What is Basel III

1Copyright © Vedanvi 2012

What is Basel III


Evolution of Basel Requirements

Pillar ICapital Ratios Liquidity Ratios Leverage Ratio

Pillar II Supervisory

Review

Pillar III Market Discipline

Capital RWA

Tier 1 Tier 2

Credit Market Operational Concentration(EU Large Exposure)

BIA

Standard

AMAStandard

IMA

VAR

Stress VAR

IRC

CCR Derivative Exposure

CEM

EPE

Standard

IRB F

IRB ACVA

WWR

LCR NSFR

Brand new with Basel III

Updated with Basel III

Updated with Basel 2.5

No Change from Basel 2Source: Moody’s Analytics


Objectives• Strengthen Market Risk Framework –

capture key risksThe Changes• Higher capital charge for market risk• Regular VaR & Stressed VaR• Incremental Risk Charge• Securitisation Charge• Comprehensive Risk Model (Structured

Credit)Impact• Significant increase in aggregated IV RWA• Increase in Attributed Equity

Basel 2.5 Changes


Objectives• Strengthen global capital and liquidity

rules to promote resilienceThe Changes• Higher Minimum Tier 1 Capital

Requirement• New Capital Conservation Buffer• Countercyclical Capital Buffer• Higher Minimum Tier 1 Common Equity

Requirements• Liquidity Standard• Leverage Ratio• Minimum Total Capital Ratio

Key Elements of Basel III


Basel III Objective Requirements

Raising quality, consistency & transparency of capital

• Tier 1 – common shares and retained earnings• Hybrid capital instruments phased out• Tier 3 capital eliminated• Deductions harmonised

Enhancing risk coverage • Stressed VaR capital requirements based on 12 month period of significant financial stress

• Higher capital for resecuritisation• Strengthen Pillar 2 and Pillar 3• Stressed counterparty credit risk capital req.• CVA – capital charge for mark to market losses• Strengthening collateral management – longer

margining period• Move to central counterparty over OTC• Treatment of wrong way risk & backtesting

Basel III Requirements Explored

Source: Basel Committee on Banking Supervision, Bank of International Settlements



Supplementing risk based capital requirement with leverage ratio

• Constrain leverage• Non risk based backstop measure

Reducing procyclicality and promoting countercyclical buffers

• Dampen cyclicality of the minimum requirements• Long term data for PD and LGD• Stress test considering downward migration of

credit portfolio in recession• FSA – scalar converting outputs of underlying PD

models into through the cycle estimates• Forward looking provisioning• Capital conservation standards• Excess credit growth





Addressing systemic risk & interconnectedness

• Move to central counterparties for OTC• High req for trading, derivative, complex

securitization and off balance sheet activities• High req for inter-financial sector exposures• Liquidity requirements penalising excessive reliance

on short term, interbank funding to support long dated assets




Complex Phase In Arrangement


9

How Far are Banks in Implementation


Basel III Implementation – Some take the leads……

MexicoFirst country in world to implement Basel III (Sept 2012)Higher capital req.

UAEImplement Basel III earlier – LCR 2015

IndiaFinal rules issued Full implementation Mar 2018- Higher capital requirements to BIII

AustraliaCapital rules issues Mar 2012 & Liquidity rules Nov 2011. Implementation 2 years sooner

Philippines Full implementation by 2014 for systemic banks

USAExtend comment period for Basel II rulesWeaker rules to BIII

EUFinal Rules delayedWeaker Rules to BIII

GermanyPushes ahead

JapanFinal rules published – Weaker rules

SwitzerlandTo impose stricter requirements to BIII

UKProposing stricter requirements

… creating a new world order and new arbitrage opportunities?

RussiaImplementing Basel III in 2015

ChinaEarly adoption of BIII & higher capital

BrazilEarly adoption of Basel III and higher capital requirements

Copyright © Vedanvi 2012

11

Implementation Progress as at End May 2012

Basel II Basel 2.5 Basel III

• 21 of 27 implemented Basel II

• Indonesia & Russia – Pillar 1 implemented but not Pillar 2 & 3

• Turkey – compliant by 2012

• China – final Regs issued• USA – Parallel run –

Basel 1 legal min

• 20 out of 27 countries have implemented

• Russia & US – issued draft Regs. on market risk

• US Regs modified in Dec 2011

• Argentina, Indonesia, Mexico, Saudi Arabia & Turkey – not implemented Basel 2.5

• India, Japan & Saudi Arabia – published final Regs.

• Europe – draft Directive & Regs published – final Rules delayed to Oct 2012

• Argentina, Hong Kong, SAR, Indonesia, Korea, Russia, Turkey & US – not issued Draft Regs.

Source Report to G20 Leaders on Basel III Implementation.. Basel Committee on Banking Supervision, Bank of International Settlements. June 2012

12

Is Basel III set to avert future crisis?


What’s Missing

Financial crisis on eave of Basel III

Libor ScandalFailed Money LaunderingControls

Jamie Dimon, blamed “errors, sloppiness and bad judgment” for the loss.

