This document provides an overview and summary of the Basel III accords and their implementation in the United States. It discusses key provisions of Basel III including revised definitions of regulatory capital, capital buffers, risk-weighted assets, leverage ratios, liquidity requirements, and disclosures. It outlines which US banking organizations are subject to Basel III and to what extent based on their size. The document also discusses implications for banking organizations and options they should consider to evaluate their compliance with the new requirements.

1. How Does Basel III Impact You?
Presented by: Michael Trickey, CPA
Managing Director
Berkshire Advisors, LLC
553 Capital Drive, Lake Zurich, IL 60047 847-540-6554 www.BGLP.com

2. “You never want a serious crisis to go to waste.”
“And what I mean by that, it’s an opportunity to do things you think you could not do before”
-- Rahm Emanuel
“All great changes are preceded by chaos.”
-- Deepak Chopra
2

3. Agenda
•Overview of Basel III
•U.S. implementation of Basel III
•Details of Basel III
•Interaction of Basel III with Dodd-Frank Act
•Implications of Basel III changes
3

4. OVERVIEW OF BASEL III
4

5. What is Basel III?
Basel III is the third installment of the Basel Accords (meetings held in Basel Switzerland), developed by the Basel Committee of Banking Supervisors (BCBS)
Includes regulators from 26 countries, including U.S.
Federal Reserve, FDIC and OCC participate on BCBS
•Developed in response to deficiencies in financial regulation revealed in late- 2000s financial crisis
•Purpose –
•Strengthen bank capital (better quality and risk buffers)
•Decrease bank leverage (enforce minimum ratios of regulatory capital to total on and off-balance sheet exposures)
•Increase bank liquidity positions (both short-term and longer-term)
•Improve disclosures
5

6. Basel III – Promulgation and Adoption
•BCBS introduced Basel III in December 2010, further developed it in June 2011, and have continued to issue updates
•U.S. regulators
•Initially adopted revised capital rules in July 2013
•Ongoing updates in conjunction with BCBS updates
•Largely making refinements and introducing liquidity rules
6

7. U.S. IMPLEMENTATION OF BASEL III
7

8. Covered “Banking Organizations”
•US Basel III generally applies to “Banking Organizations” as follows:
•National banks
•State member banks
•State nonmember banks
•U.S. bank holding companies (BHCS) other than small BHCs
•State savings associations
•Federal savings associations
•Covered savings and loan holding companies (SLHCs)
•Any of the above that are subsidiaries of foreign banks
8

9. Scope of Coverage Differs Among Subcategories of Covered Organizations
•U.S. Globally Systemically Important Banks (G-SIBs)
•Advanced Approaches Insured Depository Institution (IDI) Subsidiaries of G-SIBs
•U.S. Systematically Important Financial Institutions (SIFIs)
•Advanced Approaches Banking Organizations
•Market Risk Banking Organizations
•Banking Organizations - distinctions by asset size:
•>= $50 billion
•>= $15 billion
•>= $10 billion
•>= $500 million
9

10. Definitions
•G-SIBs - Top tier BHCs having > $700 billion in total consolidated assets or > $10 Trillion in assets under custody and Advanced Approaches IDI subsidiaries of any such BHC.
•SIFIs –Banking organizations (and non-banking organizations designated by SFOC) having > $50 billion in total consolidated assets
•Advanced Approaches Banking Organizations: 1) mandatory “core” banking organizations having consolidated total assets of $250 billion or more, consolidated on-balance sheet foreign exposure of $10 billion or more, or are a subsidiary of a core bank, and 2) those that voluntarily apply the advanced internal ratings approach for credit risk and the advanced measurement approach for operational risk
10

