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Basel iii Compliance ProfessionalsAssociation (BiiiCPA)
1200G Street NW Suite800Washington, DC 20005-6705USA Tel:
202-449-9750Web: www.basel-iii-association.com
Dear Member,
Crying is not a sign of weakness. You may let out your tears!
Assuming full implementationof the Basel III requirementsasof 30
June2011, includingchangestothe definitionof capital and
risk-weightedassets, and ignoringphase-in arrangements,Group 1
bankswouldhavean overall shortfall of €38.8 billion for the CET1
minimum capital requirement of 4.5%, whichrisesto€485.6billion for a
CET1target level of 7.0% (ie including thecapital conservation buffer);
the latter shortfall already includesthe G-SIB surchargewhere
applicable.
As a point of reference, the sum of profitsafter tax prior to distributions
across the same sample of Group 1banksin the second half of 2010 and
thefirst half of 2011was€356.6billion.
Under the same assumptions, thecapital shortfall for Group 2 banks
includedin the Basel III monitoring sample is estimated at €8.6 billion
for the CET1minimum of 4.5% and €32.4 billion for a CET1 target level
of 7.0%.
Thesum of Group 2bank profitsafter tax prior todistributionsin the
second half of 2010and the first half of 2011was€35.6 billion.
Quantitative impact study results published by the Basel
Committee, 12April 2012
TheBasel Committeepublished theresultsof
itsBasel III monitoring exercise.
Thestudyis based on rigorousreporting
processesset up by the Committee to
periodicallyreview theimplicationsof the
Basel III standardsfor financial markets.
Atotal of 212banksparticipated in the study,
including103Group1banks(ie thosethat have
Tier 1capital in excessof €3 billion and are
internationallyactive) and 109Group 2banks
(ie all other banks).
While the Basel III frameworksetsout transitional arrangementsto
implement thenew standards, themonitoring exerciseresultsassume
full implementationof thefinal Basel III packagebasedondata asof 30
June2011(ie theydonot take account of thetransitional arrangements
such asthephasein of deductions).
No assumptionsweremade about bank profitabilityor behavioural
responses,suchaschangesin bank capital or balance sheet
composition.
For that reason the resultsof thestudyare not comparable to industry
estimates.
Basedon data asof 30June 2011and applying the changestothe
definitionof capital and risk-weightedassets,the averagecommon
equityTier 1capital ratio(CET1) of Group 1bankswas7.1%, as
comparedwith theBasel III minimum requirement of 4.5%.
In orderforall Group1bankstoreachthe4.5%minimum, anincreaseof
€38.8 bi llion CET1 wou ld be requ ired .
Th e ove rall sh ortfall inc reases t o €485.6 billion toachievea
CET1 target level of 7.0% (ie including thecapital conservationbuffer);
this amount includesthe surchargefor global systemically important
bankswhereapplicable.
As a point of reference, thesum of profitsafter tax and prior to
distributionsacrossthesamesampleof Group 1banks in thesecond
half of 2010and the first half of 2011was €35 6.6 billion .
For Group 2banks, the averageCET1ratio stood at 8.3%.
In order for all Group 2banksin thesampletomeet thenew 4.5% CET1
ratio, the additional capital needed is estimatedtobe €8.6 billion.
Theywouldhave required an additional €32.4 billion toreach a CET1
target 7.0%; the sum of these banks' profitsafter tax and prior to
distributionsin thesecondhalf of2010andthefirsthalf of2011was€35.6
billion.
TheCommitteealsoassessedthe estimatedimpact of the liquidity
standards.
Assuming banksweretomake nochangestotheir liquidityrisk profile
or fundingstructure, asof June2011, theweightedaverage Liquidity
CoverageRatio(LCR) forGroup 1bankswouldhavebeen90% whilethe
weightedaverage LCR for Group 2bankswas83%.
Theaggregate LCR shortfall is €1.76trillion whichrepresents
sampleof institutionsin each jurisdiction.
approximately3% of the €58.5 trilliontotal assetsof the aggregate
sample.
TheweightedaverageNet StableFundingRatio(NSFR) is94%forboth
Group 1and Group 2 banks.
Th e aggregate sh ortfall of req u ired st ab le fu nd in g is €2 .78
trillion.
Banks haveuntil 2015tomeet the LCR standard and until 2018to meet
theNSFR standard, whichwill reflect anyrevisionsfollowingeach
standard's observation period.
As noted in a January 2012pressstatement issuedby theGroup of
Governorsand Headsof Supervision, the Basel Committee's oversight
body, modificationstoa few keyaspectsof the LCR arecurrentlyunder
investigationbut will not materiallychange the framework'sunderlying
approach.
TheCommitteewill finaliseand subsequentlypublish its
recommendationsin theseareasby the end of 2012.
Banks that are below the 100% required minimum thresholds can meet
these standards by, for example, lengthening the term of their funding
or restructuring business models which are most vulnerable to liquidity
risk in periodsof stress.
It should be noted that the shortfallsin the LCR and the NSFR are not
additive, as reducing the shortfall in one standard may also reduce the
shortfall in theother standard.
Resultsof the Basel III monitoring exercise asof 30 June 2011
April 2012
Executive summary
In 2010,the Basel Committeeon BankingSupervision conducted a
comprehensivequantitativeimpact study(C-QIS) using data asof 31
December2009toascertainthe impact on banks of the Basel III
framework,published in December 2010.
TheCommitteeintendsto continuemonitoring the impact of theBasel
III frameworkin order togather full evidenceon itsdynamics.
Toservethispurpose, a semi-annual monitoring frameworkhasbeen set
up on therisk-basedcapital ratio, theleverageratio and theliquidity
metricsusingdata collectedby national supervisorson a representative
Basel III requirementsbased on data asof 30 June 2011.
This report summarisesthe aggregate resultsof the latest Basel III
monitoringexercise,using data asof 30June 2011.
TheCommitteebelievesthat theinformation contained in the report
will providethe relevant stakeholderswitha useful benchmark for
analysis.
Information for thisreport wassubmitted by individual banksto their
national supervisorson a voluntary and confidential basis.
Atotal of 212 banksparticipated in thestudy, including103Group 1
banksand 109Group 2 banks.
Members‘coverageof their banking sector is very high for Group 1
banks,reaching 100% coveragefor some jurisdictions,whilecoverageis
comparatively lowerfor Group 2banksand varied acrossjurisdictions.
TheCommitteeappreciatesthesignificant effortscontributed by both
banksand national supervisorsto this ongoingdata collection exercise.
Thereport focuseson thefollowingitems:
- Changesto bank capital ratiosunder thenew requirements,and
estimatesof any capital deficienciesrelativetofullyphased-in
minimum and target capital requirements(toincludecapital
chargesfor global systemically important banks– G-SIBs);
- Changesto thedefinitionof capital that result from the new capital
standard, referred toascommon equityTier 1(CET1), includinga
reallocationof deductionstoCET1, and changestothe eligibility
criteria forAdditional Tier 1and Tier 2 capital;
- Increasesin risk-weightedassetsresultingfrom changesto the
definitionof capital, securitisation, tradingbook and counterparty
credit risk requirements;
- Theinternational leverageratio; and
- Twointernational liquiditystandards– the liquiditycoverageratio
(LCR) and thenet stablefunding ratio(NSFR).
With the exception of the transitional arrangementsfor non-correlation
tradingsecuritisationpositionsin the tradingbook, this report doesnot
take intoaccount any transitionalarrangementssuchasphase-in of
deductionsand grandfatheringarrangements.
Rather, the estimatespresented assume full implementationof the final
No assumptionshave been made about banks‘profitabilityor
behaviouralresponses,such aschangesin bank capital or balancesheet
composition, sincethis date or in the future.
For thisreason theresultsare not comparable tocurrent industry
estimates,whichtend to be based on forecastsand consider
management actionsto mitigatethe impact, and incorporateestimates
whereinformation is not publicly available.
Theresultspresented in thisreport arealsonot comparabletotheprior
C-QIS,whichevaluatedthe impact of policy questionsthat differ in
certainkeyrespectsfrom the finalisedBasel III framework.
As one example, theC-QIS did not consider the impact of capital
surchargesfor global systemicallyimportant banks.
Capital shortfalls
Assuming full implementationof the Basel III requirementsasof 30
June2011, includingchangestothe definitionof capital and
risk-weightedassets, and ignoringphase-in arrangements,Group 1
bankswouldhavean overall shortfall of €38.8 billion for the CET1
minimum capital requirement of 4.5%, which rises to €485.6 billion for a
CET1 target level of 7.0% (ie including the capital conservation buffer);
thelatter shortfall already includesthe G-SIB surchargewhere
applicable.
As a point of reference, the sum of profitsafter tax prior to distributions
across the same sample of Group 1banksin the second half of 2010 and
thefirst half of 2011was€356.6billion.
Under the same assumptions, thecapital shortfall for Group 2 banks
includedin the Basel III monitoring sample is estimated at €8.6 billion
for the CET1minimum of 4.5% and €32.4 billion for a CET1 target level
of 7.0%.
Thesum of Group 2bank profitsafter tax prior todistributionsin the
second half of 2010and the first half of 2011was€35.6 billion.
Further detailson additional capital needsto meet theBasel III
requirementsare included in Section 2.
Capital ratios
TheaverageCET1 ratiounder the Basel III frameworkwould decline
from 10.2% to7.1%for Group 1banks and from 10.1%to8.3% for Group
2banks.
LCR and 1January 2018for the NSFR.
TheTier 1capital ratiosof Group 1bankswoulddecline, on average
from 11.5% to 7.4% and total capital ratioswoulddecline from 14.2% to
8.6%.
As withtheCET1ratios, thedeclinein other capital ratiosis
comparatively lesspronouncedfor Group 2banks; Tier 1capital ratios
woulddecline on averagefrom 10.9% to8.6% and total capital ratios
woulddecline on averagefrom 14.3% to10.6%.
Changesin risk-weighted assets
As compared tocurrent risk-weightedassets,total risk-weightedassets
increaseon averageby 19.4% for Group 1banksunder the BaselIII
framework.
This increaseis driven largely by chargesagainst counterpartycredit
risk and tradingbook exposures.
Securitisation exposures, principally those risk-weighted at 1250% under
the Basel III framework (which were previously 50/ 50 deductions under
BaselII), are alsoa significant contributor totheincrease.
Banks that have significant exposures in theseareasinfluencethe
averageincreasein risk-weightedassetsheavily.
As Group 2 banks are lessaffected bythe revised counterpartycredit risk
and trading book rules, these banks experience a comparatively smaller
increasein risk-weightedassetsof only 6.3%.
Even within thissample, higher risk-weightedassetsare attributed
largelytoGroup 2bankswithcounterparty and securitisationexposures
(ie thosesubject toa 1250%riskweighting).
Leverage ratio
Theweightedaveragecurrent Tier 1leverageratiofor all banks is 4.5%.
For Group 1banks,it is somewhat lowerat 4.4% while it is 5.0% for
Group 2banks.
TheaverageBasel III Tier 1leverageratiofor all banks is 3.5%. The
BaselIII averagefor Group 1banksis3.4%, and theaverageforGroup 2
banksis 4.2%.
Liquidity standards
Both liquiditystandards are currentlysubject toan observation period
whichincludesareview clausetoaddressanyunintendedconsequences
prior totheir respectiveimplementation datesof 1January 2015for the
calculationof risk-weightedassets(RWA), the calculationof a leverage
Basel III monitoring resultsfor the end-June2011reportingperiod give
an indicationof theimpact of the calibration of thestandardsand
highlight several keyobservations:
Atotal of103Group1and102Group2banksparticipatedin theliquidity
monitoringexercisefor the end-June 2011reference period.
TheweightedaverageLCR forGroup 1banksis90% whiletheweighted
averageLCR for Group 2banksis 83%.
Theaggregate LCR shortfall is €1.76trillion whichrepresents
approximately3% of the €58.5 trilliontotal assetsof the aggregate
sample.
TheweightedaverageNSFR is 94% for both Group 1and Group 2
banks.
Theaggregate shortfall of required stablefunding is€2.78trillion.
General remarks
At its12September 2010meeting, theGroup of Governors and Headsof
Supervision(GHOS), theCommittee‘soversight body, announceda
substantial strengtheningof existingcapital requirementsand fully
endorsedthe agreementsit reached on 26July2010.
Thesecapital reformstogether withtheintroduction of two
international liquiditystandards, delivered on thecore of theglobal
financial reform agendapresentedtotheSeoul G20 Leaderssummit in
November 2010.
Subsequent to the initial comprehensivequantitativeimpact study
publishedin December 2010,the Committeecontinuestomonitor and
evaluatetheimpact of thesecapital and liquidityrequirements
(collectivelyreferredto as―Basel III‖) on a semi-annual basis.
This report summarisesresultsof the latestBaselIII monitoring
exerciseusing 30June 2011data.
Scope of the impact study
All but one of the 27 Committeemember jurisdictionsparticipatedin
Basel III monitoring exerciseasof 30June 2011.
Theestimatespresented are based ondata submitted by the
participatingbankstonational supervisorsin reportingquestionnaires
in accordancewiththe instructionspreparedby the Committeein
September 2011.
Thequestionnaire covered componentsof eligiblecapital, the
ratio, and componentsof theliquiditymetrics. The resultswereinitially
submittedtothe Secretariat of the Committeein October 2011.
Thepurposeof the exerciseis toprovidethe Committeewithan
ongoing assessment of the impact on participatingbanksof the capital
and liquidityproposalsset out in thefollowingdocuments:
- Revisionsto the Basel II market risk frameworkand Guidelinesfor
computing capital for incremental risk in the tradingbook;
- EnhancementstotheBasel II framework whichincludetherevised
risk weightsfor re-securitisationsheld in the banking book;
- Basel III: Aglobal framework for more resilient banksand the
bankingsystem aswell asthe Committee‘s13January2011press
releaseon lossabsorbencyat the point of non-viability;
- International frameworkfor liquidityrisk measurement, standards
andmonitoring; and
- Global systemicallyimportant banks:Assessment methodology and
theadditional lossabsorbency requirement.
Sample of participating banks
Atotal of 212 banksparticipated in thestudy, including103Group 1
banksand 109Group 2 banks. Group 1banksarethosethat haveTier 1
capital in excessof €3 billion and are internationallyactive.
All other banksare considered Group 2banks.
Banks wereasked toprovidedata asof 30June 2011at theconsolidated
level.
Subsidiariesof other banksare not includedin the analysestoavoid
doublecounting.
Table1showsthe distributionof participationby jurisdiction.
For Group 1banksmembers‘coverageof their banking sector wasvery
high reaching100% coveragefor some jurisdictions.
Coverage for Group 2 bankswascomparatively lowerand varied across
jurisdictions.
Not all banks provideddata relatingto all parts of the BaselIII
framework.
Accordingly, a small number of banksare excluded from individual
sectionsof the BaselIII monitoring analysisdue toincompletedata.
Methodology
Theimpact assessment wascarried out by comparing banks‘ capital
positionsunder Basel III tothe current regulatory framework
implemented by thenational supervisor.
With the exception of transitional arrangementsfor non-correlation
tradingsecuritisationpositionsin thetradingbook, Basel III resultsare
calculatedwithout consideringtransitional arrangementspertainingto
positionscould be attributedtodifferinginterpretationsof the rules,
thephase-in of deductionsand grandfatheringarrangements.
Reported averageamountsin this document havebeen calculatedby
creatinga composite bank at a total sample level, whicheffectively
meansthat thetotal sample averagesare weighted.
For example, the averagecommon equityTier 1capital ratio is thesum
of all banks‘common equityTier 1capital for the total sample divided
bythe sum of all banks‘risk-weightedassetsfor the total sample.
Tomaintainconfidentiality, many of theresultsshownin thisreport are
presentedusing box plots charts.
Thesechartsshowthedistributionof resultsasdescribedbythemedian
values(thethin red horizontal line) and the75th and 25th percentile
values(definedby the blue box).
Theupper and lower end pointsof the thin bluevertical linesshow the
valueswhich are1.5timesthe rangebetweenthe 25th and the75th
percentile abovethe75th percentile or belowthe25th
percentile, respectively.
Thiswouldcorrespondtoapproximately99.3%coverageif thedatawere
normallydistributed.
Thered crossesindicateoutliers.
Toestimatethe impact of implementingthe Basel III frameworkon
capital, comparisonsaremadebetweenthoseelementsof Tier 1capital
whicharenot subject to a limit under thenational implementationof
Basel I or Basel II, and CET1 under Basel III.
Data quality
For thismonitoring exercise, participatingbanks submitted
comprehensiveand detailed non-publicdata on a voluntary and
best-effortsbasis.
As withthe C-QIS, national supervisorsworked extensivelywith banks
toensuredataquality, completenessandconsistencywiththepublished
reporting instructions.
Banks are included in the variousanalysesthat followonlyto the extent
theywereable to providesufficient qualitydata tocompletethe
analyses.
For theliquidityelements,data qualityhasimproved significantly
throughout the iterationsof the BaselIII monitoring exercise, although
it is still thecasethat some differencesin banks‘reported liquidityrisk
common equitydeductionsare fullyphasedin and all non-qualifying
rather than underlying differencesin risk.
Most notablyindividual banks appear tobe usingdifferent
methodologiestoidentifyoperationalwholesaledepositsandexclusions
of liquid assetsdue tofailure to meet theoperational requirements.
Interpretation of results
Thefollowingcaveatsapplytotheinterpretationof resultsshownin this
report:
Theseresultsare not comparable to thoseshown in the C-QIS, which
evaluated theimpact of policy questionsthat differ in certain key
respectsfrom the finalisedBaselIII framework.
As one example, theC-QIS did not consider the impact of capital
surchargesfor G-SIBsbasedon the initial list of G-SIBs announced by
theFinancial StabilityBoard in November 2011.
Onemember country, Switzerland, hasalready implementedcertain
elementsof the Basel III frameworkpertainingto new rulesfor market
risk and enhancementstothe treatment of securitisationsheld in the
bankingbook (often referred to collectivelyas―Basel 2.5‖).
For banks in this country, the resultsincluded in this report reflect the
impact of adopting the BaselIII requirementsrelativeto theBasel II
and Basel2.5frameworksalreadyin place.
Thenew rules for counterparty credit risk are not fullyaccounted for in
thereport, asdata for capital chargesfor exposurestocentral
counterparties(CCPs) andstressedeffectiveexpectedpositiveexposure
(EEPE) could not be collected.
Theactual impact of thenew requirementswill likely be lower than
shownin this report giventhe phased-inimplementation of therules
and interim adjustmentsmade by thebanking sectorto changing
economicconditionsand the regulatory environment.
For example, theresultsdo not consider bank profitability, changesin
capital or portfoliocomposition, or other management responsesto the
policy changessince30June 2011or in the future.
For thisreason, theresultsare not comparable toindustry
estimates,which tend to bebasedon forecastsand consider
management actionstomitigatethe impact, aswell asincorporate
estimateswhereinformation is not publicly available.
TheBaselIII capital amountsshownin thisreport assume that all
capital instrumentsare fully phasedout.
As such, theseamountsunderestimatetheamount of Tier 1capital and
Tier 2 capital held bya bank astheydonot give any recognitionfor non-
qualifying instrumentsthat are actuallyphased out over nineyears.
Thetreatment of deductionsand non-qualifying capital instruments
alsoaffects figuresreportedin the leverageratiosection.
Theunderestimationof Tier 1capital will becomelessof an issueasthe
implementationdateof theleveragerationears.
In particular, in 2013, the capital amountsbased on the capital
requirementsin placeon the Basel III monitoring reportingdate will
reflect the amount of non-qualifying capital instrumentsincludedin
capital at that time.
Theseamountswill thereforebe more representativeof the capital held
bybanks at the implementation dateof the leverageratio.
Capital shortfallsand overall changesin regulatory capital
ratios
Table2 showsthe aggregate capital ratiosunder the current and Basel
III frameworksand the capital shortfallsif Basel III werefully
implemented, both for thedefinitionof capital and the calculationof
risk-weightedassetsasof 30 June 2011.
Ascomparedtocurrent CET1,theaverageCET1capitalratio ofGroup1
bankswouldhavefallenby nearlyone-third from 10.2% to 7.1% (a
declineof 3.1percentage points) whenBasel III deductionsand
risk-weightedassetsaretaken intoaccount.
Thereduction in theCET1 capital ratio of Group 2banksis smaller
(from 10.1%to 8.3%), whichindicatesthat the new frameworkhas
greater impact on larger banks.
Resultsshow significant variation acrossbanksasshown in Chart 1.
Thereduction in CET1ratios is driven by thenew definition of eligible
capital, by deductionsthat werenot previouslyapplied at the common
equitylevel of Tier 1capital in most jurisdictions(numerator) and by
increasesin risk-weightedassets(denominator).
Banks engagedheavily in trading or counterparty credit activitiestend
toshowthe largest denominator effectsastheseactivitiesattract
substantivelyhigher capital chargesunder the new framework.
Tier 1capital ratiosof Group 1banks wouldon averagedecline4.1
percentagepointsfrom 11.5% to 7.4%, and total capital ratiosof this
samegroup woulddeclineon averageby 5.6percentagepointsfrom
14.2% to 8.6%.
As withCET1, Group 2 banks show a more moderatedecline in Tier 1
capital ratiosfrom 10.9% to8.6%, and a declinein total capital ratios
from 14.3% to10.6%.
TheBasel III frameworkincludesthefollowingphase-in provisionsfor
capital ratios:
For CET1,thehighest form of lossabsorbing capital, theminimum
requirement will be raisedto4.5% and will be phased-in by 1January
2015;
For Tier 1capital, the minimum requirement will be raised to6.0% and
will be phased-in by1January2015;
For total capital, theminimum requirement remainsat 8.0%;
Regulatoryadjustments(ie possiblystrictersetsof deductionsthat
applyunder Basel III) will be fullyphased-inby 1January 2018;
An additional 2.5% capital conservation buffer abovethe regulatory
minimum capital ratios, whichmust be met with CET1, will be
phased-in by 1January 2019;and
Theadditional lossabsorbencyrequirement for G-SIBs, which ranges
from 1.0% to 2.5%, will be phased in by 1January2019.
It will be applied asthe extension of thecapital conservation buffer and
must be met with CET1.
TheAnnex includesa detailed overview of all relevant phase-in
arrangements.
Chart 2 and Table2 provideestimatesof the amount of capital that
Group 1and Group 2 bankswouldneed between 30June 2011and 1
January 2019in addition to the capital theyalreadyheld at thereporting
date, in order tomeet the target CET1, Tier 1,and total capital ratios
under Basel III assuming fullyphased-in target requirementsand
deductionsasof 30June 2011.
