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What is Basel III
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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
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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
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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
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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
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Basel III Objective Requirements
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
Basel III Requirements Explored
Source: Basel Committee on Banking Supervision, Bank of International Settlements
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Basel III Objective Requirements
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
Basel III Requirements Explored
Source: Basel Committee on Banking Supervision, Bank of International Settlements
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Complex Phase In Arrangement
Source: Basel Committee on Banking Supervision, Bank of International Settlements
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How Far are Banks in Implementation
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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
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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
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Is Basel III set to avert future crisis?
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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?
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• 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
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Appendix
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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.
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Level of Implementation
Main Countries Basel II Basel 2.5
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
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Level of Implementation
Main Countries Basel II Basel 2.5
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.
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Level of Implementation
Main Countries Basel II Basel 2.5
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.
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Level of Implementation
Main Countries Basel II Basel 2.5
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.
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Level of Implementation
Main Countries Basel II Basel 2.5
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.