11. G-SIBs, Advanced Approaches and SIFIs
11
Asset
Rank
Banking
Organization
3/31/2014 Total
Assets ($BIL)
3/31/2014
Custody Assets
($BIL)
Adv'd
Apprch
Banking Orgs
G-SIB
Flag
1 JPMorgan Chase $2,477 $ 20,388 1 1
2 Bank of America $2,153 $ 127 2 2
3 Citigroup $1,895 $ 10,719 3 3
4 Wells Fargo $1,547 $ 666 4 4
5 Goldman Sachs $916 $ - 5 5
7 Morgan Stanley $831 $ 6 6 6
11 US Bank $371 $ 990 7
12 Bank of NY Mellon $368 $ 20,595 8 7
13 PNC $324 $ 86 9
14 HSBC $309 $ 24 10
15 Capital One $291 $ 3 11
16 State Steet $257 $ 20,058 12 8
18 TD Bank $237 $ 10
19 BB&T $185 $ 10
20 Suntrust $180 $ 64
21 American Express $151 $ - 13
22 Ally Bank $148 $ -
25 Fifth Third $130 $ 240
27 RBS Citizens $127 $ 5
28 Regions $118 $ 17
29 BMO Harris $114 $ 127
30 Santander $109 $ -
31 Union Bank $107 $ 122
32 Northern Trust $104 $ 4,319 14
33 KeyCorp $91 $ 42
34 M&T $89 $ 62
35 Bank of the West $85 $ 0
36 Discover $80 $ -
37 BBVA Compass $75 $ 2
38 Deutsche Bank $73 $ 37
39 Comerica $66 $ 52
40 Huntington $61 $ 49
41 Zions $56 $ 2
Size Indicatiors Special Category
Non-Banks Designated as Systemically Important:
Asset
Rank
Banking
Organization
3/31/2014 Total
Assets ($BIL)
3/31/2014
Custody Assets
($BIL)
6 MetLife $891 $ -
8 Prudential Financial $747 $ -
9 AIG $547
$ 25
10
General Electic
Capital Corp
$517
$ -
Size Indicatiors

12. DETAILS OF BASEL III
12

13. U.S. Roll-out Key Provisions
1.Revised Definition of Regulatory Capital
2.Capital Buffers
3.Risk-Weighted Assets
4.Leverage Ratio
5.Liquidity
6.Disclosures
7.Prompt Corrective Action (PCA) Thresholds adjusted
8.Codifies rules into a harmonized integrated regulatory framework
9.Roll-out
1.Starts 1/1/2014 for Advanced Approaches
2.Starts 1/1/2-15 for all others
3.Phase-in of some items
13

14. Final Rule - Basel III Minimum Capital Requirements
14 NewCommon Equity Tier 1: Common Equity Tier 1: Countercyclical Buffer (if deployed) Common Equity Tier 1: Capital Conservation BufferPriorTier 2Tier 2Additional Tier 1 Tier 1Common Equity Tier 1New MinimumTransitional Period* New Adequately Capitalized MinimumsMinimum Capital RequirementsGlobal Systematically Important Banks (G- SIB) Surcharge(core and restricted capital elements, with common equity as "dominant" form) 6% Tier 1 Capital* Advanced Approaches Banking Organizations onlyBeing addressed now; U.S.more stringent than BCBS8% Total Capital* 4.00% 4.00% 1% - 4.5% 0% - 2.5% 4.5%* 1.50% Failure to maintain a buffer of at least 2.5% results in limitations on dividends and executive bonuses2.00% 2.50%

15. Payout Limitations Based on Size of Capital Conservation Buffer
15
Maximum Payout Ratio
Size of Buffer
as % of Eligible Retained Income
(% of RWA)
No Limit
Greater than 2.5
60
>1.875 to 2.500
40
>1.125 to 1.875
20
>0.625 to 1.250
0
<= 0.625

16. Calculation of Capital Ratios
16
Well Capitalized
Adequately Capitalized
Risk Based Capital Ratio %
Regulatory Capital
=
-----------------------------------
Risk-Weighted Assets
CET1 Capital Ratio %
CET1 Capital
=
-----------------------------------
=
6.50%
4.50%
Risk-Weighted Assets
Tier 1 Capital Ratio %
Tier 1 Capital
=
-----------------------------------
=
8.00%
6.00%
Risk-Weighted Assets
Total Capital Ratio %
Tier 1 + Tier 2 Capital
=
-----------------------------------
=
10.00%
8.00%
Risk-Weighted Assets

