Final rules set to prevent another banking collapse

ECB President Mario Draghi attends a press conference on the Basel III framework reforms agreed in Frankfurt Main Germany | Armando Babani  EPA

ECB President Mario Draghi attends a press conference on the Basel III framework reforms agreed in Frankfurt Main Germany | Armando Babani EPA

Global banking regulators on December 7 finalised new rules on how banks assess the riskiness of their assets for the goal of calculating minimum capital ratios.

The Financial Stability Board (FSB) welcomes the announcement by the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, that agreement has been reached on the finalisation of Basel III.

They include compromises on how regulators treat the risks banks run from their lending business, from financial market activities and from "operational risks" ranging from human error to acts of God.

Agreement on the final elements of Basel III means that G20 reforms have addressed the fault lines that caused the global financial crisis. The financial crisis was the prelude to the Great Recession. According to Bloomberg News, the final phase of Basel III is focused on the statistical models that banks use to measure their risk of losing money on investments, part of determining their capital requirements.

That means that banks' risk-weighted assets, measured under their own internal models, can not be less than 72.5 percent of the value reached with a standardized approach.

The latest set of rules limits banks' ability to arrive at a lower assessment of their level of risk than that calculated by regulators.

Most of the changes are expected to only take effect from 2022.