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Basel III: The US Implementation and its Implications for Strategy and Systems

Basel III proposes adjustments targeting various stresses that converged to create the banking crisis. Thus the aggregate goal is to reduce the risk of a major banking crisis in future. The US is adopting Basel III in a fashion that remains true to the previously adopted US rules and practices, including the Dodd-Frank Act.

Basel III responds to various causes of the financial crisis by changing or strengthening minimum standards for regulatory capital and risk management. It attempts to balance a likely reduction of credit liquidity and higher compliance costs with the reduced potential for another crisis. The US version applies Basel III to the entire US financial system, not just for the largest institutions as with Basel II, while implementing the Dodd-Frank rule to reduce the influence of credit ratings.

Fully implemented, these reforms should reduce the risk of failure for the compliant financial institutions from both internal and contagion effects.

The US Proposals to Implement Basel III:

The agencies jointly published three proposals to implement Basel III in the US. After comment periods in 2012, the final rules are expected to become effective at some point in 2013.

Implications and Risks:

  • Estimates on economic and credit effects vary and are incomplete.
  • Banks and financial markets are already adjusting to Basel III provisions.
  • Compliance costs will increase for implementing Basel III.
  • Regulatory arbitrage may lead to unintended market distortions or concentrations of risk.
  • Risk management and related technology implementations must be more robust.

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