17. Regulatory Capital
•Common Stock plus surplus
•Retained Earnings
•AOCI
•CET1 Minority Interests
•Less:
•Goodwill, net of DTLs
•Securitization gains
•Gains (losses) on certain cash flow hedges
•Insignificant investments in Financial institutions
•Other CET1 deductions
•Threshold deductions , net of DTLs
•CET1
•Additional Tier 1 capital items and deductions
•Tier 1
•Tier 2 capital items and deductions
•Tier 2
•Total Regulatory capital
17

18. Risk-Weighted Assets (RWA)
•Each Balance sheet asset amount x RWA Factor
•Each Non-balance sheet exposure x credit conversion factor x RWA factor
18

19. Minimum Leverage Requirements
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NewEnhanced Supplementary Leverage BufferNewUS Top Tier BHCs onlySupplementary Leverage Ratio (SLR) Adequately Capitalized MinimumApplies to Advance Approaches Banking OrganizationsGenerally Applicable Leverage RatioAdequately Capitalized MinimumApplies to all US Banking Organizations3.00% Advanced Approaches Banking Organizations only4.00% 2.00% Failure to maintain a buffer of at least 2.0% results in limitations on dividends and executive bonusesMinimum Leverage Requirements- U.S. Top Tier BHC defined as having > $700 billion in total consolidated assets or > $10 trillion in assets under custody and any Advanced Approaches IDI subsidiary of such BHCs - The Supplementary Leverage Ratio includes many off-balance sheet exposures in its denominator; the Generally Applicable Leverage Ratio does not- The Supplementary Leverage Ratio = Tier 1 Capital / Total Leverage Exposures (incorporates off-balance sheet exposures) - The Generally Applicable Leverage Ratio = Tier 1 Capital / Average Total Consolidated AssetsAdvanced Approaches Subsidiary IDIs of US Top Tier BHCs BufferNeed 6% SLR to be Well Capitalized1.00%

20. Payout Limitations Based on Size of Leverage Buffer for Top Tier US BHCs and their Advanced Approaches IDI Subsidiaries
20
Maximum Payout Ratio
Size of Buffer
as % of Eligible Retained Income
(% of RWA)
No Limit
Greater than 2.0
60
>1.500 to 2.000
40
>1.000 to 1.500
20
>0.500 to 1.000
0
<= 0.500

21. PCA Capital and Leverage Thresholds
21
PCA Threshold Requirements
PCA Capital Category
Common Equity Tier 1 RBC %
Tier 1 Risk-Based Capital (RBC)
Total RBC %
Generally Applicable Tier 1 Leverage (percent)
Supplementary leverage ratio for advanced approaches banking organizations %
Supplementary leverage ratio for subsidiary IDIs of top-tier US BHCs %
Current %
Interim Final Rule %
Well Capitalized
≥ 6.5
≥ 6.0
≥ 8.0
≥ 10.0
≥ 5.0
Not applicable
>= 6
Adequately Capitalized
≥ 4.5
≥ 4.0
≥ 6.0
≥ 8.0
≥ 4.0
>= 3
>= 3
Undercapitalized
< 4.5
< 4.0
< 6.0
< 8.0
< 4.0
< 3
< 3
Significantly undercapitalized
< 3.0
< 3.0
< 4.0
< 6.0
< 3.0
Not applicable
Not applicable
Critically undercapitalized
Tangible Equity to Total Assets ≤ 2%
Not applicable
Not applicable
- Revised PCA ratios are effective on January 1, 2015, for all banks
- Tangible Equity equals the revised Tier 1 Capital plus outstanding non-Tier 1 perpetual preferred stock
- The Supplementary Leverage Ratio includes many off-balance sheet exposures in its denominator; the generally applicable leverage ratio does not

22. Liquidity Coverage Ratio
22 Stock of high quality liquid assets (HQLAs) Net cash outflows over a 30-day time period>= 100%

