Banking Control Commission                   Basel III      A Comprehensive Regulatory Response                           ...
Banking Control Commission                      Outline   Reasons behind the International Financial    Crisis   Major C...
Basel I           1988             Banking Control Commission        Capital / Risk weighted assets ≥ 8%                  ...
Banking Control Commission            Market TrendIn the early 1990s,many banks did nothave the Capital to                ...
Banking Control Commission              Consequences of Basel IThe Credit Crunch:Shifts observed from Commercial and Indus...
Banking Control Commission          Consequences of Basel ISecuritization:Regulatory capital standards may have played a r...
Banking Control Commission                 Illiquid                      Individual                Financial              ...
Banking Control Commission     (Mortgage-Backed Securities (MBS- In M.B.S. the Principal and Interest of the individual mo...
Banking Control Commission            How the Market evolvesResidential mortgages fit the best the securitizationprocess, ...
Banking Control Commission                    10                    10
Banking Control Commission                    11                    11
Structured Finance:                                                                           Banking Control Commission  ...
During This Period             Banking Control Commission                      Basel II was implementedGlobal Capital Adeq...
Banking Control CommissionMortgaged loans Crisis                                             14
What’s new in Basel III                            Banking Control Commission   OLD               NEW               OLD   ...
Banking Control Commission                Emergency MeasuresSeveral meetings of the G20 leaders that lead to adopt thefoll...
Banking Control Commission                Major Elements of Basel IIIUnder Pillar I: The quality, consistency, and transp...
Banking Control Commission                   Major Elements of Basel IIIUnder Pillar 2: A Leverage Ratio as a supplementa...
Banking Control Commission          New Definition of CapitalThe following key changes are proposed:  The quality and cons...
Banking Control Commission            Tier 1 – Other ElementsTo be included in Tier 1, instruments will need tobe sufficie...
Banking Control Commission             Tier 1 – Other Elements“Innovative” features such as step-ups, which over  time hav...
Banking Control Commission                           Tier 2Tier 2 capital will be simplified.There will be one set of Tier...
Banking Control Commission               No More Tier 3Tier 3 capital will be abolished.This will ensure that capital used...
Banking Control Commission     Harmonized Structure of CapitalTotal regulatory capital will consist of the sum ofthe follo...
Banking Control Commission          Harmonized Structure of CapitalThere will be 3 components of the Capital AdequacyRatio...
Banking Control CommissionMore Capital to Cover Additional RisksAdditional Capital to cover:1) Trading Book Portfolio2) Se...
Banking Control Commission               New Leverage Ratio- A supplementary measure to the Basel III risk-based framework...
New Liquidity Risk              Banking Control CommissionAfter having limited its Capital Charge on Market Risk (i.e.main...
Banking Control Commission                  Under Pillar II1) Countercyclical Capital Buffer, above Regulatory Capital    ...
Banking Control Commission                  Under Pillar III    Improvement of Corporate Governance PracticesCompensation...
Banking Control Commission        Lebanon’s Action Plan to Implement                     Basel III1)The B.C.C.L. has sent ...
Banking Control Commission        Lebanon’s Action Plan to Implement                 .(Basel III (Cont4)The B.C.C.L. made ...
Banking Control Commission    Lebanon’s Action Plan to Implement              .(Basel III (cont8)B.C.C.L. performed in Sep...
Banking Control CommissionE – Mail: amawad@bccl.gov.lb                       34
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Basel iii a comprehensive regulatory response february 2011

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dr Amine Awad in the UAB conference - february 2011 presents views on Reasons behind the International Financial Crisis
Major Components of Basel III
Lebanon’s Action Plan to fully implement Basel III

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Basel iii a comprehensive regulatory response february 2011

  1. 1. Banking Control Commission Basel III A Comprehensive Regulatory Response (The Lebanese Road - map) Dr Amine Awad Executive Director, Lebanon’s Banking Control Commission Member of the Higher Banking Council Coordinator of Basel III Implementation Task Force Beirut February 10, 2011
  2. 2. Banking Control Commission Outline Reasons behind the International Financial Crisis Major Components of Basel III Lebanon’s Action Plan to fully implement Basel III 2
  3. 3. Basel I 1988 Banking Control Commission Capital / Risk weighted assets ≥ 8% One Type of Risk Credit Risk 4 categories of risk weights :0%,20%,50% & 100%. (One Size Fits All)Off – balance sheet items converted to on an – balance sheet amount with appropriate risk weight Date of Impl. : 1992 3
