One can almost hear the collective groan that escapes from the gate area when the flight status changes from ON TIME to DELAYED on the board.
However, I am pretty sure no bank let out the same kind of groan when OSFI, the Canadian bank regulator, announced this week that it is delaying the planned increase of the Basel III Output Floor until further notice.
And unlike most airlines, which will make you wait for hours while continually postponing departure in 20-minute increments, OSFI also promised it would let the banks know at least two years in advance of resuming the increase.
For those in need of a reminder of where we are on the regulation landscape, the Basel Committee is an international organization that sets standards for bank regulation and supervision. In the wake of the 2008 global financial crisis, it put out the Basel III framework that is meant to:
Allow the banking system to support the real economy through the economic cycle
What that means is that in times of hardship, banks should make it better by having enough capital to withstand a crisis and should keep supplying consumers and businesses with credit.
Seven years later, in 2017, the second part of Basel III, the so-called endgame or 3.1, was finalized and put to the member countries to implement.
Part of the endgame is the output floor that limits how much banks can lower their capital charge by using internal models.
In the original plan, the output floor would increase annually and eventually top out in 2027 at 72.5%, meaning that the risk-weighted assets (RWA) calculated by internal models cannot fall below 72.5% of the RWA calculated by the standardized approach.
The Canadian output floor is currently at 67.5%.
In January 2025, the UK bank regulator, PRA, also announced a delay in the British Basel 3.1 implementation until January 1st, 2027. This was the second time the implementation was postponed since September 2024.
Canada and the UK thus join the EU, which put their implementation of the Basel 3.1 market risk element, also known as the Fundamental Review of the Trading Book (FRTB), on hold until January 1st, 2026.
In varying degrees of directness, they all say that they don’t want their banks to be at a regulatory disadvantage to the US which—to put it diplomatically—has been far from the first to get on the field for the endgame.
In fact, no one has seen the Americans in the stadium yet, and even fewer expect them to get there any time soon.
Within behavioral economics and game theory there is a concept called the Fooling Solution, where a teacher sets a date for a difficult exam and gives the students a few weeks to cram the material and get ready. On the morning of the exam, the teacher cancels it because the intended purpose of the exam—for students to learn the material—has already been achieved.
One could claim that since the Basel III framework has been underway for almost fifteen years, and since the endgame is close to being fully implemented in national rules, and in many cases also in the banks, delaying it now will not have a huge impact on its effectiveness.
That is, of course, as long as no regulation is rolled back.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.