23. Net Stable Funding Ratio
•Longer term Funding
•NSFR =
•Available Stable Funding (ASF)/ Required Stable Funding (RSF)>100%
•ASF – available reliable sources of funds over a 1-year period under conditions of extended stress
•Tier 1 and Tier 2 capital, preferred stock with maturity > 1 year, liabilities with maturity > 1 year, stable deposits and funding with maturities < 1 year.
•Each weighted according to perceived availability and stability
•RSF – sum of the various types of various types of assets held and funded by a bank and off-balance sheet contingent exposures incurred and other bank activities that could expose it to liquidity risk
•Each weighted according to perceived likelihood of funding needs
23

24. Disparate Rules and Impacts
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Asset RankBanking OrganizationAdv'd Apprch Banking OrgsG-SIB FlagRevsd Cap'l Rule, w/ revsd RWAsGrand- fathered Cap'l ItemsAOCI Opt- outCET1 Cap'l Cnsvtn BufferCET1 Counter- cyclical BufferCET1 G- SIB Sur- chargeLRSLReSLRLCRMod LCRNSFRCCAR BHCsCapPR BHCsAnnual Firm-run Stress TestsD-FAST - 1 Mid- cycle, 2 annualLiving Will1JPMorgan Chase11xx11x111TBD1112Bank of America22xx22x222TBD2223Citigroup33xx33x333TBD3334Wells Fargo44xx44x444TBD4445Goldman Sachs55xx55x555TBD5557Morgan Stanley66xx66x666TBD66611US Bank7xx7x77TBD77712Bank of NY Mellon87xx87x878TBD88813PNC9xx9x99TBD99914HSBC10xx10x1010TBD1101015Capital One11xx11x1111TBD10111116State Steet128xx128x12812TBD11121218TD Bankxxxx1TBD12131319BB&Txxxx2TBD12141420Suntrustxxxx3TBD13151521American Express13xx13x134TBD14161622Ally Bankxxxx5TBD15171725Fifth Thirdxxxx6TBD16181827RBS Citizensxxxx7TBD2191928Regionsxxxx8TBD17202029BMO Harrisxxxx9TBD3212130Santanderxxxx10TBD222231Union Bankxxxx11TBD4232332Northern Trust14xx14x1412TBD5242433KeyCorpxxxx13TBD18252534M&Txxxx14TBD6262635Bank of the Westxxxx15TBD13272736Discoverxxxx16TBD7282837BBVA Compassxxxx17TBD8292938Deutsche Bankxxxx18TBD14303039Comericaxxxx19TBD9313140Huntingtonxxxx20TBD10323241Zionsxxxx21TBD113333Banking Orgs $15 bil >= assets < $50 bilxxxxxBanking Orgs $10 bil >= assets < $15 bil xxxxxxBanking Orgs with total assets < $10 bilxxxxxCapital Rules, with Revised RWAsLeverage RatioLiquidtySpecial CategoryCCAR BHCsDFA Items

25. IMPLICATIONS OF BASEL III CHANGES
25

26. What to do now?
•Take inventory – where do we stand now?
•May require extensive disaggregation of data into new RWA, liquidity, capital and leverage categories (now 17 RWA categories)
•Requires reading and interpreting hundreds of pages of regulator documents
•Systems may require updates and programming to accommodate new categories
•Changes to call reports are extensive, especially to Schedule R (regulatory capital and risk weighted assets [stay tuned])
•Organization structure and oversight committees
•Run current numbers through new paradigm model
•If we do nothing, are we in or out of compliance
•What are the best methods to improve the picture ?
•Giant puzzle - Linear programming model
•Objective function – (e.g., maximize profits)
•Variables (balances, rates, risk-weightings, etc.)
•Constraints (minimum and maximum ratios,)
•Run optimizations
•Benefits if you do something versus risks of doing nothing
26

27. What to Consider?
•Options to consider:
•Capital:
•Determine whether you should Opt-Out of AOCI changes
•Replace non-qualifying forms of capital with qualifying forms
•Raise new capital in qualifying forms
•Divest of assets that are deductions from CET1
•Assets
•Discontinue marginally profitable activities involving highly risk-weighted assets or illiquid assets
•Divest of assets with high RWA factors
•Focus on high quality liquid assets
•Collateralize more transactions
•Off-balance sheet items
•Change form of unfunded commitments, and trim excess commitment amounts
•Highly scrutinize counterparties and guarantors
•Evaluate differing forms of structured transactions
•Funding sources and types
•Lengthen maturities of deposits and debt
•Put more emphasis on stable forms of funding
•Mergers and Acquisitions
•Understand the Basel III- related ramifications of any transaction
27

