The role of the Basel Committee on

Banking Supervision (BCBS)

A de facto standard setter In banking legislation

This briefing gives an overview of the role of the Basel Committee on Banking Supervision (BCBS) in
setting international standards in banking regulation and supervision. It also raises the questions on
how the preparatory work is organised in the European Union in order to enhance transparency and
co-operation.

Relevance as non-legislative standard setter

The Basel Committee on Banking Supervision (BCBS) is a pivotal standard-setter in the banking
sector, mandated to strengthen the regulation, supervision and practices of banks worldwide.
It has a specific focus on large, internationally active banks.

Membership in the BCBS is restricted to a number of central banks and banking supervisors
from currently 28 jurisdictions (see Annex A for a presentation of all members).

The BCBS is no formal supranational authority, and the prudential rules it proposes are per se
not legally binding.

Central banks and banking supervisors of course hold expert knowledge about banking
matters, but may not necessarily have a formal right of initiative to propose new laws (such
as the European Commission has on matters contained in the EU treaties). The BCBS work in
practice very much as a network of experts in banking supervision taking also into account
that any agreement among them requires consensus. However, there has been some
indication in some jurisdiction of wanting to have a stronger political say in these negotiations
(see letter of January 2017 from the Vice Chairman of the Financial Services Committee to the
Federal Reserve Board).

Nevertheless, the rules agreed in Basel have de facto a strong impact on subsequent
legislative processes via the commitment of its members to implement them, and - as its rules
are “applied by more than 100 jurisdictions worldwide”1 - the agreed standards obviously put
pressure on other countries to follow suit.

For example, the "Basel III" agreement, developed by the BCBS and endorsed by the G20
delivered the key parameters of the most comprehensive set of reform measures in banking
regulation in the EU, while the legislative process forming the corresponding Capital
Requirements Regulation/Capital Requirements Directive IV (“CRR/CRD IV reform package”)
mainly added some additional elements (e.g. as regards remuneration practices and
corporate governance arrangements) and expanded the scope, as the EU legislation applies
not only to internationally active but to banks of all sizes (as was already the case with CRD
which transposed the Basel 2 agreement).

Enforcing the adoption of Basel standards

Though the Basel standards are not legally binding, the BCBS still monitors both the timeliness
and the substance of the subsequent legislative process, seeking to ensure that the standards
are implemented with no or little deviation.

Monitoring hence consists of two distinct work streams: The first work stream checks whether
Basel standards are timely adopted, and the second work stream - the “member jurisdiction
assessments” - assesses the consistency and completeness of the domestic regulations, also
judging the significance of any deviations. The whole process is set out in the Regulatory
Consistency Assessment Program (RCAP) that was formally adopted in 2012.

Compliance of the members’ jurisdictions with the Basel III capital standards, the Liquidity
Coverage Ratio, and the framework for Systemically Important Banks are all subject to
different RCAP reports. The RCAP’s grading system uses four categories: the regulatory
framework can be judged to be compliant, largely compliant, materially non-compliant, or
non-compliant.

For example, in December 2014 the prudential regulatory framework in the EU was evaluated
to be “materially non-compliant” with the minimum standards prescribed under the Basel III
framework. That assessment conceded that the EU framework is in several areas more
rigorous than the Basel framework, yet the overall grade was coined by deviations regarding
the Internal Ratings-Based (IRB) approach for credit risk and the counterparty credit risk
component (see Annex 2 for an overview of the related compliance assessments published
by the BCBS; those assessments were carried out at different points in time, the publication
dates of the reports hence differ).

1
See Lucia Quaglia (2015): “The European Union's Role in International Economic Fora - Paper 5: The BCBS; in-
depth analysis for the ECON Committee”, p. 7.
Consultation and transparency
In general, the BCBS is committed to consulting widely on its activities with non-member
authorities through fora like the Basel Consultative Group, gathering senior representatives
from various countries, international institutions and regional groups of banking supervisors
that are not members of the Committee. When the BCBS develops its standards, it typically
initiates a public consultation, seeking input from all relevant stakeholders on policy
proposals. Unless respondents request confidential treatment, their comments are published
on the BCBS website.The positions of its members, on the other hand, and those of
international bodies with an observer status (such as the European Banking Authority,
European Commission, and International Monetary Fund) are not made public on the BCBS
homepage.