  4. 4. Banking Control Commission Market TrendIn the early 1990s,many banks did nothave the Capital to Equitysupport the creditrisks they weretaking on theirbalance sheets. Credit Risks 4
  5. 5. Banking Control Commission Consequences of Basel IThe Credit Crunch:Shifts observed from Commercial and Industrial Loans intoTreasury SecuritiesExample:Commercial loans were assigned a 100% risk weight which requireshigh capital, while Treasuries were assigned a 0% risk weight whichrequires no capital 5
  6. 6. Banking Control Commission Consequences of Basel ISecuritization:Regulatory capital standards may have played a role in theexpansion of Securitization.Example:Off-balance sheet guarantees were not subject to capitalrequirements, so shifting from loans to these guaranteesprovided a way to reduce effective regulatory capitalrequirements. 6
  7. 7. Banking Control Commission Illiquid Individual Financial Financial Assets Assets Special Vehicle S S E E .C .CLiquid & Tradable Liquid & Tradable Capital Market Capital Market Instruments Instruments7
  8. 8. Banking Control Commission (Mortgage-Backed Securities (MBS- In M.B.S. the Principal and Interest of the individual mortgage loan are paid to the new MBS holders.- The leading issuers of these securities were the US government-sponsored agencies:Freddie Mac *Fannie Mae *Ginnie Mae * 8
  9. 9. Banking Control Commission How the Market evolvesResidential mortgages fit the best the securitizationprocess, because: * Their long maturities (15-20 years or more) * Mortgage lendings are backed by charge over Real Estate. 9
  10. 10. Banking Control Commission 10 10
  11. 11. Banking Control Commission 11 11
  12. 12. Structured Finance: Banking Control Commission The Complex Scheme of Securitization End borrowers Broker $I&P ($) Mortgages Servicer Originator $ Insurance I&P ($) Mortgages company Conduit/trust/ SPV/SPE/SIV $ MBS Investment bank (underwriter) $ MBS, I&P ($) Rating agency Institutional investor $ Financial returns ($) End lenders 12
  13. 13. During This Period Banking Control Commission Basel II was implementedGlobal Capital Adequacy Supervisory Review Market Discipline * Quantity of * ICAAP * Information on Risk Capital to Management Cover Risks * SREP (CR + MKT + * Timely quantitative & OP( qualitative information Capital ≥ 8% CR + MKT + OP Risks ( Weighted )
  14. 14. Banking Control CommissionMortgaged loans Crisis 14
  15. 15. What’s new in Basel III Banking Control Commission OLD NEW OLD NEW NEW OLD* Quantity of * Quality of * ICAAP * Leverage Ratio * Compensation * InformationCapital to Capital Policy Disclosure on RiskCover Risks * SREP * MIS as a Major Management(CR + MKT + * Capital Management * CorporateOP( Conservation Tool… Governance Practices * Timely Buffer quantitative & * Stress Tests * Pressure to fully qualitative * Liquidity implement Pillar 3 + information Ratios (LCR + * Countercyclical IFRS7… NSFR( Capital Buffer * Capital Charge on OFF B/S...
  16. 16. Banking Control Commission Emergency MeasuresSeveral meetings of the G20 leaders that lead to adopt thefollowing Roadmap:1- Upgrade the F.S.F. to become the F.S.B. (with more enforcement power), asking the latter to issue a new set of regulations aiming at strengthening the International Financial Sector2- Work on finding new Accounting Standards and Financial Rules and Management Practices that avoid the pro -cyclicality in the markets.3- Find new Regulatory and Supervisory frameworks that avoid the reoccurrence of such crisis in the future (no more silos). 16
  17. 17. Banking Control Commission Major Elements of Basel IIIUnder Pillar I: The quality, consistency, and transparency of the capital base will be raised. The risk coverage of the capital framework will be strengthened. Build up of capital buffers in good times that can be drawn upon in periods of stress New Liquidity Risk Measurement 17
  18. 18. Banking Control Commission Major Elements of Basel IIIUnder Pillar 2: A Leverage Ratio as a supplementary measure to the Basel III risk-based framework New Risk Management Approach Stress Tests in F.I.’s Concentration Risk Improvement of Corporate Governance practicesUnder Pillar 3: Full Implementation of Pillar 3(full Transparency & timely Disclosures) Full Implementation of IFRS 7 (Full reporting to all stakeholders) 18
  19. 19. Banking Control Commission New Definition of CapitalThe following key changes are proposed: The quality and consistency of the common equity element of Tier 1 capital will be significantly improved The required features for instruments to be included in Tier 1 capital outside of the common equity elements will be strengthened. 19
  20. 20. Banking Control Commission Tier 1 – Other ElementsTo be included in Tier 1, instruments will need tobe sufficiently loss absorbent: - They need to be subordinated - Have full discretionary non cumulative dividends or coupons - Neither have a maturity date nor an incentive to redeem. 20
  21. 21. Banking Control Commission Tier 1 – Other Elements“Innovative” features such as step-ups, which over time have eroded the quality of Tier 1, will be phased out.The use of call options on Tier 1 capital will be subject to strict governance arrangements which ensure that the issuing bank is not expected to exercise a call on a capital instrument unless it is in its own economic interest to do so. 21