RBS Systems Out

Etc. etc. etc...Is more Capital the only Answer?


• Reduced lending & subsequent impact on economic growth (covered above)

• Reduce appetite of investors to invest in banks – at a time when capital most needed

• Inconsistent implementation – opening regulatory arbitrage opportunities

• Incentives to move risks to “shadow banking sector”• End of free banking?• Increased cost of banking & loans • ………..

Unintended Consequences

15

Appendix


Level of Implementation

Main Countries Basel II Basel 2.5

Basel III Notes

Belgium 4 4 2 Basel III Follow EU Process

France 4 4 2 Basel III Follow EU Process

Germany 4 4 2 Basel III Follow EU Process

Italy 4 4 2 Basel III Follow EU Process

Luxembourg 4 4 2 Basel III Follow EU Process

The Netherlands 4 4 2 Basel III Follow EU Process

Spain 4 4 2 Basel III Follow EU Process

Sweden 4 4,1 2 Basel 2.5 – (4) Final rules for the Basel 2.5 agreement are in force.(1) A new national ICAAP guideline is still under development. Basel III Follow EU Process

United Kingdom 4 4 2 Basel III Follow EU Process

Key

Number and colour code: 1 = draft regulation not published; 2 = draft regulation published; 3 = final rule published; 4 = final rule in force. Green = implementation completed; Yellow = implementation in

process; Red = no implementation.




Basel III Notes

Australia 4 4 2 Basel III - Draft rules for capital requirements issued on 30 March 2012. Draft rules to implement liquidity requirements issued in November 2011 for public consultation until 17 February 2012.

Brazil 4 4 2 Basel III - Draft regulation published for public consultation on 17 February 2012.

Canada 4 4 2 Basel III - On 1 February 2011, banks were directed to meet the 7% CET1 standard as of January 2013. Regulations for (i) non-viability contingent capital and (ii) transitioning for non-qualifying instruments published August and October 2011 respectively. Draft regulation for definition of capital and counterparty credit risk issued to banks in March 2012.

Source: Basel Committee on Banking Supervision




Basel III Notes

China 4 4 2 Supervisory guidelines released between 2007 and 2010 which will be integrated into new capital regulation combining BII, B2.5 and BIII. Large banks submitted application for advanced approaches currently assessed by CBRC. Basel III - Draft regulation combines BII, B2.5 and BIII. Public consultation ended in 2011. Final rule expected to come into force in Q3 2012. Will be applied to all banking institutions.

Hong Kong 4 4 1,3 Basel III - (3) Bill passed by the Legislative Council on 29 February 2012 and published for the purpose of creating rule-making powers for the implementation of Basel III. (1) Industry consultation underway on policy proposals for inclusion in rules. Consultation on draft text of rules scheduled for second half of 2012.

India 4 4 2 Basel III - Draft regulation released for comments on 30 December 2011.




Basel III Notes

Japan 4 4 3 Basel III - Draft regulation published on 7 February 2012 – Final rules published on 30 March 2012

Russia 1, 4 1,2 1 Basel II - 1) Pillar 2 expected to be implemented not earlier than in 2014. (4) Simplified standardised approach for credit risk, simplified approach for market risk and the Basic Indicator Approach for operational risk implemented. Basel 2.5(1) Pillar 2 expected to be implemented not earlier than in 2014. (2) Final regulation (revision to the simplified approach for market risk) expected shortly - regulation expected to come into force during Q2 2012. Basel III - Draft regulations under development.

Saudi Arabia 4 3 3 Basel III - Final regulation issued to banks.

Singapore 4 4 2 Basel III - Public consultation on draft ended in February 2012. Final rule is expected to be published in mid-2012.




Basel III Notes

South Africa 4 4 1 Basel III - Draft amendments to legislation issued on 30 March 2012 for consultation.

Switzerland 4 4 2 Basel IIIPublic consultation on draft regulation on Basel III has been finished in January 2012. Decision on final rules text expected until mid-2012. Final SIFI regulation (level: Banking Act) adopted by Parliament on 30 September 2011 – Draft SIFI regulation (level: accompanying ordinances) was published in December 2011; decision on final rule text expected before end-2012.




Basel III Notes

United States 4 1.2 1 Basel II Parallel run on-going –Basel II mandatory institutions required to implement the advanced approaches to credit risk and operational risk. Those Banks have made significant progress in implementation efforts Basel 2.5 (2) Market risk capital requirements have been proposed and remain to be finalised. These proposed requirements were modified in December 2011 to incorporate restrictions on the use of credit ratings as set forth in the Dodd-Frank regulatory reform legislation. (1) Other Basel 2.5 revisions are under development as part of the proposed

Basel III rule currently expected to be issued for comment during Q2 2012. Basel IIIDraft regulation for consultation planned during Q2 2012. Basel 2.5 and Basel III rulemakings in the United States must be coordinated with applicable work on implementation of the Dodd-Frank regulatory reform legislation.

What is Basel III

Economy & Finance

basel iii

draft regulation

draft regulation

simplified

basel iii

draft rules

credit risk

public consultation