The input is hence partially documented, but the decision making process is not directly
observable: “The BCBS and its working groups are not open to the public and there is no public
record of their meetings. (Lucia Quaglia, The European Union's Role in International Economic
Fora, Paper 5: The BCBS, March 2015, p. 14)

Co-ordination and co-operation

Given that the rules agreed in the BCBS have a strong impact on subsequent legislative
processes - not de jure but de facto - the question merits closer examination how legislators
might best co-ordinate and co-operate with the BCBS.

In the following, three aspects are touched upon:

 whether a binding mandate is conceivable,
 how in particular the EU representation in the BCBS can be streamlined, and
 how the preparatory work can be organised in the EU to enhance transparency and
co-operation.

Is a strictly binding mandate conceivable?

As set out above, membership in the BCBS is according to its Charter restricted to central
banks and banking supervisors. Other international institutions such as the European
Commission, the European Banking Authority, the International Monetary Fund, or the Bank
for International Settlements, can only be given an observer status.

Independence is widely considered to be a key principle required for the proper functioning
of both central banks and banking supervisors.

The practical implications of that principle for central banks ‒ primarily targeting the conduct
of monetary policy ‒ are that in the EU “[n]either the ECB nor the national central banks
(NCBs), nor any member of their decision-making bodies, are allowed to seek or take
instructions from EU institutions or bodies, from any government of an EU Member State or
from any other body“.

Likewise, operational independence is one of the key requirements for banking supervisors.
The BCBS states that “[t]he operational independence, accountability and governance of the
supervisor are prescribed in legislation and publicly disclosed. There is no government or
industry interference that compromises the operational independence of the supervisor [...]”.
(BCBS: Core Principles for Effective Banking Supervision, p. 22)

It is difficult to imagine how a strictly binding mandate could be aligned with the operationally
independent status of banking supervisor representatives (or central bank representatives).

Moreover, the concept of a binding mandate ignores to some extent that the process in the
BCBS is all about consensus building. According to the BCBS’ charter, all decisions are taken
by consensus among its members, and not, for example, by majority voting. A binding
mandate that would for any reason not find the consensus of all other members might
therefore just prevent coming to any decision at all. If there was consensus about certain
standards among all BCBS members except one, it would therefore seem more appropriate if
that member just signalled that those standards will not be implemented in their own
jurisdiction - given that BCBS standard are not binding in legal terms anyway - rather than
obstructing the decision making process as such. The drawback of such an approach would
consequently be less international harmonisation implying curtailed equal treatment, a pitted
level playing field, and fewer possibilities to use mutual recognition between jurisdictions as
a basis for providing banking services.

Naturally, all jurisdictions of the BCBS may decide to provide political guidelines for any on-
going negotiations, if it is deemed useful for the outcome from their perspective. For example,
the European Parliament adopted in November 2016 a resolution in the view of the
finalisation of Basel III.

How can the EU representation in the BCBS be streamlined?

Seats in the BCBS are in principle granted with respect to the importance of the national
banking sectors to international financial stability. After having started life as a G10 body, the
BCBS now has 45 members from 28 jurisdictions.

As regards the representation of the EU in the BCBS, one should know that nine national
jurisdictions are also individually represented. These are Sweden and the United Kingdom on
the one hand, as well as seven national jurisdictions of the euro area on the other hand
(Belgium, France, Germany, Italy, Luxembourg, The Netherlands, and Spain)2.

2
Germany (Deutsche Bundesbank and Federal Financial Supervisory Authority), France (Bank of France and
Prudential Supervision and Resolution Authority), Italy (Bank of Italy), Spain (Bank of Spain), Netherlands
(Netherlands Bank), Belgium (National Bank of Belgium), Luxembourg (Surveillance Commission for the Financial
Sector), United Kingdom (Bank of England and Prudential Regulation Authority, Sweden (Sveriges Riksbank and
Finansinspektionen).
The reason why some jurisdictions hold two seats while others just one is that banking
supervision can either be undertaken in-house in the central bank or in a separate specialised
supervisory institution3. Only the United States actually hold four seats in the BCBS, as the US
jurisdiction is represented by the Board of Governors of the Federal Reserve System, the
Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation.

