The global body for professional accountantsThe Impact of Basel III:What little we know
The global body for professional accountants
The global body for professional accountantsBasel III: the story so farThe post- crisis G-20 consensus:• Failure of market...
The global body for professional accountantsBasel III: the story so far• Sep 2009: G-20 in Pittsburgh call fornew capital,...
The global body for professional accountantsSource: Moody’s (2012)
The global body for professional accountantsSource:Schwarz-Petersen (2013)% of Risk WeightedAssets% of Risk WeightedAssets
The global body for professional accountantsLiquidity Coverage Ratio (LCR) (by 2015)net liquidity outflows during a 30-day...
The global body for professional accountantsThe Macro ImpactAssessments.
The global body for professional accountantsImpact estimatefor Basel III Output loss Spreads incr.MAG (Dec 2010) 0.05 <20b...
The global body for professional accountantsThe Basel III IA boxed set: consensus• Small output loss, peaks in ca. 9yrs• L...
The global body for professional accountantsThe Basel III IA boxed set: unknowns• Counterfactuals• Investors’ response and...
The global body for professional accountantsThe Basel III IA boxed set: underway• Reviving securitisation (ACCA 2013)• ‘Si...
The global body for professional accountantsThe Micro Impact.
The global body for professional accountantsImprove dataquality and internalreportingImprove dataquality and internalrepor...
The global body for professional accountantsCRD IV –What’s it good for?.
The global body for professional accountants60% - 300%60% - 300%of GDP: the typical costof a financial crisis4.6%<3%4.6%<3...
The global body for professional accountantsHey! This is abit like taxableincome?!Source: Slovik (2012)
The global body for professional accountantsCapgemini (2010)
The global body for professional accountantsSource: Slovik (2012)
The global body for professional accountantsSource: BIS (2013)Meanwhile,on a balancesheet nearyou…
The global body for professional accountants“We checked –SMEs are riskier.”Paraphrasing EBA (2012) (a lot)
The global body for professional accountantsSystemic riskinternalised byno-oneRisk internalisedby counterpartiesRisk inter...
The global body for professional accountants“[T]he traditional […]effects of capital become lesspowerful […] and restrict ...
The global body for professional accountantsWhat is more dangerous in asystemic way, that which isperceived as risky or th...
The global body for professional accountantsA REFRESHER• Basel is still not a complete framework;criticism is mainstream –...
The global body for professional accountantsThank you!
Impact of Basel III: Presentation at the Romanian Banking Institute, Bucharest, 11 June 2013
Impact of Basel III: Presentation at the Romanian Banking Institute, Bucharest, 11 June 2013
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Impact of Basel III: Presentation at the Romanian Banking Institute, Bucharest, 11 June 2013

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  • 12 ROE in Europe and US , 7 ROE in Japan etc.
  • 12 ROE in Europe and US , 7 ROE in Japan etc.
  • 12 ROE in Europe and US , 7 ROE in Japan etc.
  • Impact of Basel III: Presentation at the Romanian Banking Institute, Bucharest, 11 June 2013