Under theseassumptions,the CET1capital shortfall for Group 1banks
with respect to the 4.5% CET1 minimum requirement is€38.8billion.
TheCET1shortfall withrespect to the 4.5% requirement for Group 2
banks,wherecoverageofthesectorisconsiderablysmaller,isestimated
at €8.6 billion.
For a CET1 target of 7.0% (ie the 4.5% CET1 minimum plusthe 2.5%
capital conservation buffer, plusany capital surcharge for G-SIBsas
applicable),Group 1banks‘shortfall is€485.6billionandGroup2banks‘
shortfall is €32.4 billion.
Thesurchargesfor G-SIBs are a bindingconstraint on 24 of the28
G-SIBs included in this Basel III monitoring exercise.
As a point of reference, the aggregatesum of after-taxprofitsprior to
distributionsfor Group 1and Group 2banks in the same samplewas
€356.6billion and €35.6 billion, respectively in thesecond half of 2010
andthe first half of 2011.
Assuming the4.5% CET1minimum capitalrequirementswerefullymet
(ie, there wereno CET1 shortfall), Group 1bankswouldneed an
additional €66.6 billion to meet the minimum Tier 1capital ratio
requirement of 6.0%.
Assuming banks alreadyhold 7.0% CET1capital, Group 1banks would
need and an additional €221.4billionto meet the Tier 1capital target
ratio of 8.5% (ie the6.0% Tier 1minimum plusthe 2.5% CET1capital
conservation buffer), respectively.
Group 2banks wouldneed an additional €7.3billion and an additional
€16.6billion tomeet theserespectiveTier 1capital minimum and target
ratio requirements.
AssumingCET1andTier1capitalrequirementswerefullymet(ie,there
werenoshortfallsin eitherCET1orTier 1capital), Group 1bankswould
needan additional€119.3billion tomeet theminimum total capital ratio
requirement of 8.0% and an additional €223.2billionto meet the total
capital target ratio of 10.5% (ie the8.0% Tier 1minimum plusthe 2.5%
CET1capital conservationbuffer), respectively.
Group 2banks wouldneed an additional €5.5billion and an additional
€11.6billion to meet theserespectivetotal capital minimum and target
ratio requirements.
As indicatedabove, no assumptionshavebeen madeabout bank profits
or behavioural responses, such aschangesbalancesheet
composition, that will serve to ameliorate the impact of capital shortfalls
over time.
reduction in Group 2 bank grossCET1.
Impact of the definition of capital on Common Equity Tier 1
capital
As noted above, reductionsin capital ratios under theBasel III
frameworkare attributed in part tocapital deductionsnot previously
appliedat the common equitylevel of Tier 1capital in most
jurisdictions.
Table3 showsthe impact of variousdeduction categorieson the gross
CET1capital (ie, CET1beforedeductions) of Group 1and Group 2
banks.
In the aggregate, deductionsreducethegrossCET1of Group 1banks
under the Basel III frameworkby 32.0%.
Thelargest driver of Group 1bank deductionsisgoodwill, followedby
combineddeferred tax assets(DTAs) deductions, and intangiblesother
than mortgage servicingrights.
ThesedeductionsreduceGroup 1bank grossCET1by15.4%, 4.9%, and
3.6%, respectively.
Thecategorydescribedasother deductionsreducesGroup 1bank gross
CET1by 3.0% and pertain mainlyto deductionsfor provision shortfalls
relativetoexpectedcredit lossesand deductionsrelatedtodefined
benefit pension fund schemes.
Holdingsof capital of other financial companiesreducethe CET1of
Group 1banksby 2.9%.
Thecategory―Excessabove15%‖ referstothedeductionof theamount
bywhichtheaggregate of the three itemssubjecttothe 10% limit for
inclusionin CET1 capital exceeds15%of a bank‘sCET1, calculated
after all deductionsfrom CET1.
These15% threshold bucket deductionsreduce Group 1bank gross
CET1by 2.1%. Deductionsfor MSRsexceedingthe 10% limit have a
minor impact on Group 1CET1.
DeductionsreducetheCET1 ofGroup 2banksby26.9%. Goodwillisthe
largest driver of deductionsfor Group 2 banks, followedby holdingsof
thecapital of other financial companies, and combined DTAs
deductions.
ThesedeductionsreduceGroup 2bank CET1by10.5%, 4.4%, and
4.3%, respectively.
Other deductions,whichare driven significantlyby deductionsfor
provision shortfallsrelative to expectedcredit losses, result in a 3.5%
Deductions for intangibles other than mortgage servicing rights and
deductions for itemsin excess of the aggregate 15% threshold basket
reduceGroup 2 bank grossCET1by 2.5% and 1.8%, respectively.
Deductionsfor mortgage servicingrightsabovethe 10% limit have no
impact on Group 2 banks.
Changesin risk-weighted assets
Overall results
Reductionsin capital ratiosunder the BaselIII frameworkare also
attributedto increasesin risk-weightedassets.
Table4providesadditionaldetail on thecontributorstotheseincreases,
toincludethefollowingcategories:
Definition of capital:
Thesecolumns measurethe change in risk-weighted assetsasa result of proposed
changesto the definition of capital.
Thecolumn heading ―other‖includesthe effectsof lowerrisk-weighted
assetsfor exposuresthat arecurrentlyincludedin risk-weightedassets
but receivea deduction treatment under Basel III.
Thecolumn heading―50/50‖ measuresthe increasein risk-weighted
assetsapplied to securitisation exposurescurrentlydeducted under the
Basel II framework that are risk-weightedat 1250% under Basel III.
Thecolumn heading―threshold‖ measuresthe increasein
risk-weightedassetsforexposuresthat fall belowthe10%and15%limits
for CET1 deduction;
Counterparty credit risk (CCR):
This column measurestheincreasedcapital chargefor counterparty
credit risk and thehigher capital charge that resultsfrom applying a
higher asset valuecorrelationparameter againstexposurestofinancial
institutionsunder the IRB approachestocredit risk.
Not included in CCR are risk-weightedasset effectsof capital charges
for exposuresto central counterparties (CCPs) or anyimpact of
incorporatingstressedparameters for effectiveexpectedpositive
exposure (EEPE);
Securitisation in the banking book:
This column measurestheincreasein the capital chargesfor certain
typesof securitisations(eg, resecuritisations)in the banking book;and
Trading book:
This column measurestheincreasedcapital chargesfor exposuresheld
in thetrading book toincludecapital requirementsagainst stressed
value-at-risk,incrementaldefault risk, and securitisationexposuresin
thetradingbook.
Risk-weightedassetsfor Group 1banks increaseoverall by 19.4% for
Group 1banks.
This increaseis toa largeextent attributedto higher risk-weighted
assetsfor counterparty credit risk exposures,whichresult in an overall
increasein total Group 1bank risk-weightedassetsof 6.6%.
Thepredominant driver behind this figure is capital chargesfor
counterpartycredit risk asthehigher asset value correlation parameter
resultsin an increasein overall risk-weightedassetsof only 1.0%.
Tradingbook exposuresand securitisationexposurescurrentlysubject
todeduction under Basel II, alsocontribute significantlytohigher
risk-weightedassetsat Group 1banksat 5.2% for each category.
Securitisationexposurescurrentlysubject to deduction, counterparty
credit risk exposures, and exposuresthat fall below the10% and 15%
CET1eligibility limitsare significant contributorstochangesin
risk-weightedassetsfor Group 2 banks.
Changesin risk-weightedassetsshowsignificant variationacrossbanks
asshownin Chart 3.
Again, these differencesare explainedin largepart by theextent of
banks‘counterpartycredit risk and trading book exposures, which
attract significantlyhigher capital chargesunder Basel III ascompared
tocurrent rules.
Impact of the revisions to the Basel II market risk framework
Table5 showsfurther detail on theimpact of the revised tradingbook
capital chargeson overall risk-weightedassetsfor Group 1banks.
Thesample analysed here issmallerthan theone in Table4asnot all
theGroup 1banksprovided data on market risk exposures.
For thisreduced sample of banks, tradingbook exposures resultedin a
6.1% increasein total risk-weightedassets.
Themain contributorsto this increaseare stressed value-at-risk
(stressedVaR), non-correlationtrading securitisationexposuressubject
thestandardisedmeasurement method (column heading―SMM
non-CTP‖), and theincremental risk capital charge(IRC), which
contribute2.2%, 1.7%, and 1.4%.
Lesssignificant contributors totheincreasein overall risk-weighted
assetsare capital chargesfor correlation tradingexposures.
Increasesin risk-weightedassetsare partiallyoffset by effectsrelated to
previouscapital charges24 and changestothe standardised
measurement method (SMM).
Impact of the ruleson counterparty credit risk (CVA only)
Credit valuation adjustment (CVA) risk capital chargeslead to a 7.3%
increasein total RWAfor thesubsampleof 77bankswhichprovidedthe
relevant data (6.6% on thefull Group 1sample).
Alargerfractionofthetotaleffect isattributabletotheapplicationof the
standardisedmethod thantotheadvanced method.
Theimpactson Group 2banksare smallerbut still significant, adding
up toan overall 2.9% increasein RWAover a subsample of 63banks
(2.2% for the full Group 2 sample), totallyattributableto the
standardisedmethod. Further detailed are provided in Table6.
Findingsregarding the leverage ratio
Theresultsregarding theleverageratioare provided using two
alternativemeasuresof Tier 1capital in the numerator:
BaselIII Tier 1,whichisthefullyphased-inBaselIII definition ofTier 1
capital, and Current Tier 1, whichisTier 1capital eligibleunder the
Basel II agreement (thephase-inperiod of Basel III begins in 2013).
Total exposures of Group 1banks accordingtothedefinition of the
denominatorof theleverageratio were€59.2 trillion while total
exposuresfor Group 2 bankswere€5.6 trillion.
Oneimportant element in understandingtheresultsof theleverageratio
section istheterminologyused to describea bank‘sleverage.
Generally, when a bank is referred to ashaving more leverage, or being
more leveraged, this refers toa multiple(eg 33times) asopposed toa
ratio (eg 3%).
Therefore,a bank witha high level of leveragewill have a low leverage
ratio.
Chart 4presentsleverageratiosbased on Basel III Tier 1and current
Tier 1capital.
Thechart providesthis information for all banks, Group 1banks and
Group 2banks.
Theweightedaveragecurrent Tier 1leverageratiofor all banks is 4.5%.
For Group 1banks,it is somewhat lowerat 4.4% while it is 5.0% for
Group 2banks.
TheaverageBasel III Tier 1leverageratiofor all banks is 3.5%. The
BaselIII averagefor Group 1banksis3.4%, and theaverageforGroup 2
banksis 4.2%.
Theanalysisshowsthat Group 2banksare generallylessleveragedthan
Group 1banks, and thisdifferenceincreasesunder Basel III when the
requirementsare fullyphased in.
It is likely that a portion of thiseffectis due tothe changesin the
definitionof capital, which, asseen in Section 2, are likely toaffect
Group 1banksto a greater extent than Group 2 banks.
Under the current Tier 1leverageratio, 17 bankswouldnot meet the 3%
Tier 1leverageratiolevel, includingsix Group 1banks and 11Group 2
banks.
Under the Basel III Tier 1leverageratio, 63 bankswouldnot meet the
3% Tier 1leverageratiolevel, including36 Group 1banksand 27Group
2banks.
Liquidity
Liquidity coverage ratio
Oneof thetwostandardsintroduced bythe Committeeisa 30-day
liquiditycoverageratio (LCR) whichis intendedtopromoteshort-term
resiliencetopotential liquiditydisruptions.
TheLCR hasbeen designedtorequire global banks tohave sufficient
high-qualityliquid assetsto withstanda stressed 30-dayfunding
scenario specifiedby supervisors.
TheLCR numerator consistsof a stock of unencumbered, high quality
liquidassetsthat must be availabletocover any net outflow, whilethe
denominatoris comprised of cash outflowslesscashinflows(subject to
a cap at 75% of outflows) that are expectedto occur in a severe stress
scenario.
103Group 1and 102Group 2banks providedsufficient data in the 30
June2011Basel III monitoring exercisetocalculatethe LCR according
tothe BaselIII liquidityframework.
TheweightedaverageLCR was90% for Group 1banks and 83% for
Group 2banks. Theseaggregate numbersdo not speak totherangeof
resultsacrossthe banks.
Chart 5below givesan indicationof thedistribution of bank results;the
thick red lineindicatesthe 100% minimum requirement, the thin red
horizontal linesindicatethemedian for the respectivebank group.
45% of thebanksin the BaselIII monitoring samplealreadymeet or
exceedthe minimum LCR requirement and 60% have LCRs that are at
or above75%.
For thebanks in thesample, Basel III monitoringresultsshow a
shortfall ofliquidassetsof €1.76trillion(whichrepresentsapproximately
3%of the€58.5trilliontotal assetsof theaggregate sample) asof 30June
2011, if banksweretomake nochangeswhatsoevertotheir liquidityrisk
profile.
This number isonlyreflectiveof the aggregate shortfall for banks that
are below the 100% requirement and doesnot reflect surplusliquid
assetsat banks above the100% requirement.
Banks that are below the 100% required minimum have until 2015to
meet the standard by scalingback businessactivitieswhichare most
vulnerable toa significant short-term liquidityshock or by lengthening
theterm of their fundingbeyond 30days.
Banks may alsoincreasetheir holdingsof liquid assets.
Thekey componentsof outflowsand inflowsare shownin Table7.
Group 1banksshow a notablylarger percentageof total outflows, when
comparedtobalancesheet liabilities,than Group 2 banks.
Thiscanbeexplainedbytherelativelygreatercontribution of wholesale
fundingactivitiesand commitmentswithin theGroup 1sample,
whereas,for Group 2 banks, retail activities, which attract much lower
stressfactors,comprise a greater share of funding activities.
Cap on inflows
Thecomposition of high qualityassetscurrentlyheld at banks is
depictedin Chart 6.
Themajorityof Group 1and Group 2banks‘holdings, in aggregate, are
comprised of Level 1assets;howeverthe sample, on whole, shows
diversityin their holdingsof eligibleliquid assets.
WithinLevel 1assets,0% risk-weightedsecuritiesissuedor guaranteed
bysovereigns,central banks and PSEs, and cash and central bank
reservescomprisingsignificant portionsof thequalifying pool.
Comparatively, within theLevel 2assetclass, themajorityof holdingsis
comprised of 20% risk-weightedsecuritiesissued or guaranteed by
sovereigns, central banksor PSEs, and qualifying coveredbonds.
Cap on Level 2 assets
€121billion of Level 2 liquid assetswereexcluded becausereported
Level 2assetswereinexcessofthe40% capascurrentlyoperationalised.
34banks currentlyreported assetsexcluded, of which24 (11% of the
total sample) had LCRs below 100%.
Chart 7 combinestheaboveLCR componentsby comparing liquidity
resources(buffer assetsand inflows) to outflows.
Note that the€800billiondifferencebetweentheamount ofliquidassets
andinflowsand theamount of outflowsandimpact of thecapdisplayed
in the chart issmaller than the€1.76trilliongrossshortfall noted above
asit is assumed here that surplusesat onebank can offset shortfallsat
other banks.
In practice the aggregate shortfall in theindustry is likelytolie
somewherebetweenthesetwonumbersdependingon how efficiently
banksredistributeliquidityaround thesystem.
Net stable funding ratio
Thesecond standard is thenet stablefunding ratio(NSFR), a
longer-term structural ratio toaddressliquiditymismatchesand provide
incentivesfor bankstouse stablesourcesto fund their activities.
103Group 1and 102Group 2banks providedsufficient data in the30
June2011BaselIII monitoringexercisetocalculatetheNSFR according
tothe BaselIII liquidityframework.
46% of thesebanksalready meet or exceedtheminimum NSFR
requirement, withthree-quartersat an NSFR of 85% or higher.
TheweightedaverageNSFR for each of the Group 1bank and Group 2
samplesis 94%.
Chart 8 shows the distribution of resultsfor Group 1and Group 2 banks;
the thick red line indicatesthe 100% minimum requirement, the thin red
horizontal linesindicatethemedian for the respectivebank group.
Theresultsshowthat banks in the samplehad a shortfall of stable
fundingof€2.78trillionat theendofJune2011, if banksweretomakeno
changeswhatsoevertotheir fundingstructure.
This number isonlyreflectiveof the aggregate shortfall for banks that
are below the 100% NSFR requirement and doesnot reflect anysurplus
stablefunding at banks above the 100% requirement.
Banks that are below the 100% required minimum have until 2018to
meet thestandard and can takea number of measurestodo
so,includingby lengtheningtheterm of their fundingor reducing
maturitymismatch.
It should be noted that the shortfallsin the LCR and the NSFR are not
necessarilyadditive,asdecreasingtheshortfall in onestandard may
result in a similar decreasein the shortfall of the other
standard, dependingon thestepstaken to decreasetheshortfall.
Basel 3 May 2012
EBA, ESMA and EIOPA publish tworeportson Money
Laundering
TheJoint Committeeof thethree European SupervisoryAuthorities
(EBA, ESMA and EIOPA) haspublishedtworeportson the
implementationofthethirdMoneyLaunderingDirective[2005/ 60/ EC]
(3MLD).
The―Report on the legal, regulatory and supervisoryimplementation
acrossEU MemberStatesinrelationtotheBeneficialOwnersCustomer
DueDiligencerequirements‖analysesEU MemberStates‘current
legal, regulatory and supervisoryimplementationof the anti - money
laundering/ counterterrorist financing(AML/CTF) frameworksrelated
tothe application bydifferent credit and financial institutionsof
Customer Due Diligence(CDD) measureson their customers‘
beneficial owners.
Thereport sought to identify differencesin the implementation of the
Directiveand to determine whethersuch differencescreatea gap in the
EU AML/ CTF regime that could be exploited by criminalsfor money
launderingand terrorist financingpurposes.
The―Report on the legal and regulatory provisionsand supervisory
expectationsacrossEU Member Statesof Simplified Due Diligence
requirementswherethe customersare credit and financial institutions‖
providesan overview of EU Member States‘legal and regulatory
provisionsand supervisoryexpectationsin relationto the applicationof
SimplifiedDue Diligence(SDD) requirementsof the 3MLD.
Thereport focusesexclusivelyon oneparticularsituationof lowrisk
whereSDD is applicable,namely wherethe customer isa credit or
financial institutionsituated in a EU/ EEA state or in a country that
imposesequivalent AML/CFT requirements.
Both reportscome totheconclusionthat there are significant
differencesin the implementationacrosstheEU MemberStates,and
that some of thesedifferencescould createundesirableeffectson the
common EuropeanAnti MoneyLaundering Regime.
Thereportsfind that some of thesedifferencesare not duetothe
Directive‘sminimum harmonisation approach, but insteadappear to
stem from different national interpretationsof the Directive‘s
requirements.
EIOPA - European Insuranceand Occupational PensionsAuthority
Both reportsalsocall on theEuropean Union to consider addressing
theseproblems.
The Joint Committee
TheJoint Committeeis a forum for cooperationthat wasestablished on
1stJanuary2011, withthegoal of strengtheningcooperationbetweenthe
European BankingAuthority (EBA), European Securitiesand Markets
Authority(ESMA) andEuropeanInsuranceand Occupational Pensions
Authority (EIOPA), collectivelyknown asthe threeEuropean
SupervisoryAuthorities (ESAs).
Throughthe Joint Committee, the three ESAscooperateregularlyand
closelyand ensure consistencyin their practices.
In particular, theJoint Committeeworksin theareasof supervisionof
financial conglomerates,accounting and auditing, microprudential
analysesof crosssectoraldevelopments, risksand vulnerabilitiesfor
financial stability, retail investment productsand measurescombating
moneylaundering. In addition tobeing a forum for cooperation, the
Joint Committee alsoplays an important role in the exchangeof
information withthe European Systemic RiskBoard (ESRB) and in
developingtherelationshipbetweentheESRB and the ESAs.
InterestingAbbreviations
AML – Anti MoneyLaundering
AMLTF – Anti-MoneyLaunderingTaskForce of the EBA, ESMA and
EIOPA
AML Committee– The Joint Committeeof theEuropean Supervisory
Authorities‘Sub CommitteeonAnti MoneyLaundering
CDD - Customer Due Diligence
CPMLTF – EU CommitteeonthePreventionofMoneyLaunderingand
Terrorist Financing
CTF – Counter Terrorist Financing
EBA - European BankingAuthority
EC – European Commission
EEA - European EconomicArea
EDD – Enhanced Due Diligence
ESMA - European Securitiesand MarketsAuthority
EU – European Union
FATF – FinancialAction Task Force
ID - Identity
ML – MoneyLaundering
MS – Member Stateof the European Union
SDD - Simplified Due Diligence
TF – Terrorist Financing
UBO – Ultimate BeneficialOwner
WG – WorkingGroup
3rd MLD - Third MoneyLaunderingDirective(2005/60/ EC)
BIS - Peer review of supervisory authorities' implementation of
stresstesting principles-April 2012
Stresstestingisanimportant toolused bybankstoidentify thepotential
for unexpectedadverse outcomesacrossa rangeof risks and scenarios.
In 2009, the Committeereviewedtheperformanceof stresstesting
practicesduring thefinancialcrisisand publishedrecommendationsfor
banksand supervisorsentitled Principlesfor sound stresstesting
practicesand supervision.
As part of its mandateto assessthe implementationof standardsacross
countriesand tofoster thepromotion of good supervisory practice, the
Committee'sStandardsImplementationGroup (SIG) conducted apeer
review during 2011of supervisoryauthorities' implementationof the
principles.
Thereview foundthat stresstestinghasbecome akey component of the
supervisoryassessment processaswell asa tool for contingency
planningand communication.
Countriesare, however,at varying stagesof maturityin the
implementationof theprinciples;asa result, more workremainstobe
done to fullyimplement the principlesin many countries.
Overall, the review found the 2009stresstestingprinciplesto be
generallyeffective.
TheCommittee, however, will continuetomonitor implementationof
theprinciplesand determinewhether,in thefuture, additionalguidance
might be necessary.
Peer review of supervisory authorities‘ implementation ofstress
testing principles, April 2012
Executive summary
This report summarisestheBasel Committee‘speer review on how
supervisoryauthoritieshave implemented the Committee‘s2009
Principlesfor sound stresstestingpracticesand supervision.
Theglobal financial crisis and the 2009stresstesting principles
Stresstestingis an important tool for bankstoidentify unexpected
adverseoutcomesacrossa rangeof risks. It plays a particularly
important role in:
- providingforward-lookingassessmentsof risk;
- overcominglimitationsof modelsand historicaldata;
- supportinginternaland external communication;
- feeding intocapital and liquidityplanningprocedures;
- informing the settingof banks‘risk tolerance;and
- facilitating thedevelopment of risk mitigation or contingencyplans
acrossa range of stressedconditions.
