could have a material impact on banks’ ability to manage capital.

The spectre of losing momentum, and the subsequent costs associated with the resulting dash to compliance later on, should cause firms to pause before stopping Basel III implementation work at this time. The delays do not change the fact that the new rules will have a significant impact on banks’ business mix and individual portfolios, and firms should continue to assess the extent to which changes are required. For instance, performing cost/benefit analyses of the standardised and internal models approaches for market risk and making strategic decisions around desk-structures will require significant lead time.

It is our view that instead of stopping, with the consequent loss of momentum, banks should use the additional year to help them address pressing strategic and operational challenges for them that arise from Basel III implementation – not least the need for active capital management given the interplay between models and standardised floors, which has not been managed before. Strategic decisions taken now will also need to take account of how the business and risk environments are evolving in reaction to COVID-19 and be robust in the face of Basel III implementation demands – in terms of people, models, capital and costs. 

While banks may be able to de-prioritise some initiatives in the short term (and it is clearly the BCBS’s intention that they should do), those that are able to retain momentum in their regulatory change programmes will be best placed to benefit most from the extra year.

Regulators will also expect banks to make the most of the extra time. One specific area where this may be felt most keenly is in regulatory reporting. Not only has the quality of regulatory reporting come under significant supervisory scrutiny recently, but it is also an area where increased transparency, timeliness and accuracy will be vital for the regulatory response to the COVID-19 disruption going forward. This is particularly true in the case of liquidity reporting. Although the UK PRA announced that it would accept delays for certain reporting obligations, reporting of the Liquidity Coverage Ratio and other liquidity reporting metrics were a notable exclusion.

What this means for implementation activity  

Even though the BCBS has extended the Basel III timeline by a year, this does not necessarily mean that national and jurisdictional authorities will delay their existing implementation work and consultations on transposing Basel III into their applicable legal frameworks.

Importantly, the implementation timelines for the EU’s banking package published in 2019 (CRD5, CRR2, and BRRD2) have not changed. CRD5 and BRRD2 are due to be transposed by EU Member States (including the UK) by 28 December 2020, while most components of CRR2 will apply from 28 June 2021. Banks will need to continue apace with these implementation programmes.

Moreover, the European Commission is still working towards proposing the CRD6/CRR3 package to implement Basel III in the EU. While their timeline for tabling this proposal may slip by a few months, we still expect this to come in 2020.

As a result, banks should be prepared to see policy proposals on Basel III implementation coming from key public authorities, in EU and most likely the UK, in the near term. Banks will need to ensure that they have sufficient resources available to review the content of the proposals and respond. These proposals may diverge, sometimes in important ways, from the standards set by the BCBS, and not always consistently between jurisdictions.

Banks therefore need to use this extra time to conduct the more granular impact assessment mentioned above as soon as these national legislative and regulatory proposals emerge. Gaining an early understanding of how the different national variations of Basel III are likely to affect business models across their geographical footprint will put bank executives and boards in a better competitive and regulatory position leading up to 2023 and beyond.