28. Strategic Questions
•How will phasing in of new requirements affect my growth and business plans?
•How long does each potential strategy I might pursue take to implement versus how much time I have to be in compliance?
•What are the trade-offs between yield, fees, and capital charges that I need to consider to maintain an acceptable ROE and have no dividend or bonus restrictions?
•What Implementation costs will I face and can I pass any of these costs on to my customers directly or through other revenue sources?
•To what extent will the market impose uniform standards on all types and sizes of entities, regardless of disparate regulatory adoption requirements and timelines?
•Basel III is important, but just one piece of the puzzle that needs to be considered:
•How do Basel III, Dodd-Frank, QM, QRM, CFPB, Regulation AB, massive lawsuit settlements, and other market changes and dynamics interact?
28

29. Real World Case Study Examples
29

30. Systems and Record-Keeping
•Increased complexity requires more granularity in general ledger and systems of record:
•More categories:
•Risk-weighted assets, high quality liquid assets, funding maturities and types, investments, off-balance sheet items, capital instruments
•Call reports have many more pages, fields and inter-relationships to track and program systems
•Systems will need to support extensive new internal and external reporting needs
•Planning and forecasting systems will need to be programmed
•Compliance and profitability trade-offs must be examined
•Need way of tracking and matching counterparties and guarantors to assets
•Need tighter scrutiny of commitments – excess amounts will be a drain on capital
•Increased regulator scrutiny and reporting requirements
30

31. Capital Ratio Implications
•Multi-prong approach may be necessary:
•Raise new capital or replace existing non-qualifying capital
•Reduce assets that are direct reductions of capital
•Alter asset mix to encompass lower risk-weighted assets
•Increasing capital may:
•Reduce funding costs (less debt)
•Increase net income
•But at a reduced ROE
•Capital ratios, leverage ratios, and liquidity ratios need to be considered in unison
31

32. Shedding Assets Causing Deductions From Capital
32
Source: www.globes-online.com 8-7-2014

33. Selling MSRs – Strong price and Improved Capital Ratios
33
Selling MSRs removes an asset that causes a in dollar-for-dollar reduction in CET1 for assets amounts above the 10% or CET1 limit. It also reduces RWAs, as the 10% piece not resulting in CET1 reduction is subject to a 250% risk- weighting.

34. Implications on customer ownership, customer service, and cross-selling opportunities
•Certain activities will move toward the less regulated shadow banking sector as the regulatory cost to banks to undertake such activities increases
•The interconnectedness of banks with nonbank entities will be challenged by supervisors
•Key example is mortgage servicing assets:
•Basel III has let to an increasing concentration of servicing held by less regulated, non-bank firms such as mortgage companies, REITs, hedge funds, and private equity firms that are not subject to the new capital restrictions.
•Banks are either selling loans servicing released or selling servicing rights separately
34

35. One strategy - Banks can sell MSR assets but retain subservicing to keep customer relationships
35

36. FHFA Using Approval Rights as One Means of Control
36

37. NY DFS is Delaying Transactions
37

38. Risk-Weighted Asset Implications
•Increased risk weighting on certain on and off-balance sheet exposures has a dual impact on capital ratios and liquidity ratios
•First goal is to see determine which exposure provide greatest boast in both ratio types through their elimination
•Rank by impact
•Examine profitability of each
•Take strategic actions to shed high capital and liquidity cost, low cash return assets
•MSRs
•Stock and debt in other financial institutions
•High Velocity Commercial Real Estate Assets
•Excessive unused commitments
•Certain trading assets and derivative exposures
38

39. Implications on Business Lines – Reducing Marginally Profitable Assets to Meet Leverage Ratios
39

40. Implications on Commitments
•Reduction in size of commitments
•Efforts to make commitments unconditionally cancellable where practical
•Unconditionally cancellable commitments have a O% risk weighting for capital ratios but 10% for liquidity ratios
40