In 2009, the Committeereviewedtheperformanceof stresstesting
practicesduring thecrisisand found weaknessesin variousareas.
Basedon thefindings,and aspart of itseffortsto incorporatelessons
from thecrisisin supervisorypractices,the Committee published
recommendationsfor banks and supervisorsentitledPrinciplesfor
soundstresstestingpracticesand supervision.
Theguidance setsout a comprehensiveset of principlesfor the sound
governance,designandimplementationofstresstestingprogrammesat
banks.
Theprinciplesalsoestablishedhigh-levelexpectationsfor therole and
responsibilitiesof supervisorsin evaluatingstresstestingpractices.
Scope of the review
As part of its mandateto assessthe implementationof standardsacross
countries,during 2011theCommittee's StandardsImplementation
Group undertook a peer review of supervisory authorities‘
implementationof theprinciples.
Thereview wasconducted via an off-sitesurvey of supervisory
authorities.
All Committeemember countries and one non-member country
participatedin the review.
Thereview focused primarily on progressin supervisoryprocessesused
In contrast, a few countries wereconsideredtobe advanced.
toimplement the principles.
It wasnot designedtoprovideadetailedcountry-by-country assessment
or toassessthe adequacyof banks' stresstestingprogrammes.
Increasingly, supervisorystresstestsarebeing used toset minimum
capital requirements, determineexplicit capital buffersor tolimit
capital distributionsby banks.
This recent development wasnot extensively consideredin the
principlesand asa result wasnot a key focusof the review.
Key findings
Progressoverview
In the period since the principleswere issued, stresstesting has become
a key component of the supervisory assessment processas well as a tool
for contingencyplanningand communication.
Many of the countriesparticipatingin this peer review havebeen
workingtoimplement and refinestresstestingframeworksand
methodologies at thesametime astheir economiesand banking
systemshave been affectedby a high degree of global economic and
financial uncertainty.
Althoughmanysupervisoryauthoritiesandbankshadoperationalstress
testingframeworksin place, existingguidanceand ruleshad tobe
revisedand new expectationsput in placeto broaden and deepen stress
testingcapabilitiesat both banksand supervisory authorities.
Thereviewfound that countriesareat varyingstagesof maturity in their
implementationof theprinciples.
Nearlyhalf of thecountries wereconsideredtobe at an earlystage.
Thesecountriesshowedsome progresstowardimplementingthe
principles,but theymay not haveissued or finalisedprudential
requirementson enterprise-widestresstestingsincethe principleswere
published.
Theygenerallyhad not conducted regular on-siteor off-sitereviews
otherthanin thecontext ofrisk-specificmodellingrequirementssuchas
for market risk, and had conducted industry-wide stresstests
infrequently, or onlyaspart of International MonetaryFund Financial
SectorAssessment Program (FSAP) reviews.
internaltask forcesfor stresstesting.
For thesecountries,the surveyresponsesprovided evidenceof a
rigorousregular review processthat included a combination of on-site
and off-siteassessments,some review and feedbackon detailed stress
testingmodelsusedby banks, evidenceof follow-upactionsand a
well-embeddedsupervisorystresstestingprogrammethat wasnot
limitedtoexternallyimposedscenarios.
Theremainder of countries werefound tofall betweentheabove two
groups.
Thesecountrieshave issuedsome formal requirementsor guidance
consistent withthe principles,are generallyperformingregular
supervisorystresstestson largebanksin their jurisdictionsand are
reviewingstresstestingin thecontext of annual internal capital
adequacyassessment process(ICAAP) reviewsand specific risk
reviews.
Thesecountrieshave more todo in deepeningtheir stresstesting
programmes,includingissuingupdated requirementsand conducting
more detailed on-siteand off-sitereviewsof banks' stresstesting
capabilities.
Remaining challengesand examplesof good practices
Themost commonoverall supervisoryapproachwasto conduct some
reviewof banks' stresstestingaspart of regularICAAP assessmentsand
in thecontext of specific riskswhereongoingsupervisory review of
exposure modellingis now routine, notablymarket and liquidityrisks.
Conductingmore detailed, comprehensivereviewsof banks'
enterprise-widestresstesting governanceand modellingasenvisioned
in theprinciplesrequires expert skillsand resourcing at both banksand
supervisors,and asa result hasnot yet becomestandard practice in
manycountries.
Asignificant development in the last several yearshasbeen the
increaseduse of supervisorystresstests.
Amajorityof countriesnow regularlyconduct mandated stresstests
with prescribedscenarios acrossthe largebanksin their
jurisdictions,although for some countries, thisis limitedto theFSAP
stresstests.
Anumber of countriesnoted theresource-intensivenature of
industry-wide stresstests.
In particular, themore advancedcountriesnote that resourcing at both
supervisoryauthoritiesand bankstosupport stresstestingis
challenging, with a trend towardsestablishingspeciallystaffed unitsor
andmagnitudeof keyrisks.
Many, however, found that these exercises have been helpful in terms of
enhancing the visibility of stress testing and providing a structured basis
for dialoguewithbanks on their capabilities.
It wasnotedthat industrydialoguearoundmandatedstresstestshadled
toimprovementsin bank capabilities.
Thefollowingtypesof practicesare alsoassociatedwithrelatively more
advancedcountries:
- plansfor, or completed horizontal or thematicreviewsof, stress
testingeither at an enterprise-widelevel or for specificportfolios;
- engagement withboards of directorson stresstestingscenarios and
governance;
- review of detailed evidenceof howbanksare using stresstest
outcomesin their decision-makingand risk-appetitesetting;
- well-articulatedplansfor improving their stresstesting supervision
programmes;
- involvement of both generalist and specialist supervision staff; and
- publicationof the resultsand provision of consistent feedback to
banks.
While not a primary focusof thepeer review, many countriesprovided
viewson areasfor improvement in stresstestingpracticesat banks.
Theseresponsesfocusedfairlyconsistentlyonareassuchasgovernance
andtheuse of stresstestingin bank decision-making, data and
information technologyinfrastructure, severityof scenariosand
firm-widemodellingchallenges.
Thereview found theprinciplesto be generallyeffective.
TheCommittee, however, will continuetomonitor implementationof
theprinciplesand determinewhether,in thefuture, additionalguidance
might be necessary.
Introduction
Stresstestingis an important tool for banks toidentify unexpected
adverseoutcomesacrossa rangeof risks.
Thefinancial crisishighlighted significant weaknessesin banks' stress
testingprogrammesthat contributed to failurestoidentify thenature
As a result, the Committee engaged with the industry in examining
stress testing practices and, in May 2009, the Committee published
recommendations for banks and supervisors entitled Principles for
soundstresstestingpracticesand supervision.
Theguidance set out a comprehensive set of principlesfor thesound
governance,designandimplementationof stresstestingprogrammesat
banks.
Theprinciplesestablishedexpectationsfor the roleand responsibilities
of supervisorsin evaluatingstresstesting practices. Overall, the
guidanceincludesfifteenprinciplesfor banksand six principlesfor
supervisors.
As part of its mandateto assessthe implementationof its standards
acrosscountries,the Committee'sStandards ImplementationGroup
undertook a peer review of supervisoryauthorities‘implementation of
theprinciples.
Theobjectivesof thisreview wereto:
- assesstheextent towhichtheprincipleshavebeenimplementedin a
rigorousand consistent manner acrosstheCommittee's member
authorities;
- identify and providefeedback on factorsthat aremost critical to the
effectiveimplementationof the principles;and
- assessthe effectivenessof theprinciplesthemselves.
An important element of thereview wasthe context in whichthe
principlesare beingimplemented.
Many of the countriesparticipatingin this peer review have been
workingtoimplement and refinestresstestingframeworksand
methodologies at thesametime their economiesand banking systems
havebeen affected by a high degreeof global economicand financial
uncertainty.
Althoughmanysupervisoryauthoritiesandbankshadoperationalstress
testingframeworksin place, existingguidanceand ruleshad tobe
revisedand new expectationsput in placeto broaden and deepen stress
testingcapabilitiesat both banksand supervisors.
This is beingdone in a stressedenvironment and is alsobeing
conducted at a time when stresstesting infrastructure, includingthe
abilitytocollect appropriatedata, developmodelsandaggregate
results,is evolving.
As a result, the current environment hasprovided a useful earlytest of
how countriesare putting theprinciplesintopractice.
Morebroadly, it wasevident that countriesare implementingstress
testingregimesand activitiesin different ways that may reflect their
individualsituationsandnot all will followthesame progression or path
in implementingtheprinciples.
Thereview wasintended todeliver feedback on good supervisory
practice tohelp supervisorsimplement standardsmore effectively.
Indeed, several countries havereported significant progresssubsequent
tothe completion of thepeer review survey, particularlywithregard to
supervisorystresstestingpractices.
Methodology
Thepeer review wasconducted through a questionnairewhichwas
distributedtoCommitteemember countriesin September 2011.
Analysis of the responseswasconducted by a workinggroup of
representativesofsupervisoryauthoritieswithexpertiseinstresstesting.
The questionnaire focused primarily on the implementation activities of
supervisors and consisted of both factual multiple choice questions and
free-form responses.
Thereview team used the information providedby eachcountry
and, whererelevant, sourcedocumentsdemonstrating its
implementationof the principles,to assessand compare theprogress
madeacrosscountries.
Giventheoff-siteandhigh-levelnatureof thereview,it wasnot intended
toproducea definitiveassessment of individual countries'
implementationof theprinciples,but, rather, to allowan overall view of
progressacrosscountries.
Adetailed report wasprovided tothe StandardsImplementation Group
andtothe Committee.
The review focused primarily on the implementation of principles 16-21
for supervisors, asit wasnot within the scope of the peer review toassess
complianceby bankswithprinciples1-15on stresstesting practices.
However,countrieswereinvited to provide their viewson theeaseand
effectivenessof implementation for each of theprinciplesfor banksin
their jurisdiction.
In their responses, supervisory authoritieswereaskedtofocuson
supervisionof thelargestbanksin their jurisdiction, although somealso
addressedtheir supervisoryexpectationsfor stresstesting at smaller
banks.
Assessment of principlesfor supervisors
Overall maturity of implementation
For purposesof assessingand comparingimplementation of the
principles,participatingcountries werestratified asbeing in an
early, intermediateor advanced state of implementation.
Theseassessmentswerebased on indicatorsof maturitydeveloped for
thispurposebythereviewteam, aswellasthequalityandthoroughness
of the questionnaireresponses.
Countriesin theearlycategory (nearlyhalf of respondents) showedsome
progresstowardsimplementingtheprinciples;however, theymaynot
haveissued or finalised prudential requirementson enterprise-wide
stresstestingsincethe principleswerepublished.
Thesecountriesgenerallyhad not conducted regular on-site or off-site
reviewsother than in the context of risk-specific modellingrequirements
suchasfor market risk,andhaveconductedindustry-widestresstests
infrequently, or onlyaspart of FSAP reviews.
In contrast, a few countries wereclassifiedasadvanced. For these
countries,the review team saw evidenceof a rigorousregular review
processthat included a combination of:
- on-siteand off-siteassessments;
- some review and feedback on detailedstresstestingmodelsused by
banks;
- evidenceof follow-upactions;and
- a well-embeddedsupervisory stresstestingprogramme that wasnot
limitedtoFSAP or regionally-imposed scenarios.
Theremainderof countries (approximatelyhalf of respondents) fell into
theintermediatecategory.
Thesecountrieshave issuedsome formal requirementsor guidance
consistent withthe principles,weregenerallyperformingregular
supervisorystresstestson their largebanks and werereviewingstress
testingin thecontext of annual ICAAP reviewsandspecific riskreviews.
Thesecountrieshave more todo in deepeningtheir
programmes,includingissuingupdated requirementsand conducting
more detailed on-siteand off-sitereviewsof banks' stresstesting
capabilities.
Notably, several countrieshave reportedsignificant progresssubsequent
tothecompletionofthepeerreviewsurvey, particularlywith regard to
supervisorystresstestingpracticesand alsoin somecasesissuanceof
stresstestingrequirementsor guidance.
anyimpedimentstoimplementing theprinciples.
Specific areasof supervisoryactivityin relationtothe principlesare
discussed in more detail below.
Prudential framework
Thereview found that all countrieshavein placeprudential
requirementsrelatingto stresstesting.
In manycasestheserequirementswereimplementedasacomponent of
Basel II, namely theICAAP requirements, or otherwisepre-date the
principles.
In addition, a largemajorityof the respondentsstated that theyhad
issuedspecific rulesor guidanceimplementingtheprinciples.
However,approximatelyone-third of respondentshasnot issuedany
rules or guidanceon stresstesting post-2009, and thuswouldnot be
consideredtohave implemented the principlesexplicitly.
Thesecountriesrelyon other rules relatingto stresstesting, particularly
under the Basel II credit or market risk requirements.
In termsof future plans,a number of countries acrossdifferent levelsof
maturityare in theprocessof, or are planningtostrengthen or finalise
guidanceor regulations.
In some cases,key elementsof theprincipleshavebeen incorporated
intothe Pillar 2 requirementsand in other casesas(non-mandatory)
guidancefor banks.
Somecountries issuedinformal guidancebased generallyon the
principlesor on other regional guidelines.
Anumber of countriesare still in theearlyphasesof issuingprudential
expectationsfor enterprise-widestresstesting.
At least a few countries have not yet issuedrequirementsrelating to
Basel II ICAAPs, whichwasthemost common meansof implementing
theprinciples.
Other countrieshave already updated their rulesand adapted the
principlesor other guidelinesfor their owncircumstances.
Thesewouldbe consideredtohave a more mature supervision
frameworkfor stresstesting.
Afew other countrieshave issued their owngood practiceguidelines
whichincorporatetheprinciplesaswell askeyfindingsfrom
supervisoryactivitiesand industrydialogue.
Roughlythree-quartersofrespondentsreportedthat therehavenot been
regularlycovered stresstestingfor firm-widerisks,general credit risks,
However,resourcing and other supervisoryprioritieswerenoted asa
constraint by a number of other countries.
Anumber of countriesasserted that becausetheir banks or banking
systemsare not complex, some of the aspectsof the principlesare not
relevant (eg structuredproductsand highlyleveraged counterparties).
Further, banks in some jurisdictionsgenerallydo not have the
infrastructureand skillsto be ableto complywithsophisticatedstress
testingrequirements.
Supervisory review
Principle16 recommendsthat supervisorsshould make regular and
comprehensiveassessmentsof banks' stresstestingprogrammes.
Thereview found that supervisoryauthoritiesusea combination of
on-siteand off-sitereviewstoassessbanks‘stresstestingpractices.
Most countriesindicatedthat theyhaveconductedsome form of on-site
review of stresstestingat banks.
For specific risk areas(primarilymarket, liquidityand tosome extent
credit risk), there are well establishedsupervisory review programmes.
Almost three-quartersof countriesindicatedthat theyperform extensive
regular review of firm-widestresstestingpractices.
Themost common approachfor assessingfirm-widestresstestingis
through annual ICAAP reviews, which generallycover capital planning
aswell asother matters.
Given the scope of ICAAP reviews, it may be difficult toassessall of the
principlesduring a routineICAAP review.
Indeed, a few countries indicated that theyconduct horizontal or
thematic reviewsspecificallyon firm-widestresstesting includingthe
principles,whichisconsidereda more advanced practice.
Thefrequencyof on-sitereviewsof firm-widestresstesting varied
acrosscountries.
About one-third of countries conducted less-than-annual reviews (every
2-4 years) while roughly half of responding countries reported that they
conduct annual or more frequent on-site reviewsof stresstesting.
Somesupervisorshave conducted a one-timereview of theprinciples
through self-assessments,questionnaires,or benchmarkingstudies
acrossa range of banks.
In termsof thescope of supervisoryreview,supervisory activities
retail mortgagesand corporatecredit risks,market risk, bankingbook
interest rate risk and liquidityrisk.
Authoritiesreported that areassuch asoperational risk, overseas
operations,aswell asspecific portfoliossuch ascommercialproperty
and sovereign risks,receivelesscoverage.
Supervisoryauthoritiesin most countriesreported conductingannual or
more frequent review of board and senior management reportingof
stresstest results.
Use of stresstestingin loanlossprovisioningwasreviewedregularly by
about half of the countries.
Therole of stresstestingtohelp set riskappetiteand identify risk
concentrationswereareasthat werelesscommonly reviewed;thisis an
area wheresupervisoryand bank practiceis at a very earlystage.
Review of contingencyplansfor operational risk is the surveyed area
least likely tohave been assessed by supervisorsin thecontext of stress
testing.
Somecountries noted different requirementsor expectationsof stress
testing acrossbanks, mainlydependingon the banks‘systemic
importance(includingsize, complexityand relevancetoeconomy) and
risk profile.
Most emphasised that supervisorshaveproportionately different
expectationswhenconducting stresstestingreviewsof smaller banks.
Several countries(particularlythoseat the more advanced stagesof
implementationof theprinciples)indicatedthat theyareplanning to
increasetheexpectationsof smallerinstitutionswithrespect tostress
testinggoing forward.
Supervisory action
Principle17indicatesthat supervisorsshouldtakeactionondeficiencies
in banks' stresstestingprogrammes.
Thereview found that the twomost common areasfor supervisory
follow-upwereimproving governanceprocessesfor stresstesting and
useof additional (in particular, more severe) scenarios.
Many countrieseither regularlyor occasionallyimposed requirements
toimprove data or model validation processes.
Theleast common supervisory follow-upaction indicatedin the
responseswasto require thebank toreview or changelimitsor
exposures(lessthan half of the countriesreported takingthisaction
regularly).
stresstesting.
Principle19encouragessupervisorstoconsidertheresultsof stresstests
in assessingcapital adequacyand in settingprudential buffersfor capital
and liquidity.
Alargemajorityof countriesindicated that theysometimesor regularly
imposecapital or liquidityrequirementsasa result of stresstesting
deficiencies.
In particular, use of stressscenariosfor setting liquidityrequirements
appearsto be fairlywellestablished, particularlyascountries work
towardimplementingtheBasel III liquidityframework, whichis based
on stressedcashflows.
Nearlyall of thecountriesindicatedregular review of liquiditystress
testing.
Use of stresstestsfor settingminimum capital requirements,
determiningexplicit capital buffersor for limitingcapital distributions
bybanks isa more recent development that wasnot extensively
consideredin theprinciplesand asa result wasnot a key focusof the
review.
Asmall number of countriesindicated that stresstestinghasbecome a
key tool for setting or assessing capital requirements.
Somecountries haveissuednew requirementsin the past year or so
specificallyrelated totheuseof stresstestsin assessingcapital
adequacy.
While useof stressteststoset formal minimum capital requirementsis
not common, useof standard supervisorystressscenariosasa
benchmarkingtool isincreasinglyprevalent.
Othercountriestooktheviewthat stresstestresultsarejust onefactorin
assessinghow much capital is needed tooffset the risk of unexpected
losses.
In a number of countries, and even thosewithfairly advanced stress
testingsupervision programmes, stresstesting wasseen asone of several
toolsin assessingcapital adequacyand there wasa reluctancetoplace
primary relianceon stresstest scenario outcomes.
This may reflect theevolving natureof supervisory and bank practices.
Supervisory resourcing
As stresstesting is a fairlynew and specialisedarea of supervision, the
review found that resourcingand capabilitiesfor stresstesting
supervision werekeychallengesfor many supervisoryauthorities.
Onlya few countrieshave establishedunitsspecificallydedicatedto
area of focus in their future plans.
Most countriesare primarily relying on separateteamsof staff to
conduct supervisorystresstestsand, in manycases,alsotoreview stress
testingpracticesat banks.
Theseteamsalsoperform other tasksin additiontoreviewingor
conductingstresstesting.
Typically, a set of speciallytrainedsupervisorsis responsiblefor
coordinatingwith bankswithrespect to the collectionof data for stress
testingand reviewingand consolidatingthestresstest information.
Oftenan inter-departmental team isused to conduct thestresstests.
In general, it wasnotedthat staff withavariety of different backgrounds
canbeuseful in stresstesting, includingmacro-surveillance
economists,risk specialistsand modellingexperts, aswell asgeneralist
supervisorswhoaremost familiarwithindividualinstitutionsor
accountingexperts.
Similarly, most countriesutiliseboth risk specialistsand generalist
supervisorsin reviewingstresstesting practicesat banks.
In most countries, generalist supervisorsare involved in the review of
stresstestingpractices;however, theyarenot generallyinvolved in
conductingsupervisorystresstests.
At the same time, some countriesnoted that wherestresstesting is
allocatedtoa separate unit, it can bemore difficult to ensure that stress
testingisembeddedwithin routinesupervisionand that stresstest
outcomesare understood and used by the generalist supervisors.
This wasseen asan evolving challenge.
Themore advancedcountries, in particular, noted a general lack of
specialisedstresstesting resources.
Indeed, somecountriesfound that prioritisationof supervisoryworkisa
major issueaskey individualsinvolved oftenhaveother responsibilities.
Most countriesindicatedtheyhad establishedsome form of training
programmeon stresstestingfor supervisors.
In many cases,the trainingwasof a quitegeneral nature and in some
caseslimitedtopresentation of the resultsof supervisorystresstestsor
high-level discussion in the context of introductorytraining on Pillar 2
approaches.
A few countries provide quite advanced training programmes, including
case studies, and some offer training to other countries' supervisorsor to
banksin their jurisdiction.
Not surprisingly, severalcountriesnotedthat stresstestingtrainingisan
consideredtobeamoreadvanced practicefor supervisors,asit requires
Supervisory stresstesting
Principle20recommendsthat supervisorsshould consider
implementingstresstest exercisesbased on common scenarios.
It is clearthat there has been a significant increasein the use of
supervisorystresstestsin recent years.
In fact, all countriesindicatedthat theyconduct some form of
supervisorystresstest.
As a result, progressin this area canbe considered more advanced
generallythan some other aspectsof theprinciples.
Portfolio-levelstresstestswerereported by more than half of the
countries.
In recent years, this hasincluded specificstresstestson, for
example,housing loanportfolios, consumer debt, sovereign risksand
liquidityrisk.
Somecountries indicatedthat they conduct very frequent sensitivity
testingfor specificrisks, for example,applying market risk andliquidity
shockson a regular basis.
In termsof firm-widestresstestsbased on a common scenario, there
wasa rangeof experience.
Afew countries have performed FSAP stresstestsonly.
While thesestresstestsprovide an important basisand experiencefor
designingsupervisory stresstests,in many casestheytended to be led
bytheFSAP mission team and thenational central bank, and did not
havea supervisory focus.
About one-third of countrieswerenot running stresstestson a
firm-widebasis.
