Covid-19 and the SDGs and Basel 4

The SDGs aim to provide a fulfilling and prosperous life for all. Even before the pandemic, the 2030 Agenda was daunting, however the Covid-19 pandemic has proved to be a severe setback towards achieving them and has unfortunately reversed many of the past gains. 

Below are some examples of the devastating effects of the pandemic on the SDGs : 

No poverty

Perhaps the most important goal of no poverty saw a much progess, where millions escaped living on less than USD 1.90/day. However, the pandemic pushed an estimated 125 million people into extreme poverty.

No hunger

Latin America, east and central Asia made remarkable achievments in reducing it’s proportion of undernourished population. The pandemic exposed the fragility of food supply chains globally, malnutrition of children under the age of 5 is 22%.

Good health

Achieving universal healthcare by 2030 was already unachievable, however the pandemic reversed the improvements made in maternal and infant mortality, and  reduced life expectancy.

Decent work

The international Labour Organization reported that 1/6 people have either lost their means of livelihood or had the working hours reduced since the beginning of the pandemic.

Quality education

It also exacerbated the digital divide, especially for those in rural areas, and approximately 1.25 billion people were affected by covid lockdowns with over 100 million children falling below the level of reading proficiency.

Before we delve into the current banking scenario, it is important to take note of one of the most important regulations being introduced right now, the Basel 4 accord.

What is Basel 4?

(Source : HCLTech)

Established by The Bank for international settlements, the Basel Committee on Banking supervision through it’s rules, supervision and regulations makes consistent effort to improve the banking supervision quality, globally.  Since it’s inception in 1988, the Basel Accords have addressed failures and weaknesses in the banking sector. Basel III addressed the causes behind the 2007-2008 financial crisis and introduced reforms in the key areas of leverage ratios, bank liquidity and capital. Basel 4, was initially set to start on 1 January 2022, but was postponed by a year due to the pandemic. It’s main goal is to standardize banking regulations globally, that is “Restore credibility in the calculation of risk-weighted assets (RWAs) and improve the comparability of banks’ capital ratios”( Basel Committee on Banking Supervision, High-Level Summary of Basel III Reforms, 2017). Banks will have 5 years to implement the provisions of accord.

Some of it’s main provisions are –

• Follow a standardized and general approach to calculate their capital requirements and seek special approval to use their own internal methods to ensure that there is sufficient capital in their reserves and their portfolio risk isn’t undermined.
• New and improved type of risk ratings for different assets, including derivate instruments.
• Requiring G-SIBs to maintain more reserve capital by introducing a leverage ratio
• A more risk sensitive output floor, banks will need to hold a minimum of 72.5% of the standard model from 2027.

 

Regulators in Deutsche Bank however believe that this approach, although makes it easier to compare, is only good on paper. A standardized approach does not take into account local interest rates, legal frameworks, culture and experience, but internal models do. They take into consideration historical data and are more sophisticated, capturing detailed risks faced by banks in their own regions. A study conducted by the Basel committee found that actual risk in internal models was around 75%, showing that these models are effective, and the remaining variance might be due to interpretation or management style. Hence, according to Deutsche. it would be better to find the cause of the variances instead of completely eliminating internal models. 

Only time will tell us about the success of the regulation.

 

References

Hub, I.S.K. (no date) SDGs Report 2021: COVID-19 Led to First Rise in Extreme Poverty in a Generation | News | SDG Knowledge Hub | IISD. Available at: https://sdg.iisd.org/news/sdgs-report-2021-covid-19-lead-to-first-rise-in-extreme-poverty-in-a-generation/ (Accessed: February 26, 2023).

OHCHR (no date) COVID-19 Guidance. Available at: https://www.ohchr.org/en/covid-19/covid-19-guidance (Accessed: February 26, 2023).

Sommanustweechai, A. et al. (2022d) “Multi-dimensional impacts of Coronavirus disease 2019 pandemic on Sustainable Development Goal achievement,” Globalization and Health, 18(1). Available at: https://doi.org/10.1186/s12992-022-00861-1.

COVID-19 and the SDGs | UNDP (no date b). Available at: https://feature.undp.org/covid-19-and-the-sdgs/ (Accessed: February 27, 2023).

Sodergren, M.-C. (2022) COVID-19 and the Sustainable Development Goals: Reversing progress towards decent work for all - ILOSTAT. Available at: https://ilostat.ilo.org/covid-19-and-the-sustainable-development-goals-reversing-progress-towards-decent-work-for-all/ (Accessed: February 27, 2023).

Elbannan, M.A. (2017) “The Financial Crisis, Basel Accords and Bank Regulations: An Overview,” International Journal of Accounting and Financial Reporting, 7(2), p. 225. Available at: https://doi.org/10.5296/ijafr.v7i2.12122.

Basel Committee on Banking Supervision. "High-Level Summary of Basel III Reforms," Pages 1-11.

Patil, Y. (2024) Implementing Basel 3.1: Your guide to manage reforms. Available at: https://www.wolterskluwer.com/en/expert-insights/implementing-basel-3-1-your-guide-to-manage-reforms.

Db (no date) “‘Basel IV could bring us almost back to the start.’” Available at: https://www.db.com/news/detail/20160912-sylvie-matherat-basel-iv-could bring-us-almost-back-to-the-start?language_id=1 (Accessed: February 27, 2023).