41. Implications on Product Design
•Transform unsecured credit into credit secured by collateral such as real property or cash
•Shift certain customers from credit products to debit products
•Transform long credit exposure durations (grace periods, billing cycles, credit limits) into shorter durations, particularly for non- revolving customers
•Transform contingent liabilities, especially unused credit lines (even internal guidance lines), into just in time, or case by case, underwriting
41

42. Liquidity Ratio Implications
•Institutions are encouraged to put liquid assets and longer-term funding on balance sheet
•Challenge is the liquid assets yield less and longer-term funding costs more
•Combined with higher capital needs, ROEs can suffer
•Banking organizations are meeting the challenge by cutting low margin businesses that have high risk-weighting or that involve very short-term funding
•Retail units that raise deposits (viewed as stable funding) can gain greater emphasis
42

43. Implications on Business Lines – Cutting Certain Types of Lending to Meet Liquidity Ratios
43
The letter asks these so-called “stock borrow transactions” not to be classified as loans by the bank for the purposes of the new funding rules.

44. Implications on Growth and M&A
•Growth by acquisition may lead to greater and more onerous requirements:
•Loss of grandfathering of TruPS and other capital instruments if growth is through acquisition
•AOIC Opt-out election status of combined entities
•Combined entity may move into a new asset-size bracket and the resulting increase in capital, reporting and stress testing requirements
•Desire not to just edge into new category
•> $10 billion, > $50 billion, Advanced Approaches
•Goodwill in a transaction results in a dollar-for-dollar reduction in CET1
•Generic growth may also result in some of these issues
44

45. Growth into New Asset Size Category Affects Plans
45
Source: Wall Street Journal 7-22-2014

46. Systemically Important Tag Draws Ire from Large Regional Banks
46
Source: Wall Street Journal, July 31, 2014

47. FSOC Designates MetLife as Systemically Important on 9-4-2014 – Subjects Company to Stress Tests and Living Will Requirements
47

48. Competitive Comparative Analytics discussion
48
COMPARATIVE FINANCIAL ANALYSIS
CCF
Factor
Risk
Wtg
Banking Org
< $15 billion
Banking Org
>=$ 15 bil <
$50 bil
Banking Org
>=$ 50 bil <
$250 bil
Banking Org
>=$ 250 bil <
$700 bil
G-SIB
Banking Org
Small
Mortgage
Company
Large
Mortgage
Company
REIT
1. Cash and balances due from
depository institutions 0%
2. Securities excluding securitization
exposures
a. Held-to-maturity securities
b. Available-for-sale securities
3. Federal funds sold and securities
purchased under agreements to
resell
4. Loans and leases held for sale
a. Residential mortgage exposures
50%
b. High volatility commercial real
estate exposures 150%
c. Exposures past 90 days or more
or on nonaccrral 100%
c.1 1-4 family mortgage 100%
c.2 Other exposures 150%
d. All other exposures 100%
5. Loans and leases, net of unearned
income…
a. Residential mortgage exposures
50%
b. High volatility commercial real
estate exposures 150%
Completed analysis will be
Discussed in Presentation

49. Berkshire Group Contacts
49
The Berkshire Group is a management consulting firm providing advisory services, predictive analytics, due diligence services and data subscription products to banking organizations and other financial institutions. For more information, please visit www.bglp.com. If we can be of assistance to your organization, please contact one of the parties below:
Michael W. Trickey
Managing Director
O: 847-540-6554 x204
C: 847-867-3595
Email: mtrickey@bglp.com
Jim Reynolds
Senior Director
C: 415-971-0026
Email: jreynolds@bglp.com
Debra Vander Weit
Consulting Director
O: 847-540-6554 x206
C: 847-867-3595
F: 847-540-6548
Email: dvanderweit@bglp.com
David Stinner
Director
O: 301-216-9776
C: 301-908-1531
Email: dstinner@bglp.com
Berkshire Group LP
553 Capital Drive
Lake Zurich, IL 60047
O: 847-540-6554
Email: sales@bglp.com
Web: www.bglp.com