Basel III

Walter Vecchiato

Basel III has become the focus for reforms by the Basel Committee on Banking Supervision (BCBS) to strengthen global capital and liquidity rules, with the goal of promoting a more resilient banking sector and to address the lessons of the financial crisis (BCBS, 2010). The assumption is that a strong and resilient banking system is the foundation for sustainable economic growth. This new regime pertains intrinsically to the derivatives market, as there has been a profound revision and updating with the inclusion of new requirements for market risk prudential regulation concerning the trading book.

The need to ensure that all material risks are captured in the revised capital framework is important to avoid a failure to capture major on- and off-balance-sheet risks, as well as derivative-related exposures. It was undoubtedly a key factor that amplified the crisis. In this context, one of the most important measures was to strengthen the capital requirements for counterparty credit exposures arising from banks’ derivatives, repo and securities financing activities. These reforms will raise the capital buffer backing these exposures, reduce procyclicality and provide additional