  22. 22. Banking Control Commission Tier 2Tier 2 capital will be simplified.There will be one set of Tier 2, removing subcategories ofTier 2.All Tier 2 capital will need to meet the minimum standardsof being: * Subordinated to depositors and general creditors * Have an original maturity of at least 5 years. 22
  23. 23. Banking Control Commission No More Tier 3Tier 3 capital will be abolished.This will ensure that capital used to meet marketrisk requirements will be of the same quality ascapital used to meet credit and operational riskrequirements. 23
  24. 24. Banking Control Commission Harmonized Structure of CapitalTotal regulatory capital will consist of the sum ofthe following elements:(Tier 1 Capital (going-concern capital a. Common Equity b. Additional Going-Concern Capital(Tier 2 Capital (gone-concern capital 24
  25. 25. Banking Control Commission Harmonized Structure of CapitalThere will be 3 components of the Capital AdequacyRatio: Conservation Gross CAR (+) Buffer (=) Total CARCommon Equity/RWA ≥ 4,5% 2,5% 7%Tier 1 Capital /RWA ≥ 6% 2,5% 8,5%Total Capital /RWA ≥ 8% 2,5% 10,5%P.S: In addition to a Countercyclical Buffer Range ( 0% to 2,5% ) 25
  26. 26. Banking Control CommissionMore Capital to Cover Additional RisksAdditional Capital to cover:1) Trading Book Portfolio2) Securitization Instruments3) Other off – Balance sheet Items 26
  27. 27. Banking Control Commission New Leverage Ratio- A supplementary measure to the Basel III risk-based framework- The purpose is to avoid building excessive leverage in the banking system- Helps to address model risk and measurement errorIncludes: All Assets + Certain off Balance Sheet items at 100%Measured as per accounting Balance Sheet: Net of provisions andvaluation adjustments?)Capital Measure: Tier 1 Capital (or Core Tier 1 Capital??P.S. If adopted, Under Pillar I or Pillar II 27
  28. 28. New Liquidity Risk Banking Control CommissionAfter having limited its Capital Charge on Market Risk (i.e.mainly Interest Rate Risk) Basel III introduces a newLiquidity Ratio with 2 Components:1) Liquidity Coverage Ratio (L.C.R.) (2015) With a short term (30 days) horizon, based on Cash Flow: Stock of High Quality Liquid Assets 100% Net Cash Flow for the next 30 days2) Net Stable Funding Ratio (N.S.F.R.) (2018) With a longer term (1 year) horizon, based on Liquidity Transformation (or Mismatch): Amount of Stable Funding (Available( 100% Amount of Stable Funding (Required( 28
  29. 29. Banking Control Commission Under Pillar II1) Countercyclical Capital Buffer, above Regulatory Capital Including Dynamic Provisions (i.e. provisions in good years to cover losses of capital in bad years)2) New Risk Management Practices * Do not Rely on Rating Agencies only * Do not Rely on one Model only * Do not Rely on Mathematical Models only3) Stress Testing, a major tool of Risk Management4) Capital charge to cover: * Concentration Risk * Counterparty Risk…5) Strong Management Information System (M.I.S.) that helps 29 Decision Taking.
  30. 30. Banking Control Commission Under Pillar III Improvement of Corporate Governance PracticesCompensation CommitteeBoard Audit CommitteeBoard Risk CommitteeIndependent and Expert Board MembersCriteria for the Appointment of DirectorsBusiness Continuity Planning Succession Plan… 30
  31. 31. Banking Control Commission Lebanon’s Action Plan to Implement Basel III1)The B.C.C.L. has sent (in April 2010) its comments on the following C.P.’s of the B.C.B.S.: * Strengthening the Resilience of the Banking Sector (Dec. 2009) * International Framework for Liquidity Risk Measurement (Dec. 2009) * Good Practice Principles on Supervisory Colleges (March 2010)2) B.C.C.L. issued a Memo (January 2010) asking Banks to have strong M.I.S.3)The B.D.L. will issue soon a new circular based on the new “Principles for enhancing Corporate Governance” issued by the Basel Committee (March 2010), that follows the Corporate Governance chart issued by ABL in January 2011. 31
  32. 32. Banking Control Commission Lebanon’s Action Plan to Implement .(Basel III (Cont4)The B.C.C.L. made a study (Q.I.S.) to measures the impact of the implementation of Basel III on Lebanese banks. (based on 30 June, 2010 figures); the results are discussed on a case - by - case basis with every bank.5)The B.C.C.L. issued ICAAP templates to banks, which will help performing its SREP missions in banks (October 2010 for submission in June 2011)6)The B.C.C.L. issued new regulations relating to the implementation, as of January 2011, of : * IFRS 9 * IFRS 7 (in preparation)7)B.D.L. & B.C.C.L. are in the process of issuing a new Liquidity methodology, based on the New Concept of L.C.R. and the Basel paper on “Liquidity Risk Management” 32
  33. 33. Banking Control Commission Lebanon’s Action Plan to Implement .(Basel III (cont8)B.C.C.L. performed in September 2010 a Stress Test on banks, to study the impact of a variation of the interest rates on their “Profitability” and “Equity”.9)B.C.C.L. is preparing a serie of Stress Tests on banks, with different scenarios (during 2011)10)B.D.L. is studying the implementation of a “Dynamic Provisioning Process” in banks. 33
  34. 34. Banking Control CommissionE – Mail: amawad@bccl.gov.lb 34

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