Global Banking Regulations

Yields

August 19, 2024

Global Banking Regulations: Key Standards and Who Monitors Banks Worldwide

Who Regulates the Banking Industry Globally?

Global banking regulation is essential for maintaining the stability and security of the international financial system. Key frameworks, such as Basel III, set international standards for capital adequacy and risk management, ensuring that banks around the world maintain sufficient capital to withstand economic shocks. Anti-Money Laundering (AML) regulations also play a critical role globally, requiring banks to monitor and report suspicious activities to combat financial crimes.

The coordination of these global regulations is managed by international bodies like the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS). These organizations develop and promote standards that are then adapted and enforced by national regulators within each country. This collaborative approach ensures that banks operate under consistent regulations worldwide, helping to protect the integrity of financial markets and reduce the risk of systemic crises.

Global Banking Regulations

Brief Summaries of Key Global Banking Regulations

Basel III: International Standards for Capital Adequacy and Risk Management

Basel III is a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS) in response to the 2008 financial crisis. The primary goal of Basel III is to strengthen the regulation, supervision, and risk management of banks globally. These regulations focus on improving the quality of capital, increasing capital requirements, enhancing risk management practices, and ensuring banks hold sufficient liquidity to withstand periods of financial stress.

Basel III applies to banks worldwide, including those in the US and EU, and sets out minimum standards for capital adequacy, stress testing, and market liquidity. The implementation of Basel III is monitored by national regulators in each country, who adapt these international standards to their local legal frameworks. The BCBS, an international body based in Switzerland, oversees the global adoption and consistency of Basel III standards.

Basel III Capital Requirements: Strengthening Bank Resilience

Under Basel III, banks are required to hold a higher proportion of high-quality capital, known as Common Equity Tier 1 (CET1) capital, to absorb losses during times of financial instability. The capital requirements include a minimum capital adequacy ratio, capital conservation buffer, and a countercyclical buffer, which banks must maintain to ensure they can continue operating during economic downturns.

These capital requirements are crucial for reducing the risk of bank failures and protecting the global financial system. National regulators, such as the Federal Reserve in the US and the European Central Bank (ECB) in the EU, are responsible for enforcing Basel III capital requirements within their jurisdictions, ensuring that banks comply with these global standards.

Anti-Money Laundering (AML) Regulations: Combating Financial Crime Worldwide

Anti-Money Laundering (AML) regulations are critical in the global fight against financial crime, including money laundering, terrorism financing, and corruption. These regulations require banks and other financial institutions to implement measures for detecting and reporting suspicious activities, conducting customer due diligence (CDD), and maintaining records of transactions.

AML regulations are implemented worldwide, with specific laws and guidelines tailored to each region. In the US, the Bank Secrecy Act (BSA) serves as the primary AML law, while in the EU, the Anti-Money Laundering Directives (AMLDs) set the framework. Globally, the Financial Action Task Force (FATF), an intergovernmental organization, sets international AML standards and monitors compliance by member countries. Banks are required to establish robust AML programs, and national regulators, such as FinCEN in the US and the European Banking Authority (EBA) in the EU, oversee the enforcement of these regulations.

Financial Stability Board (FSB): Coordinating Global Financial Regulation

The Financial Stability Board (FSB) is an international body that promotes global financial stability by coordinating national financial authorities and international standard-setting bodies. The FSB monitors and makes recommendations about the global financial system, ensuring that banks and other financial institutions adhere to consistent standards across borders.

One of the FSB’s key roles is to oversee the implementation of global regulatory reforms, including Basel III, and to address systemic risks in the financial sector. The FSB works closely with the G20 nations and other international organizations to strengthen financial regulation, enhance transparency, and reduce the risks of future financial crises.

IFRS 9: International Financial Reporting Standards

IFRS 9 is an international accounting standard issued by the International Accounting Standards Board (IASB) that governs how banks and other financial institutions should account for financial instruments, including loans and investments. IFRS 9 introduced significant changes to the way financial assets are classified and measured, with a focus on forward-looking expected credit loss (ECL) models for assessing credit risk.

This standard is applied by banks worldwide, particularly in regions that follow International Financial Reporting Standards (IFRS), such as the EU. IFRS 9 aims to provide a more accurate reflection of a bank’s financial health by ensuring that potential losses are recognized earlier. National regulators enforce compliance with IFRS 9, ensuring that banks maintain transparency and consistency in their financial reporting.

FATCA: Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) is a US law with global implications, requiring foreign banks and financial institutions to report information about financial accounts held by US taxpayers to the Internal Revenue Service (IRS). FATCA is designed to combat tax evasion by US citizens who hold assets in foreign banks. It mandates foreign institutions to conduct due diligence and report on these accounts, or face penalties.

While FATCA is a US regulation, its enforcement has global reach, as foreign financial institutions must comply to avoid penalties. Many countries have signed intergovernmental agreements (IGAs) with the US to facilitate FATCA compliance, making it a significant aspect of international banking regulations.

Yields MRM Suite

Yields MRM Suite

Staying compliant with evolving regulations, especially across different countries, is challenging. The Yields MRM Suite provides advanced tools specifically designed to help with Model Risk Management regulations, ensuring you meet these specific requirements effectively.

Visit our demo center to learn more.

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