The Basel Committee on Banking Supervision (BCBS) leads the world in drafting the safety-and-soundness rules that banks are expected to meet. Composed of central banks and bank supervisory authorities from major economies, it develops the Basel framework, a body of standards on bank capital, liquidity, leverage and supervision. Its secretariat is hosted by the Bank for International Settlements (BIS) in Basel, Switzerland.
The committee has no legal authority. Its standards take effect only when national or regional authorities, such as the Federal Reserve, the Prudential Regulation Authority (PRA) or the European Union legislature, adopt them into law. Members commit to implementing the standards for internationally active banks, and the committee monitors whether they do.
History
The committee was established by the central bank governors of the Group of Ten countries at the end of 1974, after disruption in international markets following the failure of Bankhaus Herstatt in West Germany. That episode gave its name to Herstatt risk, a form of settlement risk in foreign exchange. The early work of the committee focused on closing gaps in the supervision of banks' foreign establishments and on cooperation between home and host supervisors.
Membership has since expanded beyond the G10 to include major emerging economies. Its decisions are overseen by the Group of Central Bank Governors and Heads of Supervision (GHOS).
The Basel framework
Basel I
The 1988 Basel Capital Accord introduced a minimum ratio of capital to risk-weighted assets of 8%, with simple risk weights by type of exposure. It was the first international standard for bank capital and was adopted well beyond the member countries.
Basel II
Published in 2004, Basel II rested on three pillars: minimum capital requirements with more risk-sensitive approaches, including banks' own internal models; supervisory review; and market discipline through disclosure. It was being implemented when the 2007 to 2009 global financial crisis began.
Basel III
The crisis revealed that banks held too little high-quality capital and too little liquidity. Basel III, first agreed in 2010 and finalized in 2017, raised the quality and quantity of regulatory capital, introduced capital buffers, a leverage ratio, and two liquidity standards: the Liquidity Coverage Ratio and the Net Stable Funding Ratio, which address the maturity transformation at the core of banking. The 2017 reforms constrained banks' use of internal models. Implementation of the final package has been staggered and in some jurisdictions delayed or modified.
Other standards and guidance
Beyond capital and liquidity, the committee publishes the Core Principles for Effective Banking Supervision, used by the IMF and World Bank in assessing national supervisory systems, as well as guidance on credit risk, operational risk, corporate governance, large exposures and the treatment of netting and collateral haircuts. It has issued guidance on managing money laundering risk in banks and, in 2022, a standard on the prudential treatment of banks' cryptoasset exposures, which applies particularly strict treatment to unbacked cryptoassets and to stablecoins that fail certain tests.
Implementation monitoring
Through its Regulatory Consistency Assessment Programme, the committee reviews whether members' rules match the agreed standards and publishes assessments of each jurisdiction. Because each member translates the standards into its own law, differences in timing and detail are common, and banks operating across borders must manage several versions of the same rules.
Criticism
Critics argue that the framework has grown too complex, that reliance on internal models allowed banks to understate risk, and that standards designed for large international banks are applied too broadly to smaller institutions. Others contend that capital and liquidity requirements raise the cost of credit and contribute to de-risking of activities such as correspondent banking. Supporters point to the improved resilience of the banking system since 2010 as evidence of the framework's value for financial stability.