In a couple of countries,firm-widestresstestswereconducted by the
(non-supervisory) central bank, although withsome involvement by the
supervisoryauthority.
Many countriesconduct both bank-run and supervisor-runstresstests.
This can involve thesupervisoryauthorityrunningthe same scenario
usingsupervisoryor public data in order to benchmark banks' results
from thebank-run stresstest. Some countries run both regional and
country-specific stresstests.
Directingbanks torun a stresstest usinga common scenariois
banksis a more advanced practiceasit allowsbetter benchmarkingof
more detailed understandingof bank modellingcapabilitiesand an
abilityto assesstheresults.
About half of the countries have conducted bank-run, firm-wide stress
tests (outside of the FSAP process), of which about half conduct these
on an annual basis.
Supervisory assessment and challenge
Theoverall assessment and challengeof the reasonablenessof banks'
stresstest scenariosand outputsisa difficult area for supervision.
In many countries, the models, assumptionsand approachesused are
evolving, and banksare at varying degreesof sophistication.
At a general level, the review found a rangeof supervisorymethodsfor
challengingthe scope and resultsof banks‘stresstestsand scenarios.
Themost widelyused method wasto compare outputswithhistorical
experience,such asa pastsevere recession.
However,in countrieswithlittlehistoryof financial crisis,thisapproach
may be more difficult.
Anumber of countriesconductedtheir ownparallel stresstestson bank
financial data to benchmark resultsproduced by banks or placedhigh
relianceon reasonablenesschecksbased on supervisors‘understanding
of portfolios.
Peer comparisonswerevery useful in countries wherebankssubjectto
stresstestingare comparablein size and scope.
Somecountries facilitatethis by requiringbanks toreport theresultsof
their stresstestsin a standardisedmanner.
Anumber of countriesalsoplacemoderate to high relianceon banks'
owninternal model validation reporting.
Independent review by external auditorsor consultantscan be one
element of the assessment and challengeprocessfor some countries.
But more than half of countries indicatedtheydonot rely at all on
independent review of stresstesting resultsaspart of their supervision
activities.
Another supervisorytrend is that supervisoryauthoritiesare more
activelyreviewingscenarioschosen by the banksin their internal stress
testing and, for example, the banks‘ICAAPs.
Monitoring or keepinga systematic inventory of scenariosused by
tested.
peer banks‘internal view of stressed conditionsand possible
vulnerabilities.
Several countriesmaintain adatabaseof scenarios used by their
banks, and othershaveplansto dothis.
Over half of the countriesperiodicallyreview thescenariosusedby
banksin their internal stresstesting.
Afew countries in theearlier stagesof maturitywerenot regularly
reviewingscenariosused by banks.
Supervisoryauthorities in several countriesindicated that theyhave
performed reversestresstests,that is, stresstestsdesignedtobe
sufficientlysevere that theychallengetheviabilityof thebank.
However,reverse stresstesting hasnot becomea common supervisory
practice.
In fact, thesupervisorystresstestsappear tobethevehicle for assessing
theimpact of more severe scenarios.
In terms of the choice of scenario for supervisory stresstests, the most
common approach was to look to a previous severe recession or input
from thecentral bank.
Also very common wastotarget thescenario toknownvulnerabilities.
About half of the countries have usedexternallyprescribed scenarios
(for example, from a regional authority or FSAP process).
Dialogue with public and private sectors
Stresstestingis increasinglypart of thepublic debateon thestrength
andtransparencyof supervision.
Supervisoryauthorities have regular discussionswithbanking industry
riskofficersorhold occasionalseminars,workshopsorroundtableswith
banksto exchangeexperienceson stresstestingmethodologiesand use
of results.
In somecases, thishasresultedinpublicationoflocalindustryguidance
based on the Committee's principles.
Somesupervisorsalsohave a formal processfor coordinatingwith other
official organisationswithintheir country.
In some cases,a formal committeeof regulatorsand other authorities
(includingthe central bank) discussessystemic vulnerabilitiesand
providesinput intostresstesting programmesand the scenariosto be
dialogueonscenarioselection, dynamicsof models,reportingtemplates
Anumber of other supervisorscoordinatewiththeir central bank in
conductinga quantitativemacroeconomic stresstest, including
considerationof potential systemic issuesthat may be caused by banks‘
management reactionsto a common stressscenario.
Regional-level coordinatingbodieshavealsobecome increasingly
important.
Effective supervisory approaches
Thereview highlighteda number of different supervisoryapproaches
that appear tohavebeen more effectiveand arereflectiveof more
advancedprogress.
Oneof themost effectivetoolsin advancingstresstesting practiceshas
been thesignificantlyheightened focuson industry-widesupervisory
stresstests.
Many countriesfound that thisprocesshashelpedfocuson common
expectations,provideastructuredapproachfordialogueonbetterstress
testingpractices,and identify gapsin banks' stresstesting
infrastructure.
By challengingthelossresultsreportedby banks on theprescribed
scenarios, supervisorshave motivated banks tojustify their resultsand
henceimprove their internalassessment of key risk areas.
In contrast, there wassome evidencethat countries that have only
conducted supervisorystresstestsor supervisoryreviewof stresstesting
practiceswithout leveragingthesetwoaspectstogether havenot made
asmuch progressin implementingthe principles.
In addition, countriesthat addressbank stresstestingpracticesthrough
theICAAP review processhave generallyfound this tobe an effective
mechanism, althoughperiodic horizontal or thematicreviewsthat allow
detailed comparison of practicesacrossbanksis a more advanced
approachthat is in useor under considerationin some countries.
A formal self-assessment process conducted in some countries helped
banks identify where their practices are consistent with the principles
andwheregapsexist in stresstestingprogrammes.
Opendialoguewithbankswasalsoseen asakey element of an effective
supervisoryprogramme.
Annual meetingswith banks can includediscussionsof risk
developmentsand best practicesin stresstesting that effectivelycreate
incentivesfor bankstostrengthen their ownpractices.
Another approach highlightedby some countrieswastoengage in
adequacyand liquiditywasevident in a few countries, withsome also
anddata capabilities, and overall robustnessof thestresstest at the
highest level of bank management.
Several countrieshaveissued publicationsdescribingobserved good
practicesarising from benchmarking or initial implementationreviews
of the principles.
This type of guidanceallowsbanks tobenchmark themselvesagainst
their localpeers.
Banks, and to some extent regulators,areincreasinglyusingstress
testingasa meansof communicatingtheir risk profiles tothemarket.
However,disclosurerequirementsand practicesvary considerably by
country.
Many countriesnow publish aggregatesummaries of stresstestsresults
in their regular financial stabilityreports,and in some casesoutcomes
for individual banks.
Somebanks now routinely provide stresstest resultsaspart of their
financial results.
Future plans
Most supervisoryauthoritiesdescribed future enhancementsto their
stresstestingsupervisionprogrammes.
Those countries in the early phases of maturity are planning to
issue, finalise or update rules on stress testing and to commence
review and assessment of stresstestingpractices.
Someare alsoconductingsupervisorystresstestsfor the first time.
Thosesupervisoryauthorities in intermediatetoadvanced stagesof
maturityplan to focuson deepeningtheir current on-siteand off-site
review programmes, with the aim of better assessing how stresstest
outcomesare used in bank decision-makingand risk appetitesetting.
Stresstestingresultsare expectedtohave a greater impact on
contingencyplanningincludingrecoveryand resolution.
Additional supervisory workis planned for identifying and assessing
howbanksare integratingstresstestsresultsin thedevelopment of risk
appetiteand overall risk management.
Some supervisors will also use horizontal reviews across multiple banks
to assess these areas as well as to benchmark banks‘ internal stress test
scenarios and assumptions.
Greater focuson the use of stresstest outputsin assessing capital
incorporatingstresstest resultsintobusinessand strategicdecisions.
planningmore explicit consideration of stresstest outcomesin setting
capital buffers.
Principlesfor Banks
As the peer review focused on supervisory implementation, an
assessment of stresstestingpracticesat bankswasnot within thescope
of this review.
Nevertheless, manycountriesprovided high-level commentson
progressof banksin their jurisdictionsthat werereasonablyconsistent
andmay be of broader interest.
In particular, all countriesreported significant improvementsin stress
testingcapabilitiesat banks sincepublication of the principles.
Authoritiesnoted an overall improvement in the rigor and qualityof
stresstestingand thequalityof information presentedin ICAAPs.
Risk-specific stresstesting, particularlyregardingmarket and liquidity
risk, wasfound tobe reasonablywell developed.
Morerecently, bankshave focused increasinglyon centralised,
firm-widestresstestingthat encompassesa broader rangeof risks, but
manycountries note this area is still evolving.
Bankshavestrengthenedtheir resourcing, withsomebanksnowhaving
set up dedicatedstresstestingunits.
Banks are using a broader range of scenarios, includingthosethat are
more severe and complex.
However, as noted below, many countries indicated that banks‘
scenarios continue to be less severe than supervisors might find
appropriate.
Banks generallyareestablishingstronger governanceframeworkswith
clear linesof responsibilityfor stresstesting, and some banksare giving
more importancetostresstest resultsin their decisionmaking.
Somecountrieshaveseenanimprovement in datasystemsandabilityto
adapt to new vulnerabilitiesand specific scenarios.
Thelevel of documentation hasalsoimproved.
Countries' responsesto thereview surveyhighlightedthefollowing
common areasof future improvement in bank stresstestingpractices.
Integrating resultsinto decision-making.
Anumber of countriespointed tochallengesbankshave in
Stresstestingtoolsare still immature and some countries felt that in
manycasesthe bankstake a compliance-orientedapproachin order to
meet regulatory requirements.
Governance
There is a sensethat banks need to have a better understanding of stress
testing limitations, assumptions, and uncertainties by users of stress test
results,includingsenior management and the board of directors.
Severity of scenarios
Anumber of countriessawa need for firmsto deepen the severityof
scenarios.
Supervisorsin thesecountriesremain concernedthat banks' internal
stresstest scenariosdo not plausiblyreflect potential severe scenarios
and outcomes.
Data and IT infrastructure.
Anumber of countriesnoted that data and IT systems remain a key
impediment toimplementingeffectivestresstesting programmes.
Accumulation of sufficient data for modellingpurposesis a challenge
for banks in some countries and aggregatinginformationacrossthe
bank remainsan issue.
Generally, some manual intervention isneeded to support thebanks‘
current IT and data infrastructuretorun regular stresstests.
Modelling issues
Translatingand calibratingscenariosintostressoutcomescontinuesto
bean area wherebanks' capabilitiesarechallenged.
Multiplerisk classimpactsgenerallyhave not been modelled in a
sophisticated manner, although some banks attempt to take into
account correlationsbetweenrisks.
Incorporatingfeedback effectsand system-wideinteractionsremains
very difficult.
Another technical area cited is the identification and aggregation of
correlated risks and integration between credit, market and liquidity
risks.
Conclusions
Thecurrent environment hasprovided asoundtest of howcountriesare
puttingintopracticetheCommittee's2009principlesfor stresstesting
supervision.
There is clearlyroom for further progressamong the supervisory
communityin the supervisionof stresstesting.
Many countries in the early to intermediate stages of implementation
are working to finalise their prudential requirements for stress testing
and implement regular review programmes that cover enterprise-wide
stresstestinggovernance, capabilitiesand models.
Even those countriesconsideredtobe in the advancedphaseof
implementationof theprinciplesfelt that there are many remaining
challengeswithrespect totheir own stresstestingprogrammes.
Authoritiesare continuing withtheir effortsto embed theuse of stress
testingwithin their supervisory programmes.
In many cases,this requires additional resourcesand trainingfor both
generalist and specialist supervision staff.
Stresstestinginfrastructure, includingtheabilityto collect appropriate
data, develop modelsand aggregateresults,continuesto evolve.
Explicit considerationof stresstest outcomesin assessingliquidityand
market riskcapital requirementsis well establishedin supervisory
frameworks.
Stresstestinghastraditionallynot featured asprominentlyin
assessment of overall bank capital adequacybut practicesare evolving
in this area.
Thepeer review hashighlightedthat there are different supervisory
approachesand it is difficult to statewhichis most effective.
Acombination of supervisory stressteststogether withinvolvement of
generalist and specialist supervision staff in reviewsof banks‘stress
testingpracticesat anenterprise-widelevel oftencharacterisesthemore
well developed supervisoryprogrammes.
Moreadvancedcountriesare encouraging development of more
rigorouspracticesat banksby conductinghorizontal and thematic
reviews, publishingthe resultsand providingfeedback to banks.
Finally, while thereview found theprinciplesthemselvestobegenerally
effectivein settinghigh-level expectations,theCommitteewill continue
tomonitor implementationof the principlesand determinewhether, in
thefuture, additional guidancemight benecessary.
1 Stress testing should form an integral part
of the overall governance and risk
management culture of the bank. Stress
testing should be actionable, with the
results from stress testing analyses
impacting business decisions of the board
and senior management. Board and senior
management involvement in the stress
testing programme is essential for its
effective operation
2 A bank should operate a stress testing
programme that promotes risk identification
and control; provides a complementary risk
perspective to other risk management
tools; improves capital and liquidity
management; and enhances internal and
external communication.
3 Stress testing programmes should take
into account of views from across the
organisation and should cover a range of
perspectives and techniques.
4 A bank should have written policies and
procedures governing the stress testing
programme. The operation of the
programme should be appropriately
documented.
5 A bank should have a suitably robust
infrastructure in place, which is sufficiently
flexible to accommodate different and
possibly challenging stress tests at an
appropriate level of granularity.
6 A bank should regularly maintain and
update its stress testing framework. The
effectiveness of the stress testing
programme, as well as the robustness of
major individual components, should be
assessed regularly and independently.
7 Stress tests should cover a range of risks
and business areas, including at the firm-
wide level. A bank should be able to
integrate effectively, in a meaningful
fashion, across the range of its stress
testing activities to deliver a complete
picture of firm-wide risk.
8 Stress testing programmes should cover a
range of scenarios, including forward-
looking scenarios, and aim to take into
account system-wide interactions and
feedback effects.
9 Stress tests should feature a range of
severities, including events capable of
generating the most damage whether
through size of loss or through loss of
reputation. A stress testing programme
should also determine what scenarios
could challenge the viability of the bank
(reverse stress tests) and thereby uncover
hidden risks and interactions among risks.
10 As part of an overall stress testing
programme, a bank should aim to take
account of simultaneous pressures in
funding and asset markets, and the impact
of a reduction in market liquidity on
exposure valuation.
11 The effectiveness of risk mitigation
techniques should be systematically
12 The stress testing programme should
explicitly cover complex and bespoke
products such as securitised exposures.
Stress tests for securitised assets should
consider the underlying assets, their
exposure to systematic market factors,
relevant contractual arrangements and
embedded triggers, and the impact of
leverage, particularly as it relates to the
subordination level in the issue structure.
13 The stress testing programme should cover
pipeline and warehousing risks. A bank
should include such exposures in its stress
tests regardless of their probability of being
securitised.
14 A bank should enhance its stress testing
methodologies to capture the effect of
reputational risk. The bank should integrate
risks arising from off-balance sheet
vehicles and other related entities in its
stress testing programme.
15 A bank should enhance its stress testing
approaches for highly leveraged
counterparties in considering its
vulnerability to specific asset categories or
market movements and in assessing
potential wrong-way risk related to risk
mitigation techniques.
16 Supervisors should make regular and
comprehensive assessments of a
bank's stress testing programme.
17 Supervisors should require management to
take corrective action if material
deficiencies in the stress testing
programme are identified or if the results of
stress tests are not adequately taken into
consideration in the decision-making
process.
18 Supervisors should assess and if
necessary challenge the scope and severity
of firm-wide scenarios. Supervisors may
ask banks to perform sensitivity analysis
with respect to specific portfolios or
parameters, use specific scenarios or to
evaluate scenarios under which their
viability is threatened (reverse stress
testing scenarios).
19 Under Pillar 2 (supervisory review process)
of the Basel II framework, supervisors
should examine a bank's stress testing
results as part of a supervisory review of
both the bank's internal capital assessment
and its liquidity risk management. In
particular, supervisors should consider the
results of forward-looking stress testing for
assessing the adequacy of capital and
liquidity.
20 Supervisors should consider implementing
stress test exercises based on common
scenarios.
21 Supervisors should engage in a
constructive dialogue with other public
authorities and the industry to identify
systemic vulnerabilities. Supervisors should
also ensure that they have the capacity and
skills to assess a bank's stress testing
programme.
April 2012
Resultsof the Basel III monitoring exercise asof 30 June 2011
Toassesstheimpact of thenew capital and liquidityrequirementsset out in the
consultativedocumentsof June and December 2009,both theBasel Committee
on BankingSupervision and the Committeeof European BankingSupervisors
(CEBS) conducted a so-calledcomprehensivequantitativeimpact study
(C-QIS) for their member jurisdictionsbasedon data asof 31December 2009.
Themain resultsof both impact studieshavebeenpublishedin December 2010.
After finalisat ion of th e regulatory framework (referred to as ―Basel III‖)
in
December2010,theimpact of thisnew frameworkis monitored semi-annually
byboth the Basel Committeeat a global level and theEuropean Banking
Authority (EBA, formerlyCEBS) at theEuropean level, using data provided by
participatingbankson a voluntary and confidential basis.
This report summarisesthe resultsof thelatestmonitoring exerciseusing
consolidateddata of Europeanbanks asof 30June 2011. Atotal of 158banks
submitteddatafor thisexercise,consistingof48Group1banksand 110Group2
banks.
[Group 1banksare thosewith Tier 1capit al in ex cess of €3 b n and
internationallyactive.All other banks are categorised asGroup 2banks]
Member countries‘coverageof their banking system wasveryhigh for Group 1
banks,reaching 100% coveragefor many jurisdictions(aggregate coveragein
termsof Basel II risk-weightedassets:98.5%), whilefor Group 2banksit was
lowerwith a larger variation acrossjurisdictions(aggregate coverage:35.8%).
Furthermore,Group 2 bank resultsare driven by a relatively small number of
largebut non-internationallyactivebanks,ie theresultspresentedin thisreport
may not be asrepresentativeasit is thecasefor Group 1banks.
[There are 19Group 2 banksthat have Tier 1capital in excessof €3billion.
Thesebanksaccount for 64.3% of total Group 2RWA.]
Sincethe new EU directiveand regulation are not finalisedyet, no EU specific
rules are analysed in this report.
Accordingly, this monitoring exerciseiscarried out assumingfull
implementationof theBaselIII framework, ie transitionalarrangementssuchas
phase-inof deductionsand grandfatheringarrangementsare not taken into
account.
Theresultsarecomparedwiththerespectivecurrent national implementationof
theBasel II framework.
In addition, it is important to note that the monitoring exercise is based on static
balance sheet assumptions, ie capital elementsare only included if the eligibility
criteria have been fulfilledat thereportingdate.
Plannedmanagement actionstoincreasecapital or decreaserisk-weighted
assetsare not taken intoaccount (―static balancesheet assumption‖).
This allowsfor identifying effectivechangesin banks‘capital base instead of
identifying changeswhichare solely based on changesin underlying modelling
assumptions.
As a consequence, monitoring results are not comparable to industry estimates
as the latter usually include assumptions on banks‘ future profitability, planned
capitaland/ orfurthermanagement actionsthat mitigatetheimpactofBaselIII.
In addition, monitoringresultsare not comparableto C-QIS results,which
assessed the impact of policy proposalspublished in 2009that differed
significantlyfrom thefinal Basel III framework.
Theactual capital and liquidityshortfallsrelatedtothenew requirementsbythe
timeBaselIII is fullyimplementedwill differ from thoseshownin this report as
thebanking sectorreactsto thechangingeconomic and regulatory environment.
Themonitoring exerciseprovidesan impact assessment of thefollowing
aspects:
- Changesto banks‘capital ratios under Basel III, and estimates of any capital
shortfalls. In addition, estimates of capital surchargesfor global systemically
important banks(G-SIBs) are included, whereapplicable;
- Changestothedefinitionof capitalthat result fromthenewcapital
standard,referred to ascommon equity Tier 1(CET1), includingmodified
ruleson capital deductions, and changesto theeligibility criteria for Tier 1
and total capital;
- Changesin the calculationof risk-weightedassets(RWA) resultingfrom
changestothe definitionof capital, securitisation, trading book and
counterpartycredit risk requirements;
- Thecapital conservation buffer;
- Theleverageratio;and
- Twoliquiditystandards – the liquiditycoverageratio(LCR) and thenet
stablefunding ratio(NSFR).
Key results - Impact on regulatory capital ratios and estimated capital
shortfall
Assuming full implementationof theBaselIII frameworkasof 30June 2011(i.e.
without takingintoaccount transitional arrangements), theCET1capital ratios
of Group 1banks wouldhavedeclined from an averageCET1ratio of 10.2%
(withall country averagesabovethe 7.0% target level) to an averageCET1ratio
of 6.5%.
80%of Group 1bankswouldbeat orabovethe4.5%minimum while44% would
beat or above 7.0% target level.
TheCET1capital shortfall for Group 1banks is €18bn at a minimum
requirement of 4.5% and €242bn at a target level of 7.0% (includingthe G-SIB
surcharge).
As a point of reference, the sum of profits after tax prior to distributions across
the Group 1 sample in the second half of 2010 and the first h alf of 2011 was
€102 bn.
With respect totheaverageTier1andtotalcapitalratio,monitoring resultsshow
a declinefrom 11.9%to6.7% and from 14.4% to 7.8%, respectively.
Capital shortfallscomparingto theminimum ratios(excl. thecapital
conservation buffer) amount for €51bn (Tier 1capital) and €128bn (total
capital).
Takingintoaccount the capital conservation buffer and thesurcharge for
systemically important banks, the Group 1banks‘capital shortfall risesto €361
bn (Tier 1capital) and €485bn (total capital).
For Group 2banks, the averageCET1ratio declinesfrom 9.8% to 6.8% under
BaselIII, where87% of thebankswouldbe at or abovethe4.5% minimum and
72%wouldbe at or above the7.0% target level.
TherespectiveCET1shortfall is approx. €11bn at a minimum requirement of
4.5% and €35 bn at a target level of 7.0%.
Thesum of profitsafter tax prior todistributionsacrossthe Group 2samplein
thesecond half of 2010and the first half of 2011was€17 bn.
Main driversof changesin banks‘ capital ratios
For Group 1banks,the overall impact on theCET1ratio can be attributedin
almost equal partstochangesin the definition of capital and to changesrelated
tothe calculationof risk-weightedassets:while CET1declinesby 22.7%, RWA
increaseby21.2%, on average.
For Group 2banks, while the change in thedefinition of capital resultsin a
declinein CET1 of 25.9%, the new ruleson RWA affect Group 2banks far less
(+6.9%), which may be explained bythe fact that thesebanks businessmodels
are lessreliant on exposurestocounterparty and market risks(whichare the
main driversof theRWAincreaseunder thenew framework).
