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Yesterday, the Bank for International Settlements announced that its member jurisdictions have made significant progress in implementing the final elements of Basel III.

Basel III includes wide acceptance of bail-in as a way of rescuing failing banks. Unlike a bailout, which involves external assistance (often from taxpayers), a bail-in restructures the bank’s liabilities internally which includes taking the money you have on deposit and in savings accounts, as these form part of the bank’s liabilities, and converting them from cash you can use into something else, e.g. shares in the bank. 

In other words, it is a bailout by the taxpayers but without the government as the middleman.  As a depositor or saver, the bail-in conditions will not be negotiated with you.

Established in 1930, the BIS is owned by 63 central banks, representing countries from around the world that together account for about 95% of world GDP.  It has member jurisdictions from 28 countries. These member jurisdictions are represented by central banks and authorities with formal responsibility for supervising banking business.

Further reading: Bank for International Settlements: Overview, History, Investopedia, 12 August 2022

The Basel Committee on Banking Supervision (“BCBS”) is the primary global standard setter for the prudential regulation of banks, providing a forum for regular cooperation on banking supervisory matters. The Committee consists of representatives from 28 countries, based in Basel, Switzerland.

BCBS is one of the Bank for International Settlements’ (“BIS”)  committees and associations that form part of its commitment to the Basel Process.  The Basel Process is the name given to an international cooperation among central banks, except for the Central Bank of Russia whose membership has been suspended, and other financial authorities.

The Third Basel Accord or Basel III is a set of global banking regulations published by the BCBS in November 2010.  A consortium of central banks from 28 countries devised Basel III in 2009, mainly in response to the financial crisis of 2007–2008 and the subsequent economic recession.  Implementation of Basel III has been extended several times, initially scheduled from 2013 to 2015, then to 2022, and finally to 2023, due to the covid pandemic.  Delays in Basel III’s implementation have also been due to banks calling for more time to adjust to and lobby against the new regulations.

The implementation of the final components of Basel III, known as Basel III Endgame in the United States, which began in 2017 is set to end in 2024 with the regulations to take effect in July 2025. 

Basel II, published in 2004, was the previous set of global banking regulations. Basel III builds upon Basel II, refining the measurement framework for minimum capital requirements and introducing new requirements for liquidity and leverage. Basel II is now partially superseded by Basel III, with some of its provisions extended or modified.

Basel III Endgame includes updates to how banks calculate the risk of people not paying back their loans, how they use their own internal models to determine how much money they need to keep in reserve and how they should handle operational risks like fraud or system failures.

In a detailed article, Investopedia explains what Basel III is and what the effects might be for investors:

Critics of Basel III Endgame argue that the higher capital requirements would lead some banks to cut their lending activities, slowing economic growth in the short term. The thinking goes that they would need to keep more of their capital on hand, and thus, their lending would slow.

Lobbies like the Bank Policy Institute have taken to the airwaves and online, warning that the suggested regulations, which targeted only about 37 US banks with holdings of $100 billion in assets or more, would put young families’ dreams of homeownership and small businesses’ expansion plans at risk. The banks claim the reforms would not make them any more stable and would have knock-on effects on their ability to lend funds to those with less credit, including minorities who have historically faced problems obtaining credit from American financial institutions.

Proponents of the plan, however, have pointed to studies that show that banks might lend more with more of a cushion to backstop their lending activities, the same way having more savings might make you less reluctant to lend to a family member.  Whether up or down, others say any influence would be modest at best.

While the Basel III Endgame rules primarily aim to strengthen the banking system, their effects would ripple through the entire economy.

While Basel III primarily targets very large, internationally active banks, critics charge that its regulations would also affect small and medium-sized banks.

Basel III: What It Is, Capital Requirements, and Implementation, Investopedia, 22 June 2024

Investopedia’s article focuses on investors.  What about the effects on bank account holders?

Basel III introduces the “bail-in” of banks, representing a significant shift in banking regulation.

As Investopedia noted, bail-ins and bailouts are designed to prevent the complete collapse of a failing bank. The difference between the two lies primarily in who bears the financial burden of rescuing the bank.

In a bailout, the government injects capital into banks, enabling them to continue their operations.  We saw this happen after the 2007-2008 financial crisis.

Bail-ins provide immediate relief when banks use money from their unsecured creditors, including depositors and bondholders, to restructure their capital.  In other words, banks use the money from depositors and unsecured creditors to help them avoid failure.  Depositors, the bank’s customers, include you, me and anyone who has money in a bank account.