    1. 1. The global body for professional accountantsThe Impact of Basel III:What little we know
    2. 2. The global body for professional accountants
    3. 3. The global body for professional accountantsBasel III: the story so farThe post- crisis G-20 consensus:• Failure of market discipline• Too little / poor quality capital• Too much leverage• Too much short-term funding, relianceon supposedly liquid markets• Procyclical capital requirements• Insufficient provision for Too Big ToFail
    4. 4. The global body for professional accountantsBasel III: the story so far• Sep 2009: G-20 in Pittsburgh call fornew capital, liquidity rules by end 2010• Nov 2010: G-20 endorse the BaselCommittee’s Basel III proposals inSeoul, seek to enact by end 2012• Jul 2011: EC unveils CRD IVproposals• Mar 2013: CRD IV approved byCouncil, EP. MS to transpose by 2014.• Jan 2014: Deadline for transposition.• 2019-22: Full implementation
    5. 5. The global body for professional accountantsSource: Moody’s (2012)
    6. 6. The global body for professional accountantsSource:Schwarz-Petersen (2013)% of Risk WeightedAssets% of Risk WeightedAssets
    7. 7. The global body for professional accountantsLiquidity Coverage Ratio (LCR) (by 2015)net liquidity outflows during a 30-day stress period----------------------------------------------------------------------------stock of ‘high quality’ liquid assetsLiquidity Coverage Ratio (LCR) (by 2015)net liquidity outflows during a 30-day stress period----------------------------------------------------------------------------stock of ‘high quality’ liquid assetsNet Stable Funding Ratio (NSFR)(2018, but in observation from 2012)Net Stable Funding (customer deposits, long-term wholesalefunding and equity weighted by liquidity risk)----------------------------------------------------------------------------Assets (weighted by refinancing risk)Net Stable Funding Ratio (NSFR)(2018, but in observation from 2012)Net Stable Funding (customer deposits, long-term wholesalefunding and equity weighted by liquidity risk)----------------------------------------------------------------------------Assets (weighted by refinancing risk)Leverage Ratio (LCR) (tracked from 2013, disclosed from 2015)Tier 1----------------------------------------------------------------------------Total on- and off- balance sheet assetsLeverage Ratio (LCR) (tracked from 2013, disclosed from 2015)Tier 1----------------------------------------------------------------------------Total on- and off- balance sheet assets
    8. 8. The global body for professional accountantsThe Macro ImpactAssessments.
    9. 9. The global body for professional accountantsImpact estimatefor Basel III Output loss Spreads incr.MAG (Dec 2010) 0.05 <20bpsIMF (Sep 2012) 0.05 to 0.08 28bpsBCBS (Aug 2010) 0.08 66 bpsOECD (Feb 2011) 0.15 53 bpsEC (Jul 2011) 0.16 29 bpsIIF (Sep 2011) 0.70 364 bpsThe Basel III IA boxed set: estimates
    10. 10. The global body for professional accountantsThe Basel III IA boxed set: consensus• Small output loss, peaks in ca. 9yrs• Lending spreads will rise modestly• Bank ROE will suffer• Impact largest in Europe, Japan• Incremental cost falls if banks learn• Timing can determine impact• Synergies between capital and liquidity• Monetary policy can reduce the impact• Benefits will outweigh costs
    11. 11. The global body for professional accountantsThe Basel III IA boxed set: unknowns• Counterfactuals• Investors’ response and cost of equity• Liquidity gaps, maturity matching costs• Banks’ own capital targets• Banks’ changing business models• Monetary policy• Viability of non-bank channels• Impact on SMEs
    12. 12. The global body for professional accountantsThe Basel III IA boxed set: underway• Reviving securitisation (ACCA 2013)• ‘Silo-ing’ collateral (Singh 2013)• Financial disintegration, mostlythrough liquidity rules(Lehmann et al 2011)
    13. 13. The global body for professional accountantsThe Micro Impact.
    14. 14. The global body for professional accountantsImprove dataquality and internalreportingImprove dataquality and internalreportingImprove loan-lossprovisions basedon better modellingImprove loan-lossprovisions basedon better modellingRedirect fundsaway from tradingRedirect fundsaway from tradingAttract retail / SME depositsAttract retail / SME depositsTake loans offbalance sheet /originate todistributeTake loans offbalance sheet /originate todistributeShortenmaturitiesShortenmaturitiesSeek collateraland guaranteesSeek collateraland guaranteesAvoid SMEs, riskierborrowersAvoid SMEs, riskierborrowersMake greater use ofcovenantsMake greater use ofcovenantsRe-focus onfee-basedservicesRe-focus onfee-basedservicesWithdrawcapital-intensiveproducts(overdrafts)Withdrawcapital-intensiveproducts(overdrafts)RationcapitalRationcapitalRe-price creditRe-price creditImpact on SME lendingImpact on SME lendingCut costs / remunerationCut costs / remuneration
    15. 15. The global body for professional accountantsCRD IV –What’s it good for?.
    16. 16. The global body for professional accountants60% - 300%60% - 300%of GDP: the typical costof a financial crisis4.6%<3%4.6%<3%Probability of a financial crisis per year,before and after Basel III0?0?Change in the expectedseverity of crises due to Basel IIISource: BCBS (Aug 2010)
    17. 17. The global body for professional accountantsHey! This is abit like taxableincome?!Source: Slovik (2012)
    18. 18. The global body for professional accountantsCapgemini (2010)
    19. 19. The global body for professional accountantsSource: Slovik (2012)
    20. 20. The global body for professional accountantsSource: BIS (2013)Meanwhile,on a balancesheet nearyou…
    21. 21. The global body for professional accountants“We checked –SMEs are riskier.”Paraphrasing EBA (2012) (a lot)
    22. 22. The global body for professional accountantsSystemic riskinternalised byno-oneRisk internalisedby counterpartiesRisk internalisedby banks• Cross-jurisdictional activity• Size• Substitutability• Complexity• Tail risk?BIS (2011)
    23. 23. The global body for professional accountants“[T]he traditional […]effects of capital become lesspowerful […] and restrict “skin in the game” […]when banks have access to tail risk projects.The reason is that tail risk realizations can wipeout almost any level of capital [hence] a part of thelosses is never borne by shareholders.”Moreover, […] higher capital […] enables banks totake higher tail risk without the fear of breachingthe minimal capital requirement in mildly bad (i.e.,non-tail) project realizations.Perotti et al (2011) (emphasis mine)
    24. 24. The global body for professional accountantsWhat is more dangerous in asystemic way, that which isperceived as risky or that whichis perceived as not risky?Per Kurowski, Former ExecutiveDirector at the World Bank
    25. 25. The global body for professional accountantsA REFRESHER• Basel is still not a complete framework;criticism is mainstream – but there’stoo much political capital invested• Most impacts will be through changesin banks’ business models, esp. ifbanks are given too long to comply.• Risk weights are deeply problematic,as is the over-reliance on capital.
    26. 26. The global body for professional accountantsThank you!

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