GAO Assesses US Regulators Role in Shaping Basel III Reforms

The Government Accountability Office ("GAO") detailed how US regulators played a key role in shaping the Basel III capital standards. The standards, which revise methods for estimating a bank's risks and capital requirements, have not yet been implemented in the US.

In a public version of a report to the Senate Banking Committee and the House Financial Services Committee, the GAO reviewed the participation of the US regulators—the Federal Reserve, the Federal Reserve Bank of New York, the FDIC and the OCC—that were members of the Basel Committee's work from 2010 to 2019.

The Congressional committees asked the GAO to examine: "(1) how the Basel Committee organized the work to develop the standards, (2) information and analyses [US] members considered to inform their positions, and (3) [US] members' priorities for reform and actions taken to further those priorities."

The GAO concluded that US regulators prioritized two key objectives in the Basel III negotiations: (i) aligning international capital standards with US regulations to create a level playing field and (ii) improving the simplicity, comparability and risk sensitivity of bank capital standards. A central focus was limiting banks' use of internal risk models to calculate capital requirements—reducing variations in risk-weighted assets across institutions.

In the report, the GAO detailed how the US banking regulators informed their positions by reviewing public comments, engaging with industry representatives and conducting their own quantitative impact studies. The GAO said these efforts helped ensure the reforms aligned with US regulatory objectives while addressing weaknesses in the Basel framework.