Reductions in Group 1and Group 2 banks‘ CET1are mainly driven by goodwill
(-17.3% and -14.8%, respectively), followed by deductions for holdings of capital
of other financial companies(-4.4% and -7.0%, respectively).
As to the denominator of regulatory capital ratios, themain driver is the
introductionof CVA capital chargeswhichresult in an averageRWAincreaseof
8.0% and of 2.9% for Group 1and Group 2 banks, respectively.
In addition to CVA capital charges, trading book exposures and the transition
from Basel II 50/50 deductions to a 1250% risk weight treatment are the main
contributorsto theincreasein Group 1banks‘RWA.
As Group 2 banksare in general lessaffected by therevised counterparty credit
risk rules, these banksshow a much lowerincreasein overall RWA (+6.9%).
However,even withinthis group, the RWA increaseis driven by CVAcapital
charges,followedbychangesrelatedtothetransitionfromBaselII 50/50capital
deductionstoa 1250% risk weight treatment, and totheitemsthat fall below the
10/15% thresholds.
Leverage ratio
Monitoring resultsindicatea positivecorrelationbetweenbank size and the
level of leverage, sincethe averageLR is significantlylowerfor Group 1banks.
Assuming full implementationof Basel III, Group 1banksshow an average
Basel III Tier 1leverageratio(LR) of 2.7%, while Group 2 banks‘leverageratio
is 3.4%.
41%of participatingGroup 1and 72% Group 2 banks wouldmeet the 3% target
level asof June 2011.
If ahypothetical current leverageratiowasalreadyin place,Group1andGroup2
banks‘LR wouldbe4.0% and 4.7%, respectively.
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Basel 3 May 2012

  • 1. Basel iii Compliance ProfessionalsAssociation (BiiiCPA) 1200G Street NW Suite800Washington, DC 20005-6705USA Tel: 202-449-9750Web: www.basel-iii-association.com Dear Member, Crying is not a sign of weakness. You may let out your tears! Assuming full implementationof the Basel III requirementsasof 30 June2011, includingchangestothe definitionof capital and risk-weightedassets, and ignoringphase-in arrangements,Group 1 bankswouldhavean overall shortfall of €38.8 billion for the CET1 minimum capital requirement of 4.5%, whichrisesto€485.6billion for a CET1target level of 7.0% (ie including thecapital conservation buffer); the latter shortfall already includesthe G-SIB surchargewhere applicable. As a point of reference, the sum of profitsafter tax prior to distributions across the same sample of Group 1banksin the second half of 2010 and thefirst half of 2011was€356.6billion. Under the same assumptions, thecapital shortfall for Group 2 banks includedin the Basel III monitoring sample is estimated at €8.6 billion for the CET1minimum of 4.5% and €32.4 billion for a CET1 target level of 7.0%. Thesum of Group 2bank profitsafter tax prior todistributionsin the second half of 2010and the first half of 2011was€35.6 billion. Quantitative impact study results published by the Basel Committee, 12April 2012 TheBasel Committeepublished theresultsof itsBasel III monitoring exercise. Thestudyis based on rigorousreporting processesset up by the Committee to periodicallyreview theimplicationsof the Basel III standardsfor financial markets. Atotal of 212banksparticipated in the study, including103Group1banks(ie thosethat have Tier 1capital in excessof €3 billion and are internationallyactive) and 109Group 2banks (ie all other banks).
  • 2. While the Basel III frameworksetsout transitional arrangementsto implement thenew standards, themonitoring exerciseresultsassume full implementationof thefinal Basel III packagebasedondata asof 30 June2011(ie theydonot take account of thetransitional arrangements such asthephasein of deductions). No assumptionsweremade about bank profitabilityor behavioural responses,suchaschangesin bank capital or balance sheet composition. For that reason the resultsof thestudyare not comparable to industry estimates. Basedon data asof 30June 2011and applying the changestothe definitionof capital and risk-weightedassets,the averagecommon equityTier 1capital ratio(CET1) of Group 1bankswas7.1%, as comparedwith theBasel III minimum requirement of 4.5%. In orderforall Group1bankstoreachthe4.5%minimum, anincreaseof €38.8 bi llion CET1 wou ld be requ ired . Th e ove rall sh ortfall inc reases t o €485.6 billion toachievea CET1 target level of 7.0% (ie including thecapital conservationbuffer); this amount includesthe surchargefor global systemically important bankswhereapplicable. As a point of reference, thesum of profitsafter tax and prior to distributionsacrossthesamesampleof Group 1banks in thesecond half of 2010and the first half of 2011was €35 6.6 billion . For Group 2banks, the averageCET1ratio stood at 8.3%. In order for all Group 2banksin thesampletomeet thenew 4.5% CET1 ratio, the additional capital needed is estimatedtobe €8.6 billion. Theywouldhave required an additional €32.4 billion toreach a CET1 target 7.0%; the sum of these banks' profitsafter tax and prior to distributionsin thesecondhalf of2010andthefirsthalf of2011was€35.6 billion. TheCommitteealsoassessedthe estimatedimpact of the liquidity standards. Assuming banksweretomake nochangestotheir liquidityrisk profile or fundingstructure, asof June2011, theweightedaverage Liquidity CoverageRatio(LCR) forGroup 1bankswouldhavebeen90% whilethe weightedaverage LCR for Group 2bankswas83%. Theaggregate LCR shortfall is €1.76trillion whichrepresents
  • 3. sampleof institutionsin each jurisdiction. approximately3% of the €58.5 trilliontotal assetsof the aggregate sample. TheweightedaverageNet StableFundingRatio(NSFR) is94%forboth Group 1and Group 2 banks. Th e aggregate sh ortfall of req u ired st ab le fu nd in g is €2 .78 trillion. Banks haveuntil 2015tomeet the LCR standard and until 2018to meet theNSFR standard, whichwill reflect anyrevisionsfollowingeach standard's observation period. As noted in a January 2012pressstatement issuedby theGroup of Governorsand Headsof Supervision, the Basel Committee's oversight body, modificationstoa few keyaspectsof the LCR arecurrentlyunder investigationbut will not materiallychange the framework'sunderlying approach. TheCommitteewill finaliseand subsequentlypublish its recommendationsin theseareasby the end of 2012. Banks that are below the 100% required minimum thresholds can meet these standards by, for example, lengthening the term of their funding or restructuring business models which are most vulnerable to liquidity risk in periodsof stress. It should be noted that the shortfallsin the LCR and the NSFR are not additive, as reducing the shortfall in one standard may also reduce the shortfall in theother standard. Resultsof the Basel III monitoring exercise asof 30 June 2011 April 2012 Executive summary In 2010,the Basel Committeeon BankingSupervision conducted a comprehensivequantitativeimpact study(C-QIS) using data asof 31 December2009toascertainthe impact on banks of the Basel III framework,published in December 2010. TheCommitteeintendsto continuemonitoring the impact of theBasel III frameworkin order togather full evidenceon itsdynamics. Toservethispurpose, a semi-annual monitoring frameworkhasbeen set up on therisk-basedcapital ratio, theleverageratio and theliquidity metricsusingdata collectedby national supervisorson a representative
  • 4. Basel III requirementsbased on data asof 30 June 2011. This report summarisesthe aggregate resultsof the latest Basel III monitoringexercise,using data asof 30June 2011. TheCommitteebelievesthat theinformation contained in the report will providethe relevant stakeholderswitha useful benchmark for analysis. Information for thisreport wassubmitted by individual banksto their national supervisorson a voluntary and confidential basis. Atotal of 212 banksparticipated in thestudy, including103Group 1 banksand 109Group 2 banks. Members‘coverageof their banking sector is very high for Group 1 banks,reaching 100% coveragefor some jurisdictions,whilecoverageis comparatively lowerfor Group 2banksand varied acrossjurisdictions. TheCommitteeappreciatesthesignificant effortscontributed by both banksand national supervisorsto this ongoingdata collection exercise. Thereport focuseson thefollowingitems: - Changesto bank capital ratiosunder thenew requirements,and estimatesof any capital deficienciesrelativetofullyphased-in minimum and target capital requirements(toincludecapital chargesfor global systemically important banks– G-SIBs); - Changesto thedefinitionof capital that result from the new capital standard, referred toascommon equityTier 1(CET1), includinga reallocationof deductionstoCET1, and changestothe eligibility criteria forAdditional Tier 1and Tier 2 capital; - Increasesin risk-weightedassetsresultingfrom changesto the definitionof capital, securitisation, tradingbook and counterparty credit risk requirements; - Theinternational leverageratio; and - Twointernational liquiditystandards– the liquiditycoverageratio (LCR) and thenet stablefunding ratio(NSFR). With the exception of the transitional arrangementsfor non-correlation tradingsecuritisationpositionsin the tradingbook, this report doesnot take intoaccount any transitionalarrangementssuchasphase-in of deductionsand grandfatheringarrangements. Rather, the estimatespresented assume full implementationof the final
  • 5. No assumptionshave been made about banks‘profitabilityor behaviouralresponses,such aschangesin bank capital or balancesheet composition, sincethis date or in the future. For thisreason theresultsare not comparable tocurrent industry estimates,whichtend to be based on forecastsand consider management actionsto mitigatethe impact, and incorporateestimates whereinformation is not publicly available. Theresultspresented in thisreport arealsonot comparabletotheprior C-QIS,whichevaluatedthe impact of policy questionsthat differ in certainkeyrespectsfrom the finalisedBasel III framework. As one example, theC-QIS did not consider the impact of capital surchargesfor global systemicallyimportant banks. Capital shortfalls Assuming full implementationof the Basel III requirementsasof 30 June2011, includingchangestothe definitionof capital and risk-weightedassets, and ignoringphase-in arrangements,Group 1 bankswouldhavean overall shortfall of €38.8 billion for the CET1 minimum capital requirement of 4.5%, which rises to €485.6 billion for a CET1 target level of 7.0% (ie including the capital conservation buffer); thelatter shortfall already includesthe G-SIB surchargewhere applicable. As a point of reference, the sum of profitsafter tax prior to distributions across the same sample of Group 1banksin the second half of 2010 and thefirst half of 2011was€356.6billion. Under the same assumptions, thecapital shortfall for Group 2 banks includedin the Basel III monitoring sample is estimated at €8.6 billion for the CET1minimum of 4.5% and €32.4 billion for a CET1 target level of 7.0%. Thesum of Group 2bank profitsafter tax prior todistributionsin the second half of 2010and the first half of 2011was€35.6 billion. Further detailson additional capital needsto meet theBasel III requirementsare included in Section 2. Capital ratios TheaverageCET1 ratiounder the Basel III frameworkwould decline from 10.2% to7.1%for Group 1banks and from 10.1%to8.3% for Group 2banks.
  • 6. LCR and 1January 2018for the NSFR. TheTier 1capital ratiosof Group 1bankswoulddecline, on average from 11.5% to 7.4% and total capital ratioswoulddecline from 14.2% to 8.6%. As withtheCET1ratios, thedeclinein other capital ratiosis comparatively lesspronouncedfor Group 2banks; Tier 1capital ratios woulddecline on averagefrom 10.9% to8.6% and total capital ratios woulddecline on averagefrom 14.3% to10.6%. Changesin risk-weighted assets As compared tocurrent risk-weightedassets,total risk-weightedassets increaseon averageby 19.4% for Group 1banksunder the BaselIII framework. This increaseis driven largely by chargesagainst counterpartycredit risk and tradingbook exposures. Securitisation exposures, principally those risk-weighted at 1250% under the Basel III framework (which were previously 50/ 50 deductions under BaselII), are alsoa significant contributor totheincrease. Banks that have significant exposures in theseareasinfluencethe averageincreasein risk-weightedassetsheavily. As Group 2 banks are lessaffected bythe revised counterpartycredit risk and trading book rules, these banks experience a comparatively smaller increasein risk-weightedassetsof only 6.3%. Even within thissample, higher risk-weightedassetsare attributed largelytoGroup 2bankswithcounterparty and securitisationexposures (ie thosesubject toa 1250%riskweighting). Leverage ratio Theweightedaveragecurrent Tier 1leverageratiofor all banks is 4.5%. For Group 1banks,it is somewhat lowerat 4.4% while it is 5.0% for Group 2banks. TheaverageBasel III Tier 1leverageratiofor all banks is 3.5%. The BaselIII averagefor Group 1banksis3.4%, and theaverageforGroup 2 banksis 4.2%. Liquidity standards Both liquiditystandards are currentlysubject toan observation period whichincludesareview clausetoaddressanyunintendedconsequences prior totheir respectiveimplementation datesof 1January 2015for the
  • 7. calculationof risk-weightedassets(RWA), the calculationof a leverage Basel III monitoring resultsfor the end-June2011reportingperiod give an indicationof theimpact of the calibration of thestandardsand highlight several keyobservations: Atotal of103Group1and102Group2banksparticipatedin theliquidity monitoringexercisefor the end-June 2011reference period. TheweightedaverageLCR forGroup 1banksis90% whiletheweighted averageLCR for Group 2banksis 83%. Theaggregate LCR shortfall is €1.76trillion whichrepresents approximately3% of the €58.5 trilliontotal assetsof the aggregate sample. TheweightedaverageNSFR is 94% for both Group 1and Group 2 banks. Theaggregate shortfall of required stablefunding is€2.78trillion. General remarks At its12September 2010meeting, theGroup of Governors and Headsof Supervision(GHOS), theCommittee‘soversight body, announceda substantial strengtheningof existingcapital requirementsand fully endorsedthe agreementsit reached on 26July2010. Thesecapital reformstogether withtheintroduction of two international liquiditystandards, delivered on thecore of theglobal financial reform agendapresentedtotheSeoul G20 Leaderssummit in November 2010. Subsequent to the initial comprehensivequantitativeimpact study publishedin December 2010,the Committeecontinuestomonitor and evaluatetheimpact of thesecapital and liquidityrequirements (collectivelyreferredto as―Basel III‖) on a semi-annual basis. This report summarisesresultsof the latestBaselIII monitoring exerciseusing 30June 2011data. Scope of the impact study All but one of the 27 Committeemember jurisdictionsparticipatedin Basel III monitoring exerciseasof 30June 2011. Theestimatespresented are based ondata submitted by the participatingbankstonational supervisorsin reportingquestionnaires in accordancewiththe instructionspreparedby the Committeein September 2011. Thequestionnaire covered componentsof eligiblecapital, the
  • 8. ratio, and componentsof theliquiditymetrics. The resultswereinitially submittedtothe Secretariat of the Committeein October 2011. Thepurposeof the exerciseis toprovidethe Committeewithan ongoing assessment of the impact on participatingbanksof the capital and liquidityproposalsset out in thefollowingdocuments: - Revisionsto the Basel II market risk frameworkand Guidelinesfor computing capital for incremental risk in the tradingbook; - EnhancementstotheBasel II framework whichincludetherevised risk weightsfor re-securitisationsheld in the banking book; - Basel III: Aglobal framework for more resilient banksand the bankingsystem aswell asthe Committee‘s13January2011press releaseon lossabsorbencyat the point of non-viability; - International frameworkfor liquidityrisk measurement, standards andmonitoring; and - Global systemicallyimportant banks:Assessment methodology and theadditional lossabsorbency requirement. Sample of participating banks Atotal of 212 banksparticipated in thestudy, including103Group 1 banksand 109Group 2 banks. Group 1banksarethosethat haveTier 1 capital in excessof €3 billion and are internationallyactive. All other banksare considered Group 2banks. Banks wereasked toprovidedata asof 30June 2011at theconsolidated level. Subsidiariesof other banksare not includedin the analysestoavoid doublecounting. Table1showsthe distributionof participationby jurisdiction. For Group 1banksmembers‘coverageof their banking sector wasvery high reaching100% coveragefor some jurisdictions. Coverage for Group 2 bankswascomparatively lowerand varied across jurisdictions.
  • 9. Not all banks provideddata relatingto all parts of the BaselIII framework. Accordingly, a small number of banksare excluded from individual sectionsof the BaselIII monitoring analysisdue toincompletedata. Methodology Theimpact assessment wascarried out by comparing banks‘ capital positionsunder Basel III tothe current regulatory framework implemented by thenational supervisor. With the exception of transitional arrangementsfor non-correlation tradingsecuritisationpositionsin thetradingbook, Basel III resultsare calculatedwithout consideringtransitional arrangementspertainingto
  • 10. positionscould be attributedtodifferinginterpretationsof the rules, thephase-in of deductionsand grandfatheringarrangements. Reported averageamountsin this document havebeen calculatedby creatinga composite bank at a total sample level, whicheffectively meansthat thetotal sample averagesare weighted. For example, the averagecommon equityTier 1capital ratio is thesum of all banks‘common equityTier 1capital for the total sample divided bythe sum of all banks‘risk-weightedassetsfor the total sample. Tomaintainconfidentiality, many of theresultsshownin thisreport are presentedusing box plots charts. Thesechartsshowthedistributionof resultsasdescribedbythemedian values(thethin red horizontal line) and the75th and 25th percentile values(definedby the blue box). Theupper and lower end pointsof the thin bluevertical linesshow the valueswhich are1.5timesthe rangebetweenthe 25th and the75th percentile abovethe75th percentile or belowthe25th percentile, respectively. Thiswouldcorrespondtoapproximately99.3%coverageif thedatawere normallydistributed. Thered crossesindicateoutliers. Toestimatethe impact of implementingthe Basel III frameworkon capital, comparisonsaremadebetweenthoseelementsof Tier 1capital whicharenot subject to a limit under thenational implementationof Basel I or Basel II, and CET1 under Basel III. Data quality For thismonitoring exercise, participatingbanks submitted comprehensiveand detailed non-publicdata on a voluntary and best-effortsbasis. As withthe C-QIS, national supervisorsworked extensivelywith banks toensuredataquality, completenessandconsistencywiththepublished reporting instructions. Banks are included in the variousanalysesthat followonlyto the extent theywereable to providesufficient qualitydata tocompletethe analyses. For theliquidityelements,data qualityhasimproved significantly throughout the iterationsof the BaselIII monitoring exercise, although it is still thecasethat some differencesin banks‘reported liquidityrisk
  • 11. common equitydeductionsare fullyphasedin and all non-qualifying rather than underlying differencesin risk. Most notablyindividual banks appear tobe usingdifferent methodologiestoidentifyoperationalwholesaledepositsandexclusions of liquid assetsdue tofailure to meet theoperational requirements. Interpretation of results Thefollowingcaveatsapplytotheinterpretationof resultsshownin this report: Theseresultsare not comparable to thoseshown in the C-QIS, which evaluated theimpact of policy questionsthat differ in certain key respectsfrom the finalisedBaselIII framework. As one example, theC-QIS did not consider the impact of capital surchargesfor G-SIBsbasedon the initial list of G-SIBs announced by theFinancial StabilityBoard in November 2011. Onemember country, Switzerland, hasalready implementedcertain elementsof the Basel III frameworkpertainingto new rulesfor market risk and enhancementstothe treatment of securitisationsheld in the bankingbook (often referred to collectivelyas―Basel 2.5‖). For banks in this country, the resultsincluded in this report reflect the impact of adopting the BaselIII requirementsrelativeto theBasel II and Basel2.5frameworksalreadyin place. Thenew rules for counterparty credit risk are not fullyaccounted for in thereport, asdata for capital chargesfor exposurestocentral counterparties(CCPs) andstressedeffectiveexpectedpositiveexposure (EEPE) could not be collected. Theactual impact of thenew requirementswill likely be lower than shownin this report giventhe phased-inimplementation of therules and interim adjustmentsmade by thebanking sectorto changing economicconditionsand the regulatory environment. For example, theresultsdo not consider bank profitability, changesin capital or portfoliocomposition, or other management responsesto the policy changessince30June 2011or in the future. For thisreason, theresultsare not comparable toindustry estimates,which tend to bebasedon forecastsand consider management actionstomitigatethe impact, aswell asincorporate estimateswhereinformation is not publicly available. TheBaselIII capital amountsshownin thisreport assume that all
  • 12. capital instrumentsare fully phasedout. As such, theseamountsunderestimatetheamount of Tier 1capital and Tier 2 capital held bya bank astheydonot give any recognitionfor non- qualifying instrumentsthat are actuallyphased out over nineyears. Thetreatment of deductionsand non-qualifying capital instruments alsoaffects figuresreportedin the leverageratiosection. Theunderestimationof Tier 1capital will becomelessof an issueasthe implementationdateof theleveragerationears. In particular, in 2013, the capital amountsbased on the capital requirementsin placeon the Basel III monitoring reportingdate will reflect the amount of non-qualifying capital instrumentsincludedin capital at that time. Theseamountswill thereforebe more representativeof the capital held bybanks at the implementation dateof the leverageratio. Capital shortfallsand overall changesin regulatory capital ratios Table2 showsthe aggregate capital ratiosunder the current and Basel III frameworksand the capital shortfallsif Basel III werefully implemented, both for thedefinitionof capital and the calculationof risk-weightedassetsasof 30 June 2011.
  • 13. Ascomparedtocurrent CET1,theaverageCET1capitalratio ofGroup1 bankswouldhavefallenby nearlyone-third from 10.2% to 7.1% (a declineof 3.1percentage points) whenBasel III deductionsand risk-weightedassetsaretaken intoaccount. Thereduction in theCET1 capital ratio of Group 2banksis smaller (from 10.1%to 8.3%), whichindicatesthat the new frameworkhas greater impact on larger banks. Resultsshow significant variation acrossbanksasshown in Chart 1. Thereduction in CET1ratios is driven by thenew definition of eligible capital, by deductionsthat werenot previouslyapplied at the common equitylevel of Tier 1capital in most jurisdictions(numerator) and by increasesin risk-weightedassets(denominator). Banks engagedheavily in trading or counterparty credit activitiestend toshowthe largest denominator effectsastheseactivitiesattract substantivelyhigher capital chargesunder the new framework. Tier 1capital ratiosof Group 1banks wouldon averagedecline4.1 percentagepointsfrom 11.5% to 7.4%, and total capital ratiosof this samegroup woulddeclineon averageby 5.6percentagepointsfrom 14.2% to 8.6%. As withCET1, Group 2 banks show a more moderatedecline in Tier 1 capital ratiosfrom 10.9% to8.6%, and a declinein total capital ratios from 14.3% to10.6%.