Moreover, following the agreement to create a Banking Union and to assign the responsibility
for the direct supervision of the most significant banks in the euro area to the European
Central Bank (ECB) and its separate supervisory arm the Single Supervisory Mechanism (SSM),
those two institutions now also each hold a seat in the BCBS.

The general concept underlying the SSM, as stipulated in the respective Regulation, is based
on the cooperation between the ECB and national supervisors, whereas each of them has a
dedicated area of responsibility, namely the ECB for significant banks, national supervisors for
less significant banks. From that perspective, the scope of the ECB and its supervisory arm is
more aligned with that of the BCBS than that of national supervisors, as the BCBS likewise
focusses on large, internationally active banks.

As the BCBS’s overall objective is to enhance financial stability by building a consensus around
which standards serve that objective the best, a variety of views can contribute to the breadth
of discussion. However, if the EU shall be perceived and treated as a single jurisdiction 4, the
input of national supervisors in the EU would have to be coordinated beforehand.

The European Commission has concluded that there is generally room for improvement with
respect to the external representation: “The Union has also put in place a Banking Union with
centralized supervision and resolution for banks in the euro area and open to all other Member
States. The external representation of the Union, when exercising its competences specific to
the euro area [...] has not kept up with those developments. This limits the effectiveness of the
euro area voice in the international financial institutions.” (COM (2015) 602 final: “A roadmap
for moving towards a more consistent external representation of the euro area in
international fora”, published on 21.10.2015, p.2).

The European Parliament (EP) consequently asked for a more effective, streamlined
representation of the Banking Union, having adopted a resolution on 12 April 2016 regarding
the EU role in the framework of international financial, monetary and regulatory institutions
and bodies, which inter alia
 “Calls on the Member States to accept the representation of the Banking Union in the
Basel Committee on Banking Supervision through the Single Supervisory Mechanism;
  Considers that [...] progressive streamlining of the EU representation should be
implemented over the next years [...] through the unification of seats...”5

Moreover, the EP, in its 2016 Annual Report on Banking Union recalled the conclusions of the
12 April 2016 resolutions and further stated inter alia
 “[...] stresses the importance of the role of the Commission, the ECB and the EBA in
terms of engaging in the work of the BCBS and providing Parliament and the Council
with transparent and comprehensive updates on the state of play of the BCBS
discussions; considers that the EU should work on having an appropriate
representation in the BCBS, notably for the euro area; ”

How can the preparatory work be organised to enhance transparency and co-operation?
According to the BCBS’ Charter, its members are committed to implement BCBS standards in
their domestic jurisdictions. That commitment, however, points to the crucial problem that
the BCBS members – central banks and banking supervisors – are not legislators. Any
subsequent smooth implementation of Basel standards into law requires that the legislator is
well informed about the agreed standards, the underlying reasoning, and that the legislator
accepts them as they stand. For that very reason BCBS members should seek the cooperation
with the legislator as early as possible and provide the legislator with as much information as
needed.

“The positions of the ECB representatives are determined on the basis of internal analyses and
discussions among staff participating in technical working groups and senior ECB officials
(whether responsible for supervision or other central banking tasks) involved in the decision-
making process of the BCBS. The internal preparations take place also via dedicated and
internal contact groups (established upon Executive Board decision) and via joint preparatory
meetings ahead of BCBS meetings, in which staff from both the supervisory and central bank
functions take part. (Lucia Quaglia, The European Union's Role in International Economic Fora,
Paper 5: The BCBS, March 2015, p. 16f.)

There is no specific dedicated mechanism for the ECB or the SSM to report back to the EP on
issues that are dealt with by the BCBS.