As Investopedia noted:

The use of bail-ins was evident in Cyprus, a country saddled with high debt and the potential for bank failures. The country’s banking industry grew after Cyprus joined the European Union (EU) and the Eurozone. This growth, coupled with risky investments in the Greek market and risky loans from two large domestic lenders, led to government intervention in 2013.

A bailout wasn’t possible, as the federal government didn’t have access to global financial markets or loans. Instead, it instituted the bail-in policy, forcing depositors with more than 100,000 euros to write off a portion of their holdings, a levy of 47.5%.

Why Bank Bail-Ins Are the New Bailouts, Investopedia, 5 September 2023

The terms of the Cypriot bail-in were simple. Cyprus levied a “one-time” tax on bank deposits to raise funds.  “The tax will take 6.75 per cent from insured deposits of €100,000 or less, and 9.9 per cent from uninsured amounts above €100,000. Depositors will get bank stock equal to whatever they lose from the tax,” The Atlantic reported at the time.

A couple of weeks later, on 26 March 2013, Cyprus, the European Union and the International Monetary Fund reached a deal.  The deal involved the country’s second-largest lender, Cyprus Popular Bank (Laiki), going through an immediate resolution process that would see deposits under €100,000, which are guaranteed, being put into a good bank.  Non-performing loans and uninsured deposits would be placed in a bad bank and liquidated over time.

A few days later, on 30 March 2013, Reuters reported that “major depositors [read people and small to medium-sized businesses who had savings in their bank accounts] in Cyprus’s biggest bank will lose around 60 per cent of savings over 100,000 euros … sharpening the terms of a bailout that has shaken European banks but saved the island from bankruptcy.”

But what about the people and small businesses? Did the bail-in save them from bankruptcy? Or, did it cause their bankruptcy? BIS and its member jurisdictions don’t seem to have given that so much as a passing thought.

With bail-ins, governments may not be bailing out the banks from the public coffers – money taxpayers have given and entrusted to their governments to be used wisely for public services – but taxpayers who have a bank account with money in it will still be bailing out the bank, directly rather than through the government.

On 13 May 2024 at a meeting of the Governors and Heads of Supervision (“GHOS”), “members unanimously reaffirmed their expectation of implementing all aspects of the Basel III framework in full, consistently and as soon as possible,” a BIS press release dated 2 October 2024 stated.

The Basel Framework that the GHOS have unanimously adopted only specifically refers to bail-ins in the notes to one of its template forms:

It’s gobblygook to most of us who are not involved in central or commercial banking, but it demonstrates that they are accepting bail-ins as a way of rescuing failing banks. This is confirmed in a speech given in 2018 at the IADI-ERC International Conference by Mr, Fernando Restoy, chairman of the Financial Stability Institute, Bank for International Settlements.  His speech was titled ‘Bail-in in the new bank resolution framework: is there an issue with the middle class?’.

“As I have already mentioned, the availability of bail-in powers is a fundamental and innovative component of the Key Attributes,” he said.

The “Key Attributes” Restoy was referring to are the Financial Stability Board’s ‘Key attributes of effective resolution regimes for financial institutions’.  A document referenced in The Basel Framework which was unanimously adopted by the GHOS earlier this year.  The document refers to “bail-in with resolution” which simply means managing the bail-in in an orderly way, minimising the impact on the economy. The process is imposed by a resolution authority and is not negotiated with the bank or its creditors or depositors.

Further reading: The Bank of England has released a guide to executing bail-ins, to support its wider Resolvability Assessment Framework. Paul Young looks at the key features, and how firms can prepare their contingency planning, Grant Thronton, 25 August 2021

The practice of bail-in should be made illegal, not become the banking norm.

Depositors, particularly people and small and medium-sized companies, have no say in how a bank is managed, who is employed there, how much the directors award themselves or what operations it involves itself in.  We deposit our money into banks, acting as lenders and providing funds to the bank which then uses these funds to make loans to other customers or invest in other assets.  The banks use our money to fund their operations and make profits, some of which are distributed to the bank’s shareholders. We allow banks to profit from our savings because we trust our money is safe and our deposits will be repaid by the bank on demand.  If the banks can now take our money to fund their mismanagement or worse, our money is no longer safe.  Why would we deposit money with the bank?

You can see how far your country’s central bank is in implementing Basel III on BIS’ implementation dashboard by following the hyperlink contained in the words ‘RCAP: Basel III implementation dashboard’ HERE.

Featured image: Bank for International Settlements, Basel Switzerland, Bilderberg.org