  • 14. TheBasel III frameworkincludesthefollowingphase-in provisionsfor capital ratios: For CET1,thehighest form of lossabsorbing capital, theminimum requirement will be raisedto4.5% and will be phased-in by 1January 2015; For Tier 1capital, the minimum requirement will be raised to6.0% and will be phased-in by1January2015; For total capital, theminimum requirement remainsat 8.0%; Regulatoryadjustments(ie possiblystrictersetsof deductionsthat applyunder Basel III) will be fullyphased-inby 1January 2018; An additional 2.5% capital conservation buffer abovethe regulatory minimum capital ratios, whichmust be met with CET1, will be phased-in by 1January 2019;and Theadditional lossabsorbencyrequirement for G-SIBs, which ranges from 1.0% to 2.5%, will be phased in by 1January2019. It will be applied asthe extension of thecapital conservation buffer and must be met with CET1. TheAnnex includesa detailed overview of all relevant phase-in arrangements. Chart 2 and Table2 provideestimatesof the amount of capital that Group 1and Group 2 bankswouldneed between 30June 2011and 1 January 2019in addition to the capital theyalreadyheld at thereporting date, in order tomeet the target CET1, Tier 1,and total capital ratios under Basel III assuming fullyphased-in target requirementsand deductionsasof 30June 2011. Under theseassumptions,the CET1capital shortfall for Group 1banks with respect to the 4.5% CET1 minimum requirement is€38.8billion. TheCET1shortfall withrespect to the 4.5% requirement for Group 2 banks,wherecoverageofthesectorisconsiderablysmaller,isestimated at €8.6 billion. For a CET1 target of 7.0% (ie the 4.5% CET1 minimum plusthe 2.5% capital conservation buffer, plusany capital surcharge for G-SIBsas applicable),Group 1banks‘shortfall is€485.6billionandGroup2banks‘ shortfall is €32.4 billion. Thesurchargesfor G-SIBs are a bindingconstraint on 24 of the28 G-SIBs included in this Basel III monitoring exercise. As a point of reference, the aggregatesum of after-taxprofitsprior to distributionsfor Group 1and Group 2banks in the same samplewas
  • 15. €356.6billion and €35.6 billion, respectively in thesecond half of 2010 andthe first half of 2011. Assuming the4.5% CET1minimum capitalrequirementswerefullymet (ie, there wereno CET1 shortfall), Group 1bankswouldneed an additional €66.6 billion to meet the minimum Tier 1capital ratio requirement of 6.0%. Assuming banks alreadyhold 7.0% CET1capital, Group 1banks would need and an additional €221.4billionto meet the Tier 1capital target ratio of 8.5% (ie the6.0% Tier 1minimum plusthe 2.5% CET1capital conservation buffer), respectively. Group 2banks wouldneed an additional €7.3billion and an additional €16.6billion tomeet theserespectiveTier 1capital minimum and target ratio requirements. AssumingCET1andTier1capitalrequirementswerefullymet(ie,there werenoshortfallsin eitherCET1orTier 1capital), Group 1bankswould needan additional€119.3billion tomeet theminimum total capital ratio requirement of 8.0% and an additional €223.2billionto meet the total capital target ratio of 10.5% (ie the8.0% Tier 1minimum plusthe 2.5% CET1capital conservationbuffer), respectively. Group 2banks wouldneed an additional €5.5billion and an additional €11.6billion to meet theserespectivetotal capital minimum and target ratio requirements. As indicatedabove, no assumptionshavebeen madeabout bank profits or behavioural responses, such aschangesbalancesheet composition, that will serve to ameliorate the impact of capital shortfalls over time.
  • 16. reduction in Group 2 bank grossCET1. Impact of the definition of capital on Common Equity Tier 1 capital As noted above, reductionsin capital ratios under theBasel III frameworkare attributed in part tocapital deductionsnot previously appliedat the common equitylevel of Tier 1capital in most jurisdictions. Table3 showsthe impact of variousdeduction categorieson the gross CET1capital (ie, CET1beforedeductions) of Group 1and Group 2 banks. In the aggregate, deductionsreducethegrossCET1of Group 1banks under the Basel III frameworkby 32.0%. Thelargest driver of Group 1bank deductionsisgoodwill, followedby combineddeferred tax assets(DTAs) deductions, and intangiblesother than mortgage servicingrights. ThesedeductionsreduceGroup 1bank grossCET1by15.4%, 4.9%, and 3.6%, respectively. Thecategorydescribedasother deductionsreducesGroup 1bank gross CET1by 3.0% and pertain mainlyto deductionsfor provision shortfalls relativetoexpectedcredit lossesand deductionsrelatedtodefined benefit pension fund schemes. Holdingsof capital of other financial companiesreducethe CET1of Group 1banksby 2.9%. Thecategory―Excessabove15%‖ referstothedeductionof theamount bywhichtheaggregate of the three itemssubjecttothe 10% limit for inclusionin CET1 capital exceeds15%of a bank‘sCET1, calculated after all deductionsfrom CET1. These15% threshold bucket deductionsreduce Group 1bank gross CET1by 2.1%. Deductionsfor MSRsexceedingthe 10% limit have a minor impact on Group 1CET1. DeductionsreducetheCET1 ofGroup 2banksby26.9%. Goodwillisthe largest driver of deductionsfor Group 2 banks, followedby holdingsof thecapital of other financial companies, and combined DTAs deductions. ThesedeductionsreduceGroup 2bank CET1by10.5%, 4.4%, and 4.3%, respectively. Other deductions,whichare driven significantlyby deductionsfor provision shortfallsrelative to expectedcredit losses, result in a 3.5%
  • 17. Deductions for intangibles other than mortgage servicing rights and deductions for itemsin excess of the aggregate 15% threshold basket reduceGroup 2 bank grossCET1by 2.5% and 1.8%, respectively. Deductionsfor mortgage servicingrightsabovethe 10% limit have no impact on Group 2 banks. Changesin risk-weighted assets Overall results Reductionsin capital ratiosunder the BaselIII frameworkare also attributedto increasesin risk-weightedassets. Table4providesadditionaldetail on thecontributorstotheseincreases, toincludethefollowingcategories: Definition of capital: Thesecolumns measurethe change in risk-weighted assetsasa result of proposed changesto the definition of capital. Thecolumn heading ―other‖includesthe effectsof lowerrisk-weighted assetsfor exposuresthat arecurrentlyincludedin risk-weightedassets but receivea deduction treatment under Basel III. Thecolumn heading―50/50‖ measuresthe increasein risk-weighted assetsapplied to securitisation exposurescurrentlydeducted under the Basel II framework that are risk-weightedat 1250% under Basel III. Thecolumn heading―threshold‖ measuresthe increasein risk-weightedassetsforexposuresthat fall belowthe10%and15%limits for CET1 deduction;
  • 18. Counterparty credit risk (CCR): This column measurestheincreasedcapital chargefor counterparty credit risk and thehigher capital charge that resultsfrom applying a higher asset valuecorrelationparameter againstexposurestofinancial institutionsunder the IRB approachestocredit risk. Not included in CCR are risk-weightedasset effectsof capital charges for exposuresto central counterparties (CCPs) or anyimpact of incorporatingstressedparameters for effectiveexpectedpositive exposure (EEPE); Securitisation in the banking book: This column measurestheincreasein the capital chargesfor certain typesof securitisations(eg, resecuritisations)in the banking book;and Trading book: This column measurestheincreasedcapital chargesfor exposuresheld in thetrading book toincludecapital requirementsagainst stressed value-at-risk,incrementaldefault risk, and securitisationexposuresin thetradingbook. Risk-weightedassetsfor Group 1banks increaseoverall by 19.4% for Group 1banks. This increaseis toa largeextent attributedto higher risk-weighted assetsfor counterparty credit risk exposures,whichresult in an overall increasein total Group 1bank risk-weightedassetsof 6.6%. Thepredominant driver behind this figure is capital chargesfor counterpartycredit risk asthehigher asset value correlation parameter resultsin an increasein overall risk-weightedassetsof only 1.0%. Tradingbook exposuresand securitisationexposurescurrentlysubject todeduction under Basel II, alsocontribute significantlytohigher risk-weightedassetsat Group 1banksat 5.2% for each category.
  • 19. Securitisationexposurescurrentlysubject to deduction, counterparty credit risk exposures, and exposuresthat fall below the10% and 15% CET1eligibility limitsare significant contributorstochangesin risk-weightedassetsfor Group 2 banks. Changesin risk-weightedassetsshowsignificant variationacrossbanks asshownin Chart 3. Again, these differencesare explainedin largepart by theextent of banks‘counterpartycredit risk and trading book exposures, which attract significantlyhigher capital chargesunder Basel III ascompared tocurrent rules. Impact of the revisions to the Basel II market risk framework Table5 showsfurther detail on theimpact of the revised tradingbook capital chargeson overall risk-weightedassetsfor Group 1banks. Thesample analysed here issmallerthan theone in Table4asnot all theGroup 1banksprovided data on market risk exposures. For thisreduced sample of banks, tradingbook exposures resultedin a 6.1% increasein total risk-weightedassets. Themain contributorsto this increaseare stressed value-at-risk (stressedVaR), non-correlationtrading securitisationexposuressubject thestandardisedmeasurement method (column heading―SMM
  • 20. non-CTP‖), and theincremental risk capital charge(IRC), which contribute2.2%, 1.7%, and 1.4%. Lesssignificant contributors totheincreasein overall risk-weighted assetsare capital chargesfor correlation tradingexposures. Increasesin risk-weightedassetsare partiallyoffset by effectsrelated to previouscapital charges24 and changestothe standardised measurement method (SMM). Impact of the ruleson counterparty credit risk (CVA only) Credit valuation adjustment (CVA) risk capital chargeslead to a 7.3% increasein total RWAfor thesubsampleof 77bankswhichprovidedthe relevant data (6.6% on thefull Group 1sample). Alargerfractionofthetotaleffect isattributabletotheapplicationof the standardisedmethod thantotheadvanced method. Theimpactson Group 2banksare smallerbut still significant, adding up toan overall 2.9% increasein RWAover a subsample of 63banks (2.2% for the full Group 2 sample), totallyattributableto the standardisedmethod. Further detailed are provided in Table6.
  • 21. Findingsregarding the leverage ratio Theresultsregarding theleverageratioare provided using two alternativemeasuresof Tier 1capital in the numerator: BaselIII Tier 1,whichisthefullyphased-inBaselIII definition ofTier 1 capital, and Current Tier 1, whichisTier 1capital eligibleunder the Basel II agreement (thephase-inperiod of Basel III begins in 2013). Total exposures of Group 1banks accordingtothedefinition of the denominatorof theleverageratio were€59.2 trillion while total exposuresfor Group 2 bankswere€5.6 trillion. Oneimportant element in understandingtheresultsof theleverageratio section istheterminologyused to describea bank‘sleverage. Generally, when a bank is referred to ashaving more leverage, or being more leveraged, this refers toa multiple(eg 33times) asopposed toa ratio (eg 3%). Therefore,a bank witha high level of leveragewill have a low leverage ratio. Chart 4presentsleverageratiosbased on Basel III Tier 1and current Tier 1capital. Thechart providesthis information for all banks, Group 1banks and Group 2banks.
  • 22. Theweightedaveragecurrent Tier 1leverageratiofor all banks is 4.5%. For Group 1banks,it is somewhat lowerat 4.4% while it is 5.0% for Group 2banks. TheaverageBasel III Tier 1leverageratiofor all banks is 3.5%. The BaselIII averagefor Group 1banksis3.4%, and theaverageforGroup 2 banksis 4.2%. Theanalysisshowsthat Group 2banksare generallylessleveragedthan Group 1banks, and thisdifferenceincreasesunder Basel III when the requirementsare fullyphased in. It is likely that a portion of thiseffectis due tothe changesin the definitionof capital, which, asseen in Section 2, are likely toaffect Group 1banksto a greater extent than Group 2 banks. Under the current Tier 1leverageratio, 17 bankswouldnot meet the 3% Tier 1leverageratiolevel, includingsix Group 1banks and 11Group 2 banks. Under the Basel III Tier 1leverageratio, 63 bankswouldnot meet the 3% Tier 1leverageratiolevel, including36 Group 1banksand 27Group 2banks. Liquidity Liquidity coverage ratio Oneof thetwostandardsintroduced bythe Committeeisa 30-day liquiditycoverageratio (LCR) whichis intendedtopromoteshort-term resiliencetopotential liquiditydisruptions. TheLCR hasbeen designedtorequire global banks tohave sufficient high-qualityliquid assetsto withstanda stressed 30-dayfunding scenario specifiedby supervisors. TheLCR numerator consistsof a stock of unencumbered, high quality liquidassetsthat must be availabletocover any net outflow, whilethe denominatoris comprised of cash outflowslesscashinflows(subject to a cap at 75% of outflows) that are expectedto occur in a severe stress scenario. 103Group 1and 102Group 2banks providedsufficient data in the 30 June2011Basel III monitoring exercisetocalculatethe LCR according tothe BaselIII liquidityframework. TheweightedaverageLCR was90% for Group 1banks and 83% for Group 2banks. Theseaggregate numbersdo not speak totherangeof resultsacrossthe banks.
  • 23. Chart 5below givesan indicationof thedistribution of bank results;the thick red lineindicatesthe 100% minimum requirement, the thin red horizontal linesindicatethemedian for the respectivebank group. 45% of thebanksin the BaselIII monitoring samplealreadymeet or exceedthe minimum LCR requirement and 60% have LCRs that are at or above75%. For thebanks in thesample, Basel III monitoringresultsshow a shortfall ofliquidassetsof €1.76trillion(whichrepresentsapproximately 3%of the€58.5trilliontotal assetsof theaggregate sample) asof 30June 2011, if banksweretomake nochangeswhatsoevertotheir liquidityrisk profile. This number isonlyreflectiveof the aggregate shortfall for banks that are below the 100% requirement and doesnot reflect surplusliquid assetsat banks above the100% requirement. Banks that are below the 100% required minimum have until 2015to meet the standard by scalingback businessactivitieswhichare most vulnerable toa significant short-term liquidityshock or by lengthening theterm of their fundingbeyond 30days. Banks may alsoincreasetheir holdingsof liquid assets. Thekey componentsof outflowsand inflowsare shownin Table7. Group 1banksshow a notablylarger percentageof total outflows, when comparedtobalancesheet liabilities,than Group 2 banks. Thiscanbeexplainedbytherelativelygreatercontribution of wholesale fundingactivitiesand commitmentswithin theGroup 1sample, whereas,for Group 2 banks, retail activities, which attract much lower
  • 24. stressfactors,comprise a greater share of funding activities. Cap on inflows Thecomposition of high qualityassetscurrentlyheld at banks is depictedin Chart 6. Themajorityof Group 1and Group 2banks‘holdings, in aggregate, are comprised of Level 1assets;howeverthe sample, on whole, shows diversityin their holdingsof eligibleliquid assets. WithinLevel 1assets,0% risk-weightedsecuritiesissuedor guaranteed bysovereigns,central banks and PSEs, and cash and central bank reservescomprisingsignificant portionsof thequalifying pool. Comparatively, within theLevel 2assetclass, themajorityof holdingsis comprised of 20% risk-weightedsecuritiesissued or guaranteed by sovereigns, central banksor PSEs, and qualifying coveredbonds.
  • 25. Cap on Level 2 assets €121billion of Level 2 liquid assetswereexcluded becausereported Level 2assetswereinexcessofthe40% capascurrentlyoperationalised. 34banks currentlyreported assetsexcluded, of which24 (11% of the total sample) had LCRs below 100%. Chart 7 combinestheaboveLCR componentsby comparing liquidity resources(buffer assetsand inflows) to outflows. Note that the€800billiondifferencebetweentheamount ofliquidassets andinflowsand theamount of outflowsandimpact of thecapdisplayed in the chart issmaller than the€1.76trilliongrossshortfall noted above asit is assumed here that surplusesat onebank can offset shortfallsat other banks. In practice the aggregate shortfall in theindustry is likelytolie somewherebetweenthesetwonumbersdependingon how efficiently banksredistributeliquidityaround thesystem.
  • 26. Net stable funding ratio Thesecond standard is thenet stablefunding ratio(NSFR), a longer-term structural ratio toaddressliquiditymismatchesand provide incentivesfor bankstouse stablesourcesto fund their activities. 103Group 1and 102Group 2banks providedsufficient data in the30 June2011BaselIII monitoringexercisetocalculatetheNSFR according tothe BaselIII liquidityframework. 46% of thesebanksalready meet or exceedtheminimum NSFR requirement, withthree-quartersat an NSFR of 85% or higher. TheweightedaverageNSFR for each of the Group 1bank and Group 2 samplesis 94%. Chart 8 shows the distribution of resultsfor Group 1and Group 2 banks; the thick red line indicatesthe 100% minimum requirement, the thin red horizontal linesindicatethemedian for the respectivebank group.
  • 27. Theresultsshowthat banks in the samplehad a shortfall of stable fundingof€2.78trillionat theendofJune2011, if banksweretomakeno changeswhatsoevertotheir fundingstructure. This number isonlyreflectiveof the aggregate shortfall for banks that are below the 100% NSFR requirement and doesnot reflect anysurplus stablefunding at banks above the 100% requirement. Banks that are below the 100% required minimum have until 2018to meet thestandard and can takea number of measurestodo so,includingby lengtheningtheterm of their fundingor reducing maturitymismatch. It should be noted that the shortfallsin the LCR and the NSFR are not necessarilyadditive,asdecreasingtheshortfall in onestandard may result in a similar decreasein the shortfall of the other standard, dependingon thestepstaken to decreasetheshortfall.
  • 29. EBA, ESMA and EIOPA publish tworeportson Money Laundering TheJoint Committeeof thethree European SupervisoryAuthorities (EBA, ESMA and EIOPA) haspublishedtworeportson the implementationofthethirdMoneyLaunderingDirective[2005/ 60/ EC] (3MLD). The―Report on the legal, regulatory and supervisoryimplementation acrossEU MemberStatesinrelationtotheBeneficialOwnersCustomer DueDiligencerequirements‖analysesEU MemberStates‘current legal, regulatory and supervisoryimplementationof the anti - money laundering/ counterterrorist financing(AML/CTF) frameworksrelated tothe application bydifferent credit and financial institutionsof Customer Due Diligence(CDD) measureson their customers‘ beneficial owners. Thereport sought to identify differencesin the implementation of the Directiveand to determine whethersuch differencescreatea gap in the EU AML/ CTF regime that could be exploited by criminalsfor money launderingand terrorist financingpurposes. The―Report on the legal and regulatory provisionsand supervisory expectationsacrossEU Member Statesof Simplified Due Diligence requirementswherethe customersare credit and financial institutions‖ providesan overview of EU Member States‘legal and regulatory provisionsand supervisoryexpectationsin relationto the applicationof SimplifiedDue Diligence(SDD) requirementsof the 3MLD. Thereport focusesexclusivelyon oneparticularsituationof lowrisk whereSDD is applicable,namely wherethe customer isa credit or financial institutionsituated in a EU/ EEA state or in a country that imposesequivalent AML/CFT requirements. Both reportscome totheconclusionthat there are significant differencesin the implementationacrosstheEU MemberStates,and that some of thesedifferencescould createundesirableeffectson the common EuropeanAnti MoneyLaundering Regime. Thereportsfind that some of thesedifferencesare not duetothe Directive‘sminimum harmonisation approach, but insteadappear to stem from different national interpretationsof the Directive‘s requirements.
  • 30. EIOPA - European Insuranceand Occupational PensionsAuthority Both reportsalsocall on theEuropean Union to consider addressing theseproblems. The Joint Committee TheJoint Committeeis a forum for cooperationthat wasestablished on 1stJanuary2011, withthegoal of strengtheningcooperationbetweenthe European BankingAuthority (EBA), European Securitiesand Markets Authority(ESMA) andEuropeanInsuranceand Occupational Pensions Authority (EIOPA), collectivelyknown asthe threeEuropean SupervisoryAuthorities (ESAs). Throughthe Joint Committee, the three ESAscooperateregularlyand closelyand ensure consistencyin their practices. In particular, theJoint Committeeworksin theareasof supervisionof financial conglomerates,accounting and auditing, microprudential analysesof crosssectoraldevelopments, risksand vulnerabilitiesfor financial stability, retail investment productsand measurescombating moneylaundering. In addition tobeing a forum for cooperation, the Joint Committee alsoplays an important role in the exchangeof information withthe European Systemic RiskBoard (ESRB) and in developingtherelationshipbetweentheESRB and the ESAs. InterestingAbbreviations AML – Anti MoneyLaundering AMLTF – Anti-MoneyLaunderingTaskForce of the EBA, ESMA and EIOPA AML Committee– The Joint Committeeof theEuropean Supervisory Authorities‘Sub CommitteeonAnti MoneyLaundering CDD - Customer Due Diligence CPMLTF – EU CommitteeonthePreventionofMoneyLaunderingand Terrorist Financing CTF – Counter Terrorist Financing EBA - European BankingAuthority EC – European Commission EEA - European EconomicArea
  • 31. EDD – Enhanced Due Diligence ESMA - European Securitiesand MarketsAuthority EU – European Union FATF – FinancialAction Task Force ID - Identity ML – MoneyLaundering MS – Member Stateof the European Union SDD - Simplified Due Diligence TF – Terrorist Financing UBO – Ultimate BeneficialOwner WG – WorkingGroup 3rd MLD - Third MoneyLaunderingDirective(2005/60/ EC)
  • 32. BIS - Peer review of supervisory authorities' implementation of stresstesting principles-April 2012 Stresstestingisanimportant toolused bybankstoidentify thepotential for unexpectedadverse outcomesacrossa rangeof risks and scenarios. In 2009, the Committeereviewedtheperformanceof stresstesting practicesduring thefinancialcrisisand publishedrecommendationsfor banksand supervisorsentitled Principlesfor sound stresstesting practicesand supervision. As part of its mandateto assessthe implementationof standardsacross countriesand tofoster thepromotion of good supervisory practice, the Committee'sStandardsImplementationGroup (SIG) conducted apeer review during 2011of supervisoryauthorities' implementationof the principles. Thereview foundthat stresstestinghasbecome akey component of the supervisoryassessment processaswell asa tool for contingency planningand communication. Countriesare, however,at varying stagesof maturityin the implementationof theprinciples;asa result, more workremainstobe done to fullyimplement the principlesin many countries. Overall, the review found the 2009stresstestingprinciplesto be generallyeffective. TheCommittee, however, will continuetomonitor implementationof theprinciplesand determinewhether,in thefuture, additionalguidance might be necessary. Peer review of supervisory authorities‘ implementation ofstress testing principles, April 2012 Executive summary
  • 33. This report summarisestheBasel Committee‘speer review on how supervisoryauthoritieshave implemented the Committee‘s2009 Principlesfor sound stresstestingpracticesand supervision. Theglobal financial crisis and the 2009stresstesting principles Stresstestingis an important tool for bankstoidentify unexpected adverseoutcomesacrossa rangeof risks. It plays a particularly important role in: - providingforward-lookingassessmentsof risk; - overcominglimitationsof modelsand historicaldata; - supportinginternaland external communication; - feeding intocapital and liquidityplanningprocedures; - informing the settingof banks‘risk tolerance;and - facilitating thedevelopment of risk mitigation or contingencyplans acrossa range of stressedconditions. In 2009, the Committeereviewedtheperformanceof stresstesting practicesduring thecrisisand found weaknessesin variousareas. Basedon thefindings,and aspart of itseffortsto incorporatelessons from thecrisisin supervisorypractices,the Committee published recommendationsfor banks and supervisorsentitledPrinciplesfor soundstresstestingpracticesand supervision. Theguidance setsout a comprehensiveset of principlesfor the sound governance,designandimplementationofstresstestingprogrammesat banks. Theprinciplesalsoestablishedhigh-levelexpectationsfor therole and responsibilitiesof supervisorsin evaluatingstresstestingpractices. Scope of the review As part of its mandateto assessthe implementationof standardsacross countries,during 2011theCommittee's StandardsImplementation Group undertook a peer review of supervisory authorities‘ implementationof theprinciples. Thereview wasconducted via an off-sitesurvey of supervisory authorities. All Committeemember countries and one non-member country participatedin the review. Thereview focused primarily on progressin supervisoryprocessesused
  • 34. In contrast, a few countries wereconsideredtobe advanced. toimplement the principles. It wasnot designedtoprovideadetailedcountry-by-country assessment or toassessthe adequacyof banks' stresstestingprogrammes. Increasingly, supervisorystresstestsarebeing used toset minimum capital requirements, determineexplicit capital buffersor tolimit capital distributionsby banks. This recent development wasnot extensively consideredin the principlesand asa result wasnot a key focusof the review. Key findings Progressoverview In the period since the principleswere issued, stresstesting has become a key component of the supervisory assessment processas well as a tool for contingencyplanningand communication. Many of the countriesparticipatingin this peer review havebeen workingtoimplement and refinestresstestingframeworksand methodologies at thesametime astheir economiesand banking systemshave been affectedby a high degree of global economic and financial uncertainty. Althoughmanysupervisoryauthoritiesandbankshadoperationalstress testingframeworksin place, existingguidanceand ruleshad tobe revisedand new expectationsput in placeto broaden and deepen stress testingcapabilitiesat both banksand supervisory authorities. Thereviewfound that countriesareat varyingstagesof maturity in their implementationof theprinciples. Nearlyhalf of thecountries wereconsideredtobe at an earlystage. Thesecountriesshowedsome progresstowardimplementingthe principles,but theymay not haveissued or finalisedprudential requirementson enterprise-widestresstestingsincethe principleswere published. Theygenerallyhad not conducted regular on-siteor off-sitereviews otherthanin thecontext ofrisk-specificmodellingrequirementssuchas for market risk, and had conducted industry-wide stresstests infrequently, or onlyaspart of International MonetaryFund Financial SectorAssessment Program (FSAP) reviews.
