Understanding Basel III endgame and its impact on banking in Africa

By Cyril ODOI

Banks and financial authorities worldwide work diligently to prevent financial crises of any kind. Global rules, known as the Basel Accords, establish safety standards for banks that require them to maintain sufficient capital and manage risks prudently.

These rules have evolved over time whenever problems have emerged. The latest upgrade, often referred to as the Basel III Endgame (B3E), is among the final adjustments designed to make banks more resilient to financial stress.

Past crises have demonstrated that many African economies become vulnerable when banks fail, prompting local authorities to pay closer attention to these global standards. For businesses, however, this also means that banks should have the capacity to lend even in tough times, rather than failing and resorting to freezing of credit.

Basel I & II: Laying the Foundations

Basel I was introduced in 1988 by central bank governors from the Group of Ten countries at the Committee’s headquarters in Basel, Switzerland (hence the name). Their mandate was to ensure that banks had sufficient capital to handle most potential risks.

Since then, the Committee has expanded its membership from the original G-10 to 45 institutions across 28 jurisdictions; South Africa is presently the only African member of the central Basel Committee on Banking Supervision (BCBS). The BCBS is described as “the primary global standard setter for the prudential regulation of banks, providing a forum for regular cooperation on banking supervisory matters.”

Because the Accord was meant to evolve, Basel II was introduced in 2004, allowing banks greater flexibility in calculating risks, using their internal models. Basel II’s core is a robust three-pillar framework designed to enhance bank stability and transparency. Pillar 1 dictates how banks calculate the capital they must hold, allowing them to use their own internal risk models.

This is then scrutinized under Pillar 2, where regulators thoroughly assess these calculations and the bank’s overall risk management. Finally, Pillar 3 requires banks to publicly disclose detailed information on their risk exposures and capital adequacy, promoting greater transparency and accountability in the financial market. These changes have prompted banks to adopt more intelligent and transparent risk management practices.

Basel III: Tougher Standards after the Crises

The 2008 global financial crisis exposed the risky practices of many banks, which resulted in excessive debt, insufficient cash reserves, and weak risk-management controls. These weaknesses necessitated the introduction of Basel III in 2010 to address the identified gaps with more explicit risk rules to mitigate the effects of future financial shocks.

Basel III primarily increased core capital requirements and introduced new buffers, while also implementing new liquidity rules. Banks must now maintain a cushion of high-quality liquid assets, such as cash, central bank reserves, or government bonds. It also established a net stable funding ratio, prompting banks to utilize more long-term funding rather than short-term debt.

Basel III Endgame: The Final Upgrades

The latest Basel III reforms, commonly known as the “Endgame,” represent the final phase of updates agreed upon by global regulators around 2017, with full implementation expected by 2028.

These reforms aim to strengthen and simplify risk calculation standards worldwide. One major change is the replacement of banks’ internal operational risk models with a single standardized approach. (B3E also revised the credit and market risk frameworks to reduce complexity.) The net result is the emergence of higher risk-weighted assets (RWA), resulting in increased capital requirements.

These changes will invariably affect smaller banks, including many in Africa. Consequently, while their regulators can phase in these new requirements more slowly, these banks must eventually update their risk models. In short, the B3E concept means banking rules everywhere are becoming tougher and more uniform.

Impact on African Banks: Ghana and Beyond

In Africa, many banks initially operated under simple capital rules; however, over time, some countries have advanced rapidly toward modern Basel standards, with Ghana serving as a notable example. In 2017, the Bank of Ghana closed two insolvent banks and later merged five others to form Consolidated Bank Ghana Limited. By 2019, Ghana had applied key parts of Basel II and III. As a result, most Ghanaian banks today maintain high capital buffers and adhere to strict risk assessment procedures.

While Ghana’s heavy recapitalization initiative initially slowed lending, many analysts now agree that it has strengthened the sector. These reforms aim to rebuild trust and enhance the safety of African banks. Similar stories have played out in other regions. Following its banking crisis in 2009, Nigeria also required its banks to recapitalize and tighten regulations.

Other African countries have been varied in their approach. The South African Reserve Bank (SARB) has adopted Basel III with a phased implementation, aligning local banks with international best practices.

Kenya and Uganda have not fully adopted Basel III, though their regulators encourage strong capital positions. Many smaller markets will adopt simpler versions that fit their systems. Overall, the trend is toward stronger regulation where banks must upgrade their systems, hold more high-quality capital and liquidity, and enhance their risk management practices. International investors now often view Basel compliance as a sign of a credible banking sector, making many regulators see the adoption of these steps as a path to stronger, more attractive banks.

Risk Management: Pillars of Prudence

Banks face three primary risks: credit risk (loans not being repaid), market risk (losses resulting from price fluctuations), and operational risk (including fraud and system failures). To manage these, banks run “stress tests”; hypothetical scenarios such as “what happens if 10% of loans default?”

They then see how much capital they would need to cover such losses. Banks also diversify loan portfolios, so that one setback does not cripple them. To prevent concentration risk, Basel standards require banks to set limits on exposures to any one borrower or industry, ensuring that a single failure does not jeopardize the entire bank’s stability.

For African banks in particular, this means assessing the shocks that are likely to occur in their markets, including sudden currency devaluations, political instability, or unexpected regulatory changes. Regulators in Africa are pushing banks to adopt these practices.

AI and Banking

AI helps with regulatory compliance. The new Basel rules require complex calculations and reports. AI-driven tools can automate parts of this routine work, flag potential problems, and reduce manual errors. However, because AI needs good data input and human oversight, regulators expect banks to utilize AI as a tool alongside experts, rather than as a substitute. When used strategically, AI enables banks to meet global standards while freeing staff to focus on more critical tasks.

Looking Ahead

For Africa, while meeting these standards may be a challenge, it also offers an opportunity to build confidence in the banking sector. The outcome of Ghana’s recent reforms suggests that strict rules can lead to healthier banks. New technology (like AI) can ease the burden of compliance and risk checks. In the long run, well-capitalized banks mean savings are safer and loans are steadier, even in periods of downturn.  Basel’s journey from its first Accord to the Endgame is about learning from crises and laying a stronger financial foundation for everyone.

>>The writer is a risk management expert specializing in the Basel regulatory framework and counterparty credit risk. A Doctorate in Business Administration candidate with over six years of banking experience, he has co-authored economic studies and applies his research to promote transparency and sound risk practices in finance.

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