However, the EP has already established formal regular dialogues both with the ECB and with
its supervisory arm: According to the Interinstitutional Agreement between the EP and the
ECB, the Chair of the Supervisory Board of the SSM regularly participates in public hearings,
and can also be invited to additional ad hoc exchanges of views. Moreover, as the ECB over
the years developed an accountability framework that goes beyond the Treaty requirements,
the President of the ECB regularly takes part in the institutionalised “Monetary Dialogue” with
the EP’s competent committee.
Those regular hearings with the ECB and its supervisory arm, both members of the BCBS, may
be used to enhance the transparency and co-operation on issues dealt with in the BCBS.

As stated in the resolution on 12 April 2016 mentioned above, the EP

 “Views favourably the willingness of the ECB President to further cooperate with
Parliament regarding the ECB's role in banking matters, in particular in the framework
of global standards-setting bodies such as the FSB…”

In the same vein, exchanges of views on the Basel process with the Commission and the EBA
(that hold observers’ seats in the Basel committee) may be organised regularly in the EP.

Finally, a direct dialogue with the BCBS can also enhance the understanding of issues dealt
with by the BCBS, and provide early feedback about the legislator’s view of standards under
discussion. The BCBS is externally represented by its Chairman, or by its Secretary General.
On 12 October 2016, the EP’s Committee on Economic and Monetary Affairs held a first public
exchange of views with Mr Coen, the Secretary General of the BCBS, discussing regulatory
reform measures in progress. Such exchange of views gives the legislator the chance to feed
his position about standards under discussion into the decision making process, which, if
taken into account, later on facilitates the implementation of the BCBS standards. On 24
October 2017 William Coen will come to the Banking Union Working Group for a second
exchange of views.

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© European Union, 2017.
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Annex A: BCBS members and observers
Members - i.e. Country jurisdictions whose institutions are considered as Members of the
BCBS Committee.
Argentina, Australia, Belgium, Brazil, Canada, China, European Union (European Central Bank,
and European Supervisory Mechanism), France, Germany, Hong Kong SAR, India, Indonesia,
Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, Russia, Saudi Arabia, Singapore, South
Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States of America

Observers - i.e. Country jurisdictions, supervisory groups, international agencies and other
bodies considered as observer.
Countries/jurisdictions:
Chile, Malaysia, United Arab Emirates

Supervisory groups, international agencies and other bodies:

Bank for International Settlements, Basel Consultative Group, European Banking Authority,
European Commission, International Monetary Fund
Annex B: Example of member jurisdiction assessments -
implementation of Basel III standards pertaining to Risk-based
capital and Liquidity coverage ratio and G-SIB requirements
RCAP latest report
Risk-based capital RCAP latest
LCR assessment G-SIB assesment -risk-based capital
Jurisdiction regulations report - LCR
grade grade regulations
assessment grade requirements
requirements

Argentina Compliant Compliant Compliant September 2016 September 2016

Australia Compliant Under way NA March 2014 NA

Brazil Compliant Under way NA December 2013 NA

Canada Compliant Under way NA June 2014 NA

China Compliant Compliant Compliant September 2013 July 2017

Materially non-
European Union* Largely Compliant Compliant December 2014 July 2017
compliant

Hong Kong SAR Compliant Largely Compliant NA March 2015 March 2015

India Compliant Largely Compliant NA June 2015 June 2015

Indonesia Largely Compliant Compliant NA December 2016 December 2016

October 2012
Japan Compliant Compliant Compliant December 2016
December 2016

Korea Largely Compliant Compliant NA September 2016 September 2016

Mexico Compliant Compliant NA March 2015 March 2015

Russia Compliant Compliant NA March 2016 March 2016

Saudi Arabia Compliant Largely Compliant NA September 2015 September 2015

Singapore Compliant Compliant NA March 2013 December 2016

South Africa Compliant Compliant NA June 2015 June 2015

Switzerland Compliant Under way Compliant June 2013 NA

Turkey Compliant Compliant NA March 2016 March 2016

United States Largely Compliant Compliant Compliant December 2014 July 2017

* European Union: The assessment covered those nine Member States which at that time were home to 14
global systemically important banks (G-SIBs).