  • 35. internaltask forcesfor stresstesting. For thesecountries,the surveyresponsesprovided evidenceof a rigorousregular review processthat included a combination of on-site and off-siteassessments,some review and feedbackon detailed stress testingmodelsusedby banks, evidenceof follow-upactionsand a well-embeddedsupervisorystresstestingprogrammethat wasnot limitedtoexternallyimposedscenarios. Theremainder of countries werefound tofall betweentheabove two groups. Thesecountrieshave issuedsome formal requirementsor guidance consistent withthe principles,are generallyperformingregular supervisorystresstestson largebanksin their jurisdictionsand are reviewingstresstestingin thecontext of annual internal capital adequacyassessment process(ICAAP) reviewsand specific risk reviews. Thesecountrieshave more todo in deepeningtheir stresstesting programmes,includingissuingupdated requirementsand conducting more detailed on-siteand off-sitereviewsof banks' stresstesting capabilities. Remaining challengesand examplesof good practices Themost commonoverall supervisoryapproachwasto conduct some reviewof banks' stresstestingaspart of regularICAAP assessmentsand in thecontext of specific riskswhereongoingsupervisory review of exposure modellingis now routine, notablymarket and liquidityrisks. Conductingmore detailed, comprehensivereviewsof banks' enterprise-widestresstesting governanceand modellingasenvisioned in theprinciplesrequires expert skillsand resourcing at both banksand supervisors,and asa result hasnot yet becomestandard practice in manycountries. Asignificant development in the last several yearshasbeen the increaseduse of supervisorystresstests. Amajorityof countriesnow regularlyconduct mandated stresstests with prescribedscenarios acrossthe largebanksin their jurisdictions,although for some countries, thisis limitedto theFSAP stresstests. Anumber of countriesnoted theresource-intensivenature of industry-wide stresstests. In particular, themore advancedcountriesnote that resourcing at both supervisoryauthoritiesand bankstosupport stresstestingis challenging, with a trend towardsestablishingspeciallystaffed unitsor
  • 36. andmagnitudeof keyrisks. Many, however, found that these exercises have been helpful in terms of enhancing the visibility of stress testing and providing a structured basis for dialoguewithbanks on their capabilities. It wasnotedthat industrydialoguearoundmandatedstresstestshadled toimprovementsin bank capabilities. Thefollowingtypesof practicesare alsoassociatedwithrelatively more advancedcountries: - plansfor, or completed horizontal or thematicreviewsof, stress testingeither at an enterprise-widelevel or for specificportfolios; - engagement withboards of directorson stresstestingscenarios and governance; - review of detailed evidenceof howbanksare using stresstest outcomesin their decision-makingand risk-appetitesetting; - well-articulatedplansfor improving their stresstesting supervision programmes; - involvement of both generalist and specialist supervision staff; and - publicationof the resultsand provision of consistent feedback to banks. While not a primary focusof thepeer review, many countriesprovided viewson areasfor improvement in stresstestingpracticesat banks. Theseresponsesfocusedfairlyconsistentlyonareassuchasgovernance andtheuse of stresstestingin bank decision-making, data and information technologyinfrastructure, severityof scenariosand firm-widemodellingchallenges. Thereview found theprinciplesto be generallyeffective. TheCommittee, however, will continuetomonitor implementationof theprinciplesand determinewhether,in thefuture, additionalguidance might be necessary. Introduction Stresstestingis an important tool for banks toidentify unexpected adverseoutcomesacrossa rangeof risks. Thefinancial crisishighlighted significant weaknessesin banks' stress testingprogrammesthat contributed to failurestoidentify thenature
  • 37. As a result, the Committee engaged with the industry in examining stress testing practices and, in May 2009, the Committee published recommendations for banks and supervisors entitled Principles for soundstresstestingpracticesand supervision. Theguidance set out a comprehensive set of principlesfor thesound governance,designandimplementationof stresstestingprogrammesat banks. Theprinciplesestablishedexpectationsfor the roleand responsibilities of supervisorsin evaluatingstresstesting practices. Overall, the guidanceincludesfifteenprinciplesfor banksand six principlesfor supervisors. As part of its mandateto assessthe implementationof its standards acrosscountries,the Committee'sStandards ImplementationGroup undertook a peer review of supervisoryauthorities‘implementation of theprinciples. Theobjectivesof thisreview wereto: - assesstheextent towhichtheprincipleshavebeenimplementedin a rigorousand consistent manner acrosstheCommittee's member authorities; - identify and providefeedback on factorsthat aremost critical to the effectiveimplementationof the principles;and - assessthe effectivenessof theprinciplesthemselves. An important element of thereview wasthe context in whichthe principlesare beingimplemented. Many of the countriesparticipatingin this peer review have been workingtoimplement and refinestresstestingframeworksand methodologies at thesametime their economiesand banking systems havebeen affected by a high degreeof global economicand financial uncertainty. Althoughmanysupervisoryauthoritiesandbankshadoperationalstress testingframeworksin place, existingguidanceand ruleshad tobe revisedand new expectationsput in placeto broaden and deepen stress testingcapabilitiesat both banksand supervisors. This is beingdone in a stressedenvironment and is alsobeing conducted at a time when stresstesting infrastructure, includingthe abilitytocollect appropriatedata, developmodelsandaggregate results,is evolving. As a result, the current environment hasprovided a useful earlytest of how countriesare putting theprinciplesintopractice.
  • 38. Morebroadly, it wasevident that countriesare implementingstress testingregimesand activitiesin different ways that may reflect their individualsituationsandnot all will followthesame progression or path in implementingtheprinciples. Thereview wasintended todeliver feedback on good supervisory practice tohelp supervisorsimplement standardsmore effectively. Indeed, several countries havereported significant progresssubsequent tothe completion of thepeer review survey, particularlywithregard to supervisorystresstestingpractices. Methodology Thepeer review wasconducted through a questionnairewhichwas distributedtoCommitteemember countriesin September 2011. Analysis of the responseswasconducted by a workinggroup of representativesofsupervisoryauthoritieswithexpertiseinstresstesting. The questionnaire focused primarily on the implementation activities of supervisors and consisted of both factual multiple choice questions and free-form responses. Thereview team used the information providedby eachcountry and, whererelevant, sourcedocumentsdemonstrating its implementationof the principles,to assessand compare theprogress madeacrosscountries. Giventheoff-siteandhigh-levelnatureof thereview,it wasnot intended toproducea definitiveassessment of individual countries' implementationof theprinciples,but, rather, to allowan overall view of progressacrosscountries. Adetailed report wasprovided tothe StandardsImplementation Group andtothe Committee. The review focused primarily on the implementation of principles 16-21 for supervisors, asit wasnot within the scope of the peer review toassess complianceby bankswithprinciples1-15on stresstesting practices. However,countrieswereinvited to provide their viewson theeaseand effectivenessof implementation for each of theprinciplesfor banksin their jurisdiction. In their responses, supervisory authoritieswereaskedtofocuson supervisionof thelargestbanksin their jurisdiction, although somealso addressedtheir supervisoryexpectationsfor stresstesting at smaller banks.
  • 39. Assessment of principlesfor supervisors Overall maturity of implementation For purposesof assessingand comparingimplementation of the principles,participatingcountries werestratified asbeing in an early, intermediateor advanced state of implementation. Theseassessmentswerebased on indicatorsof maturitydeveloped for thispurposebythereviewteam, aswellasthequalityandthoroughness of the questionnaireresponses. Countriesin theearlycategory (nearlyhalf of respondents) showedsome progresstowardsimplementingtheprinciples;however, theymaynot haveissued or finalised prudential requirementson enterprise-wide stresstestingsincethe principleswerepublished. Thesecountriesgenerallyhad not conducted regular on-site or off-site reviewsother than in the context of risk-specific modellingrequirements suchasfor market risk,andhaveconductedindustry-widestresstests infrequently, or onlyaspart of FSAP reviews. In contrast, a few countries wereclassifiedasadvanced. For these countries,the review team saw evidenceof a rigorousregular review processthat included a combination of: - on-siteand off-siteassessments; - some review and feedback on detailedstresstestingmodelsused by banks; - evidenceof follow-upactions;and - a well-embeddedsupervisory stresstestingprogramme that wasnot limitedtoFSAP or regionally-imposed scenarios. Theremainderof countries (approximatelyhalf of respondents) fell into theintermediatecategory. Thesecountrieshave issuedsome formal requirementsor guidance consistent withthe principles,weregenerallyperformingregular supervisorystresstestson their largebanks and werereviewingstress testingin thecontext of annual ICAAP reviewsandspecific riskreviews. Thesecountrieshave more todo in deepeningtheir programmes,includingissuingupdated requirementsand conducting more detailed on-siteand off-sitereviewsof banks' stresstesting capabilities. Notably, several countrieshave reportedsignificant progresssubsequent tothecompletionofthepeerreviewsurvey, particularlywith regard to supervisorystresstestingpracticesand alsoin somecasesissuanceof stresstestingrequirementsor guidance.
  • 40. anyimpedimentstoimplementing theprinciples. Specific areasof supervisoryactivityin relationtothe principlesare discussed in more detail below. Prudential framework Thereview found that all countrieshavein placeprudential requirementsrelatingto stresstesting. In manycasestheserequirementswereimplementedasacomponent of Basel II, namely theICAAP requirements, or otherwisepre-date the principles. In addition, a largemajorityof the respondentsstated that theyhad issuedspecific rulesor guidanceimplementingtheprinciples. However,approximatelyone-third of respondentshasnot issuedany rules or guidanceon stresstesting post-2009, and thuswouldnot be consideredtohave implemented the principlesexplicitly. Thesecountriesrelyon other rules relatingto stresstesting, particularly under the Basel II credit or market risk requirements. In termsof future plans,a number of countries acrossdifferent levelsof maturityare in theprocessof, or are planningtostrengthen or finalise guidanceor regulations. In some cases,key elementsof theprincipleshavebeen incorporated intothe Pillar 2 requirementsand in other casesas(non-mandatory) guidancefor banks. Somecountries issuedinformal guidancebased generallyon the principlesor on other regional guidelines. Anumber of countriesare still in theearlyphasesof issuingprudential expectationsfor enterprise-widestresstesting. At least a few countries have not yet issuedrequirementsrelating to Basel II ICAAPs, whichwasthemost common meansof implementing theprinciples. Other countrieshave already updated their rulesand adapted the principlesor other guidelinesfor their owncircumstances. Thesewouldbe consideredtohave a more mature supervision frameworkfor stresstesting. Afew other countrieshave issued their owngood practiceguidelines whichincorporatetheprinciplesaswell askeyfindingsfrom supervisoryactivitiesand industrydialogue. Roughlythree-quartersofrespondentsreportedthat therehavenot been
  • 41. regularlycovered stresstestingfor firm-widerisks,general credit risks, However,resourcing and other supervisoryprioritieswerenoted asa constraint by a number of other countries. Anumber of countriesasserted that becausetheir banks or banking systemsare not complex, some of the aspectsof the principlesare not relevant (eg structuredproductsand highlyleveraged counterparties). Further, banks in some jurisdictionsgenerallydo not have the infrastructureand skillsto be ableto complywithsophisticatedstress testingrequirements. Supervisory review Principle16 recommendsthat supervisorsshould make regular and comprehensiveassessmentsof banks' stresstestingprogrammes. Thereview found that supervisoryauthoritiesusea combination of on-siteand off-sitereviewstoassessbanks‘stresstestingpractices. Most countriesindicatedthat theyhaveconductedsome form of on-site review of stresstestingat banks. For specific risk areas(primarilymarket, liquidityand tosome extent credit risk), there are well establishedsupervisory review programmes. Almost three-quartersof countriesindicatedthat theyperform extensive regular review of firm-widestresstestingpractices. Themost common approachfor assessingfirm-widestresstestingis through annual ICAAP reviews, which generallycover capital planning aswell asother matters. Given the scope of ICAAP reviews, it may be difficult toassessall of the principlesduring a routineICAAP review. Indeed, a few countries indicated that theyconduct horizontal or thematic reviewsspecificallyon firm-widestresstesting includingthe principles,whichisconsidereda more advanced practice. Thefrequencyof on-sitereviewsof firm-widestresstesting varied acrosscountries. About one-third of countries conducted less-than-annual reviews (every 2-4 years) while roughly half of responding countries reported that they conduct annual or more frequent on-site reviewsof stresstesting. Somesupervisorshave conducted a one-timereview of theprinciples through self-assessments,questionnaires,or benchmarkingstudies acrossa range of banks. In termsof thescope of supervisoryreview,supervisory activities
  • 42. retail mortgagesand corporatecredit risks,market risk, bankingbook interest rate risk and liquidityrisk. Authoritiesreported that areassuch asoperational risk, overseas operations,aswell asspecific portfoliossuch ascommercialproperty and sovereign risks,receivelesscoverage. Supervisoryauthoritiesin most countriesreported conductingannual or more frequent review of board and senior management reportingof stresstest results. Use of stresstestingin loanlossprovisioningwasreviewedregularly by about half of the countries. Therole of stresstestingtohelp set riskappetiteand identify risk concentrationswereareasthat werelesscommonly reviewed;thisis an area wheresupervisoryand bank practiceis at a very earlystage. Review of contingencyplansfor operational risk is the surveyed area least likely tohave been assessed by supervisorsin thecontext of stress testing. Somecountries noted different requirementsor expectationsof stress testing acrossbanks, mainlydependingon the banks‘systemic importance(includingsize, complexityand relevancetoeconomy) and risk profile. Most emphasised that supervisorshaveproportionately different expectationswhenconducting stresstestingreviewsof smaller banks. Several countries(particularlythoseat the more advanced stagesof implementationof theprinciples)indicatedthat theyareplanning to increasetheexpectationsof smallerinstitutionswithrespect tostress testinggoing forward. Supervisory action Principle17indicatesthat supervisorsshouldtakeactionondeficiencies in banks' stresstestingprogrammes. Thereview found that the twomost common areasfor supervisory follow-upwereimproving governanceprocessesfor stresstesting and useof additional (in particular, more severe) scenarios. Many countrieseither regularlyor occasionallyimposed requirements toimprove data or model validation processes. Theleast common supervisory follow-upaction indicatedin the responseswasto require thebank toreview or changelimitsor exposures(lessthan half of the countriesreported takingthisaction regularly).
