Alternative Investment Management Association Representing the global hedge fund industry
The Basel Committee on Banking Supervision (BCBS) provides a forum to enhance understanding and improve the quality of banking supervision across the globe. The BCBS continues to develop guidelines and supervisory standards on banking, the most notable of which are its international standards on capital adequacy.
The first ‘Basel Accord’ on the international convergence of capital measurement and capital standards (Basel I) was agreed in 1988 and, after certain amendments, was superseded in 2004 by ‘Basel II’ which introduced a more risk-sensitive approach under three pillars: (i) minimum capital requirements; (ii) supervisory review; and (iii) market discipline. The most recent version, ‘Basel III: A global regulatory framework for more resilient banks and banking systems’, was published in December 2010.
Basel III, among other things, seeks to improve the banking sector’s ability to absorb shocks which arise from financial and economic stress, whatever the source, by introducing:
· higher and better-quality capital requirements;
· improved risk coverage;
· a leverage ratio as a backstop to the risk based requirements;
· measures to promote the build up of capital which can be drawn down during periods of economic stress; and
· two global liquidity standards.
Whilst primarily aimed at banks, such provisions will have an impact on hedge fund managers, in particular, due to the amount of capital a bank may be required to set asidewhen making allocations to hedge funds and the possibility that portfolio managers will be included within the scope of certain requirements of national legislation implementing the Basel III recommendations.
The requirements of Basel III will be implemented on an ongoing basis. The most recent progress report on implementation was published in October 2012.
BCBS Basel III implementation report of October 2012 (October 2012)