  • 43. stresstesting. Principle19encouragessupervisorstoconsidertheresultsof stresstests in assessingcapital adequacyand in settingprudential buffersfor capital and liquidity. Alargemajorityof countriesindicated that theysometimesor regularly imposecapital or liquidityrequirementsasa result of stresstesting deficiencies. In particular, use of stressscenariosfor setting liquidityrequirements appearsto be fairlywellestablished, particularlyascountries work towardimplementingtheBasel III liquidityframework, whichis based on stressedcashflows. Nearlyall of thecountriesindicatedregular review of liquiditystress testing. Use of stresstestsfor settingminimum capital requirements, determiningexplicit capital buffersor for limitingcapital distributions bybanks isa more recent development that wasnot extensively consideredin theprinciplesand asa result wasnot a key focusof the review. Asmall number of countriesindicated that stresstestinghasbecome a key tool for setting or assessing capital requirements. Somecountries haveissuednew requirementsin the past year or so specificallyrelated totheuseof stresstestsin assessingcapital adequacy. While useof stressteststoset formal minimum capital requirementsis not common, useof standard supervisorystressscenariosasa benchmarkingtool isincreasinglyprevalent. Othercountriestooktheviewthat stresstestresultsarejust onefactorin assessinghow much capital is needed tooffset the risk of unexpected losses. In a number of countries, and even thosewithfairly advanced stress testingsupervision programmes, stresstesting wasseen asone of several toolsin assessingcapital adequacyand there wasa reluctancetoplace primary relianceon stresstest scenario outcomes. This may reflect theevolving natureof supervisory and bank practices. Supervisory resourcing As stresstesting is a fairlynew and specialisedarea of supervision, the review found that resourcingand capabilitiesfor stresstesting supervision werekeychallengesfor many supervisoryauthorities. Onlya few countrieshave establishedunitsspecificallydedicatedto
  • 44. area of focus in their future plans. Most countriesare primarily relying on separateteamsof staff to conduct supervisorystresstestsand, in manycases,alsotoreview stress testingpracticesat banks. Theseteamsalsoperform other tasksin additiontoreviewingor conductingstresstesting. Typically, a set of speciallytrainedsupervisorsis responsiblefor coordinatingwith bankswithrespect to the collectionof data for stress testingand reviewingand consolidatingthestresstest information. Oftenan inter-departmental team isused to conduct thestresstests. In general, it wasnotedthat staff withavariety of different backgrounds canbeuseful in stresstesting, includingmacro-surveillance economists,risk specialistsand modellingexperts, aswell asgeneralist supervisorswhoaremost familiarwithindividualinstitutionsor accountingexperts. Similarly, most countriesutiliseboth risk specialistsand generalist supervisorsin reviewingstresstesting practicesat banks. In most countries, generalist supervisorsare involved in the review of stresstestingpractices;however, theyarenot generallyinvolved in conductingsupervisorystresstests. At the same time, some countriesnoted that wherestresstesting is allocatedtoa separate unit, it can bemore difficult to ensure that stress testingisembeddedwithin routinesupervisionand that stresstest outcomesare understood and used by the generalist supervisors. This wasseen asan evolving challenge. Themore advancedcountries, in particular, noted a general lack of specialisedstresstesting resources. Indeed, somecountriesfound that prioritisationof supervisoryworkisa major issueaskey individualsinvolved oftenhaveother responsibilities. Most countriesindicatedtheyhad establishedsome form of training programmeon stresstestingfor supervisors. In many cases,the trainingwasof a quitegeneral nature and in some caseslimitedtopresentation of the resultsof supervisorystresstestsor high-level discussion in the context of introductorytraining on Pillar 2 approaches. A few countries provide quite advanced training programmes, including case studies, and some offer training to other countries' supervisorsor to banksin their jurisdiction. Not surprisingly, severalcountriesnotedthat stresstestingtrainingisan
  • 45. consideredtobeamoreadvanced practicefor supervisors,asit requires Supervisory stresstesting Principle20recommendsthat supervisorsshould consider implementingstresstest exercisesbased on common scenarios. It is clearthat there has been a significant increasein the use of supervisorystresstestsin recent years. In fact, all countriesindicatedthat theyconduct some form of supervisorystresstest. As a result, progressin this area canbe considered more advanced generallythan some other aspectsof theprinciples. Portfolio-levelstresstestswerereported by more than half of the countries. In recent years, this hasincluded specificstresstestson, for example,housing loanportfolios, consumer debt, sovereign risksand liquidityrisk. Somecountries indicatedthat they conduct very frequent sensitivity testingfor specificrisks, for example,applying market risk andliquidity shockson a regular basis. In termsof firm-widestresstestsbased on a common scenario, there wasa rangeof experience. Afew countries have performed FSAP stresstestsonly. While thesestresstestsprovide an important basisand experiencefor designingsupervisory stresstests,in many casestheytended to be led bytheFSAP mission team and thenational central bank, and did not havea supervisory focus. About one-third of countrieswerenot running stresstestson a firm-widebasis. In a couple of countries,firm-widestresstestswereconducted by the (non-supervisory) central bank, although withsome involvement by the supervisoryauthority. Many countriesconduct both bank-run and supervisor-runstresstests. This can involve thesupervisoryauthorityrunningthe same scenario usingsupervisoryor public data in order to benchmark banks' results from thebank-run stresstest. Some countries run both regional and country-specific stresstests. Directingbanks torun a stresstest usinga common scenariois
  • 46. banksis a more advanced practiceasit allowsbetter benchmarkingof more detailed understandingof bank modellingcapabilitiesand an abilityto assesstheresults. About half of the countries have conducted bank-run, firm-wide stress tests (outside of the FSAP process), of which about half conduct these on an annual basis. Supervisory assessment and challenge Theoverall assessment and challengeof the reasonablenessof banks' stresstest scenariosand outputsisa difficult area for supervision. In many countries, the models, assumptionsand approachesused are evolving, and banksare at varying degreesof sophistication. At a general level, the review found a rangeof supervisorymethodsfor challengingthe scope and resultsof banks‘stresstestsand scenarios. Themost widelyused method wasto compare outputswithhistorical experience,such asa pastsevere recession. However,in countrieswithlittlehistoryof financial crisis,thisapproach may be more difficult. Anumber of countriesconductedtheir ownparallel stresstestson bank financial data to benchmark resultsproduced by banks or placedhigh relianceon reasonablenesschecksbased on supervisors‘understanding of portfolios. Peer comparisonswerevery useful in countries wherebankssubjectto stresstestingare comparablein size and scope. Somecountries facilitatethis by requiringbanks toreport theresultsof their stresstestsin a standardisedmanner. Anumber of countriesalsoplacemoderate to high relianceon banks' owninternal model validation reporting. Independent review by external auditorsor consultantscan be one element of the assessment and challengeprocessfor some countries. But more than half of countries indicatedtheydonot rely at all on independent review of stresstesting resultsaspart of their supervision activities. Another supervisorytrend is that supervisoryauthoritiesare more activelyreviewingscenarioschosen by the banksin their internal stress testing and, for example, the banks‘ICAAPs. Monitoring or keepinga systematic inventory of scenariosused by
  • 47. tested. peer banks‘internal view of stressed conditionsand possible vulnerabilities. Several countriesmaintain adatabaseof scenarios used by their banks, and othershaveplansto dothis. Over half of the countriesperiodicallyreview thescenariosusedby banksin their internal stresstesting. Afew countries in theearlier stagesof maturitywerenot regularly reviewingscenariosused by banks. Supervisoryauthorities in several countriesindicated that theyhave performed reversestresstests,that is, stresstestsdesignedtobe sufficientlysevere that theychallengetheviabilityof thebank. However,reverse stresstesting hasnot becomea common supervisory practice. In fact, thesupervisorystresstestsappear tobethevehicle for assessing theimpact of more severe scenarios. In terms of the choice of scenario for supervisory stresstests, the most common approach was to look to a previous severe recession or input from thecentral bank. Also very common wastotarget thescenario toknownvulnerabilities. About half of the countries have usedexternallyprescribed scenarios (for example, from a regional authority or FSAP process). Dialogue with public and private sectors Stresstestingis increasinglypart of thepublic debateon thestrength andtransparencyof supervision. Supervisoryauthorities have regular discussionswithbanking industry riskofficersorhold occasionalseminars,workshopsorroundtableswith banksto exchangeexperienceson stresstestingmethodologiesand use of results. In somecases, thishasresultedinpublicationoflocalindustryguidance based on the Committee's principles. Somesupervisorsalsohave a formal processfor coordinatingwith other official organisationswithintheir country. In some cases,a formal committeeof regulatorsand other authorities (includingthe central bank) discussessystemic vulnerabilitiesand providesinput intostresstesting programmesand the scenariosto be
  • 48. dialogueonscenarioselection, dynamicsof models,reportingtemplates Anumber of other supervisorscoordinatewiththeir central bank in conductinga quantitativemacroeconomic stresstest, including considerationof potential systemic issuesthat may be caused by banks‘ management reactionsto a common stressscenario. Regional-level coordinatingbodieshavealsobecome increasingly important. Effective supervisory approaches Thereview highlighteda number of different supervisoryapproaches that appear tohavebeen more effectiveand arereflectiveof more advancedprogress. Oneof themost effectivetoolsin advancingstresstesting practiceshas been thesignificantlyheightened focuson industry-widesupervisory stresstests. Many countriesfound that thisprocesshashelpedfocuson common expectations,provideastructuredapproachfordialogueonbetterstress testingpractices,and identify gapsin banks' stresstesting infrastructure. By challengingthelossresultsreportedby banks on theprescribed scenarios, supervisorshave motivated banks tojustify their resultsand henceimprove their internalassessment of key risk areas. In contrast, there wassome evidencethat countries that have only conducted supervisorystresstestsor supervisoryreviewof stresstesting practiceswithout leveragingthesetwoaspectstogether havenot made asmuch progressin implementingthe principles. In addition, countriesthat addressbank stresstestingpracticesthrough theICAAP review processhave generallyfound this tobe an effective mechanism, althoughperiodic horizontal or thematicreviewsthat allow detailed comparison of practicesacrossbanksis a more advanced approachthat is in useor under considerationin some countries. A formal self-assessment process conducted in some countries helped banks identify where their practices are consistent with the principles andwheregapsexist in stresstestingprogrammes. Opendialoguewithbankswasalsoseen asakey element of an effective supervisoryprogramme. Annual meetingswith banks can includediscussionsof risk developmentsand best practicesin stresstesting that effectivelycreate incentivesfor bankstostrengthen their ownpractices. Another approach highlightedby some countrieswastoengage in
  • 49. adequacyand liquiditywasevident in a few countries, withsome also anddata capabilities, and overall robustnessof thestresstest at the highest level of bank management. Several countrieshaveissued publicationsdescribingobserved good practicesarising from benchmarking or initial implementationreviews of the principles. This type of guidanceallowsbanks tobenchmark themselvesagainst their localpeers. Banks, and to some extent regulators,areincreasinglyusingstress testingasa meansof communicatingtheir risk profiles tothemarket. However,disclosurerequirementsand practicesvary considerably by country. Many countriesnow publish aggregatesummaries of stresstestsresults in their regular financial stabilityreports,and in some casesoutcomes for individual banks. Somebanks now routinely provide stresstest resultsaspart of their financial results. Future plans Most supervisoryauthoritiesdescribed future enhancementsto their stresstestingsupervisionprogrammes. Those countries in the early phases of maturity are planning to issue, finalise or update rules on stress testing and to commence review and assessment of stresstestingpractices. Someare alsoconductingsupervisorystresstestsfor the first time. Thosesupervisoryauthorities in intermediatetoadvanced stagesof maturityplan to focuson deepeningtheir current on-siteand off-site review programmes, with the aim of better assessing how stresstest outcomesare used in bank decision-makingand risk appetitesetting. Stresstestingresultsare expectedtohave a greater impact on contingencyplanningincludingrecoveryand resolution. Additional supervisory workis planned for identifying and assessing howbanksare integratingstresstestsresultsin thedevelopment of risk appetiteand overall risk management. Some supervisors will also use horizontal reviews across multiple banks to assess these areas as well as to benchmark banks‘ internal stress test scenarios and assumptions. Greater focuson the use of stresstest outputsin assessing capital
  • 50. incorporatingstresstest resultsintobusinessand strategicdecisions. planningmore explicit consideration of stresstest outcomesin setting capital buffers. Principlesfor Banks As the peer review focused on supervisory implementation, an assessment of stresstestingpracticesat bankswasnot within thescope of this review. Nevertheless, manycountriesprovided high-level commentson progressof banksin their jurisdictionsthat werereasonablyconsistent andmay be of broader interest. In particular, all countriesreported significant improvementsin stress testingcapabilitiesat banks sincepublication of the principles. Authoritiesnoted an overall improvement in the rigor and qualityof stresstestingand thequalityof information presentedin ICAAPs. Risk-specific stresstesting, particularlyregardingmarket and liquidity risk, wasfound tobe reasonablywell developed. Morerecently, bankshave focused increasinglyon centralised, firm-widestresstestingthat encompassesa broader rangeof risks, but manycountries note this area is still evolving. Bankshavestrengthenedtheir resourcing, withsomebanksnowhaving set up dedicatedstresstestingunits. Banks are using a broader range of scenarios, includingthosethat are more severe and complex. However, as noted below, many countries indicated that banks‘ scenarios continue to be less severe than supervisors might find appropriate. Banks generallyareestablishingstronger governanceframeworkswith clear linesof responsibilityfor stresstesting, and some banksare giving more importancetostresstest resultsin their decisionmaking. Somecountrieshaveseenanimprovement in datasystemsandabilityto adapt to new vulnerabilitiesand specific scenarios. Thelevel of documentation hasalsoimproved. Countries' responsesto thereview surveyhighlightedthefollowing common areasof future improvement in bank stresstestingpractices. Integrating resultsinto decision-making. Anumber of countriespointed tochallengesbankshave in
  • 51. Stresstestingtoolsare still immature and some countries felt that in manycasesthe bankstake a compliance-orientedapproachin order to meet regulatory requirements. Governance There is a sensethat banks need to have a better understanding of stress testing limitations, assumptions, and uncertainties by users of stress test results,includingsenior management and the board of directors. Severity of scenarios Anumber of countriessawa need for firmsto deepen the severityof scenarios. Supervisorsin thesecountriesremain concernedthat banks' internal stresstest scenariosdo not plausiblyreflect potential severe scenarios and outcomes. Data and IT infrastructure. Anumber of countriesnoted that data and IT systems remain a key impediment toimplementingeffectivestresstesting programmes. Accumulation of sufficient data for modellingpurposesis a challenge for banks in some countries and aggregatinginformationacrossthe bank remainsan issue. Generally, some manual intervention isneeded to support thebanks‘ current IT and data infrastructuretorun regular stresstests. Modelling issues Translatingand calibratingscenariosintostressoutcomescontinuesto bean area wherebanks' capabilitiesarechallenged. Multiplerisk classimpactsgenerallyhave not been modelled in a sophisticated manner, although some banks attempt to take into account correlationsbetweenrisks. Incorporatingfeedback effectsand system-wideinteractionsremains very difficult. Another technical area cited is the identification and aggregation of correlated risks and integration between credit, market and liquidity risks.
  • 52. Conclusions Thecurrent environment hasprovided asoundtest of howcountriesare puttingintopracticetheCommittee's2009principlesfor stresstesting supervision. There is clearlyroom for further progressamong the supervisory communityin the supervisionof stresstesting. Many countries in the early to intermediate stages of implementation are working to finalise their prudential requirements for stress testing and implement regular review programmes that cover enterprise-wide stresstestinggovernance, capabilitiesand models. Even those countriesconsideredtobe in the advancedphaseof implementationof theprinciplesfelt that there are many remaining challengeswithrespect totheir own stresstestingprogrammes. Authoritiesare continuing withtheir effortsto embed theuse of stress testingwithin their supervisory programmes. In many cases,this requires additional resourcesand trainingfor both generalist and specialist supervision staff. Stresstestinginfrastructure, includingtheabilityto collect appropriate data, develop modelsand aggregateresults,continuesto evolve. Explicit considerationof stresstest outcomesin assessingliquidityand market riskcapital requirementsis well establishedin supervisory frameworks. Stresstestinghastraditionallynot featured asprominentlyin assessment of overall bank capital adequacybut practicesare evolving in this area. Thepeer review hashighlightedthat there are different supervisory approachesand it is difficult to statewhichis most effective. Acombination of supervisory stressteststogether withinvolvement of generalist and specialist supervision staff in reviewsof banks‘stress testingpracticesat anenterprise-widelevel oftencharacterisesthemore well developed supervisoryprogrammes. Moreadvancedcountriesare encouraging development of more rigorouspracticesat banksby conductinghorizontal and thematic reviews, publishingthe resultsand providingfeedback to banks. Finally, while thereview found theprinciplesthemselvestobegenerally effectivein settinghigh-level expectations,theCommitteewill continue
  • 53. tomonitor implementationof the principlesand determinewhether, in thefuture, additional guidancemight benecessary. 1 Stress testing should form an integral part of the overall governance and risk management culture of the bank. Stress testing should be actionable, with the results from stress testing analyses impacting business decisions of the board and senior management. Board and senior management involvement in the stress testing programme is essential for its effective operation 2 A bank should operate a stress testing programme that promotes risk identification and control; provides a complementary risk perspective to other risk management tools; improves capital and liquidity management; and enhances internal and external communication. 3 Stress testing programmes should take into account of views from across the organisation and should cover a range of perspectives and techniques. 4 A bank should have written policies and procedures governing the stress testing programme. The operation of the programme should be appropriately documented. 5 A bank should have a suitably robust infrastructure in place, which is sufficiently flexible to accommodate different and possibly challenging stress tests at an appropriate level of granularity. 6 A bank should regularly maintain and update its stress testing framework. The effectiveness of the stress testing programme, as well as the robustness of major individual components, should be assessed regularly and independently. 7 Stress tests should cover a range of risks and business areas, including at the firm- wide level. A bank should be able to integrate effectively, in a meaningful fashion, across the range of its stress testing activities to deliver a complete picture of firm-wide risk. 8 Stress testing programmes should cover a range of scenarios, including forward- looking scenarios, and aim to take into account system-wide interactions and feedback effects. 9 Stress tests should feature a range of severities, including events capable of generating the most damage whether through size of loss or through loss of reputation. A stress testing programme should also determine what scenarios could challenge the viability of the bank (reverse stress tests) and thereby uncover hidden risks and interactions among risks. 10 As part of an overall stress testing programme, a bank should aim to take account of simultaneous pressures in funding and asset markets, and the impact of a reduction in market liquidity on exposure valuation. 11 The effectiveness of risk mitigation techniques should be systematically
  • 54. 12 The stress testing programme should explicitly cover complex and bespoke products such as securitised exposures. Stress tests for securitised assets should consider the underlying assets, their exposure to systematic market factors, relevant contractual arrangements and embedded triggers, and the impact of leverage, particularly as it relates to the subordination level in the issue structure. 13 The stress testing programme should cover pipeline and warehousing risks. A bank should include such exposures in its stress tests regardless of their probability of being securitised. 14 A bank should enhance its stress testing methodologies to capture the effect of reputational risk. The bank should integrate risks arising from off-balance sheet vehicles and other related entities in its stress testing programme. 15 A bank should enhance its stress testing approaches for highly leveraged counterparties in considering its vulnerability to specific asset categories or market movements and in assessing potential wrong-way risk related to risk mitigation techniques. 16 Supervisors should make regular and comprehensive assessments of a bank's stress testing programme. 17 Supervisors should require management to take corrective action if material deficiencies in the stress testing programme are identified or if the results of stress tests are not adequately taken into consideration in the decision-making process. 18 Supervisors should assess and if necessary challenge the scope and severity of firm-wide scenarios. Supervisors may ask banks to perform sensitivity analysis with respect to specific portfolios or parameters, use specific scenarios or to evaluate scenarios under which their viability is threatened (reverse stress testing scenarios). 19 Under Pillar 2 (supervisory review process) of the Basel II framework, supervisors should examine a bank's stress testing results as part of a supervisory review of both the bank's internal capital assessment and its liquidity risk management. In particular, supervisors should consider the results of forward-looking stress testing for assessing the adequacy of capital and liquidity. 20 Supervisors should consider implementing stress test exercises based on common scenarios. 21 Supervisors should engage in a constructive dialogue with other public authorities and the industry to identify systemic vulnerabilities. Supervisors should also ensure that they have the capacity and skills to assess a bank's stress testing programme.
  • 55. April 2012 Resultsof the Basel III monitoring exercise asof 30 June 2011 Toassesstheimpact of thenew capital and liquidityrequirementsset out in the consultativedocumentsof June and December 2009,both theBasel Committee on BankingSupervision and the Committeeof European BankingSupervisors (CEBS) conducted a so-calledcomprehensivequantitativeimpact study (C-QIS) for their member jurisdictionsbasedon data asof 31December 2009. Themain resultsof both impact studieshavebeenpublishedin December 2010. After finalisat ion of th e regulatory framework (referred to as ―Basel III‖) in December2010,theimpact of thisnew frameworkis monitored semi-annually byboth the Basel Committeeat a global level and theEuropean Banking Authority (EBA, formerlyCEBS) at theEuropean level, using data provided by participatingbankson a voluntary and confidential basis. This report summarisesthe resultsof thelatestmonitoring exerciseusing consolidateddata of Europeanbanks asof 30June 2011. Atotal of 158banks submitteddatafor thisexercise,consistingof48Group1banksand 110Group2 banks. [Group 1banksare thosewith Tier 1capit al in ex cess of €3 b n and internationallyactive.All other banks are categorised asGroup 2banks] Member countries‘coverageof their banking system wasveryhigh for Group 1 banks,reaching 100% coveragefor many jurisdictions(aggregate coveragein termsof Basel II risk-weightedassets:98.5%), whilefor Group 2banksit was lowerwith a larger variation acrossjurisdictions(aggregate coverage:35.8%). Furthermore,Group 2 bank resultsare driven by a relatively small number of largebut non-internationallyactivebanks,ie theresultspresentedin thisreport may not be asrepresentativeasit is thecasefor Group 1banks. [There are 19Group 2 banksthat have Tier 1capital in excessof €3billion. Thesebanksaccount for 64.3% of total Group 2RWA.]
  • 56. Sincethe new EU directiveand regulation are not finalisedyet, no EU specific rules are analysed in this report. Accordingly, this monitoring exerciseiscarried out assumingfull implementationof theBaselIII framework, ie transitionalarrangementssuchas phase-inof deductionsand grandfatheringarrangementsare not taken into account. Theresultsarecomparedwiththerespectivecurrent national implementationof theBasel II framework. In addition, it is important to note that the monitoring exercise is based on static balance sheet assumptions, ie capital elementsare only included if the eligibility criteria have been fulfilledat thereportingdate. Plannedmanagement actionstoincreasecapital or decreaserisk-weighted assetsare not taken intoaccount (―static balancesheet assumption‖). This allowsfor identifying effectivechangesin banks‘capital base instead of identifying changeswhichare solely based on changesin underlying modelling assumptions. As a consequence, monitoring results are not comparable to industry estimates as the latter usually include assumptions on banks‘ future profitability, planned capitaland/ orfurthermanagement actionsthat mitigatetheimpactofBaselIII. In addition, monitoringresultsare not comparableto C-QIS results,which assessed the impact of policy proposalspublished in 2009that differed significantlyfrom thefinal Basel III framework. Theactual capital and liquidityshortfallsrelatedtothenew requirementsbythe timeBaselIII is fullyimplementedwill differ from thoseshownin this report as thebanking sectorreactsto thechangingeconomic and regulatory environment. Themonitoring exerciseprovidesan impact assessment of thefollowing aspects: - Changesto banks‘capital ratios under Basel III, and estimates of any capital shortfalls. In addition, estimates of capital surchargesfor global systemically important banks(G-SIBs) are included, whereapplicable; - Changestothedefinitionof capitalthat result fromthenewcapital standard,referred to ascommon equity Tier 1(CET1), includingmodified ruleson capital deductions, and changesto theeligibility criteria for Tier 1 and total capital; - Changesin the calculationof risk-weightedassets(RWA) resultingfrom changestothe definitionof capital, securitisation, trading book and counterpartycredit risk requirements;
  • 57. - Thecapital conservation buffer; - Theleverageratio;and - Twoliquiditystandards – the liquiditycoverageratio(LCR) and thenet stablefunding ratio(NSFR). Key results - Impact on regulatory capital ratios and estimated capital shortfall Assuming full implementationof theBaselIII frameworkasof 30June 2011(i.e. without takingintoaccount transitional arrangements), theCET1capital ratios of Group 1banks wouldhavedeclined from an averageCET1ratio of 10.2% (withall country averagesabovethe 7.0% target level) to an averageCET1ratio of 6.5%. 80%of Group 1bankswouldbeat orabovethe4.5%minimum while44% would beat or above 7.0% target level. TheCET1capital shortfall for Group 1banks is €18bn at a minimum requirement of 4.5% and €242bn at a target level of 7.0% (includingthe G-SIB surcharge). As a point of reference, the sum of profits after tax prior to distributions across the Group 1 sample in the second half of 2010 and the first h alf of 2011 was €102 bn. With respect totheaverageTier1andtotalcapitalratio,monitoring resultsshow a declinefrom 11.9%to6.7% and from 14.4% to 7.8%, respectively. Capital shortfallscomparingto theminimum ratios(excl. thecapital conservation buffer) amount for €51bn (Tier 1capital) and €128bn (total capital). Takingintoaccount the capital conservation buffer and thesurcharge for systemically important banks, the Group 1banks‘capital shortfall risesto €361 bn (Tier 1capital) and €485bn (total capital). For Group 2banks, the averageCET1ratio declinesfrom 9.8% to 6.8% under BaselIII, where87% of thebankswouldbe at or abovethe4.5% minimum and 72%wouldbe at or above the7.0% target level. TherespectiveCET1shortfall is approx. €11bn at a minimum requirement of 4.5% and €35 bn at a target level of 7.0%. Thesum of profitsafter tax prior todistributionsacrossthe Group 2samplein thesecond half of 2010and the first half of 2011was€17 bn.
  • 58. Main driversof changesin banks‘ capital ratios For Group 1banks,the overall impact on theCET1ratio can be attributedin almost equal partstochangesin the definition of capital and to changesrelated tothe calculationof risk-weightedassets:while CET1declinesby 22.7%, RWA increaseby21.2%, on average. For Group 2banks, while the change in thedefinition of capital resultsin a declinein CET1 of 25.9%, the new ruleson RWA affect Group 2banks far less (+6.9%), which may be explained bythe fact that thesebanks businessmodels are lessreliant on exposurestocounterparty and market risks(whichare the main driversof theRWAincreaseunder thenew framework). Reductions in Group 1and Group 2 banks‘ CET1are mainly driven by goodwill (-17.3% and -14.8%, respectively), followed by deductions for holdings of capital of other financial companies(-4.4% and -7.0%, respectively). As to the denominator of regulatory capital ratios, themain driver is the introductionof CVA capital chargeswhichresult in an averageRWAincreaseof 8.0% and of 2.9% for Group 1and Group 2 banks, respectively. In addition to CVA capital charges, trading book exposures and the transition from Basel II 50/50 deductions to a 1250% risk weight treatment are the main contributorsto theincreasein Group 1banks‘RWA. As Group 2 banksare in general lessaffected by therevised counterparty credit risk rules, these banksshow a much lowerincreasein overall RWA (+6.9%). However,even withinthis group, the RWA increaseis driven by CVAcapital charges,followedbychangesrelatedtothetransitionfromBaselII 50/50capital deductionstoa 1250% risk weight treatment, and totheitemsthat fall below the 10/15% thresholds. Leverage ratio Monitoring resultsindicatea positivecorrelationbetweenbank size and the level of leverage, sincethe averageLR is significantlylowerfor Group 1banks. Assuming full implementationof Basel III, Group 1banksshow an average Basel III Tier 1leverageratio(LR) of 2.7%, while Group 2 banks‘leverageratio is 3.4%. 41%of participatingGroup 1and 72% Group 2 banks wouldmeet the 3% target level asof June 2011. If ahypothetical current leverageratiowasalreadyin place,Group1andGroup2 banks‘LR wouldbe4.0% and 4.7%, respectively.