Basel III And Its Implications

1. Dr.Nabil Zaki
Basel III And Its Implications

2. 2
Basel III

3. Agenda
• Welcome
• Housekeeping notes
• Session starts
• Q&A
• End of webinar

4. House Keeping
• Slides will be available on our SlideShare page, link will be
emailed to you
• Recording of the webinar will be available to download, link
will be emailed
• Take the time to complete post-webinar survey that will pop
up at the end
• You can type your questions throughout the session
• Time will be allocated in the end for the speaker to address
your questions

5. About Your Speaker
Dr. Nabil Zaki.
Dr. Nabil W. Zaki has been in the investment and banking industry for
more than 30 years. During that period, he assumed senior positions in
both corporate finance and treasury with major Wall Street firms and
international financial institutions in New York, Canada and the Middle
East. He has held high profile management positions with Chase
Manhattan Bank, Merrill Lynch, Prudential Securities and Tradition.
Currently, Nabil Zaki is an adjunct Professor of Corporate Finance and
Derivatives at New York University. He taught at New York Institute of
Finance (currently known as FT Knowledge) from 1995 until 2004. He
lectures extensively on portfolio management, risk management,
derivatives, and international capital markets for major Wall Street firms
and financial institutions. Nabil worked as senior vice presidents at both
Chase Manhattan bank as well as Merrill Lynch in a variety of senior posts
in credit and treasury.

6. 6
Sheila Blair of FDIC to put 829 of the nation’s 7,800 banks on its “problem
List” at the end of June 2010; up from 775 at the end of 1Q10.
Already 118 banks failed until Sept 1st
, 2010; well ahead of the pace set in
2009, when 140 were seized by regulators.
Lending by US banks is still stunted; loan balances across all major loan
Categories fell; leading to a decline of total assets for the industry by 1% to
$13.2 trillion during 1Q10, and a massive liquidity squeeze.
US banks’ 2Q10 profits totaled $21.6 billion, reversing a combined loss of
$4.4 billion in 2Q09. Banks set aside more than $40.3 billion for
future loan losses.

7. 7
From 2007 until September 2011
A total of 396 bank failures in USA
With total assets of
US$674.7 billion
&
Cost to U.S. government of
US$80.7 billion

8. 8
BISis recognizing that a key
characteristic of the 2007
onwards financial
crisis is the inaccurate and
ineffective
management of liquidity risk

9. 9
Basel III
A new set of rules on banking supervision, published in
response to the recent financial crisis.
The Basel Committee is an international organization, set up
by the governors of the G10 central banks at the end of 1974,
operating under the patronage of BIS.
After the crisis broke out in 2007, the Committee was extended
to G20 countries (including China, India & Brazil).
The Committee coordinates the allocation of supervisory duties
among the national authorities for the supervision of banking
activities worldwide.

10. 10
Basel III
Basel III
Capital
Proposals
Basel III
Liquidity
Proposals

11. 11
Introduction of a Leverage Ratio
Increased Capital Requirements
on Certain counterparty Credit Risks
Improving Quality & Consistency of
Regulatory Capital
Components of Basel III Capital Proposals
Addressing Procyclicality

12. 12

Increased Capital Requirements
“Tighter definitions” of Common Equity
Banks must hold 4.5% by Jan. 2015,
then a further 2.5%, totaling 7%
 Measures to limit Counterparty Credit Risk
 Introduction of a Leverage Ratio
 A framework for counter-cyclical capital
buffers
 Short & Medium-term quantitative
Liquidity Ratios
The Basel III Regulations

13. 13
New Elements of Basel III
(1) Increasing & improving the quality of bank capital by:
(a) Increasing the minimum regulatory ratios
(b) Introducing capital buffers to be added to the minima
(c) Reviewing the treatment of certain regulatory capital components
(particularly deferred tax assets, minority interest capital and significant
equity investments in banks, finance and insurance companies, and
hybrid equity instruments) to improve their quality.
(2) The introduction of anti-cyclical capital buffers to avoid excessive
increases in bank’s risk position in the expansive phases of the cycle;
therefore, avoiding the negative consequences that emerge in recession
phases.
(3) The introduction of additional capital requirements for counterparty risk,
in relation to banks’ off-balance sheet activities (derivatives, guarantees
& commitments).
(4) The introduction of a leverage ratio (the ratio between capital and non-
risk weighted total assets).
(5) The introduction of liquidity risk measurement/monitoring provisions in
the short-term (liquidity coverage ratio) and in the mid-term (net stable
funding ratio- NSFR)

14. 14
Basel III
Capital Requirements
Capital
Ratios
Capital
Buffers
Definition
Of Capital

15. 15
Basel III
Risk-based
Capital Ratios
Core Tier 1 Total Tier 1
Total
Capital
Basel 3 requires banks to hold
4.5% of common equity, up
from 2%.
6% of capital must be Tier 1.
Tier 2 no more than 2%.
Total Tier 1 increased
from 4% to 6%.
Other types of Tier 1 can
account for 1.5%.
Combined with buffers,
Total Tier 1 = 8.5% RWAs
Total minimum capital
requirement remains at
8%, subject to new capital
Buffers.
Combined with buffers,
Total Risk-based capital
=10.5% of RWAs

16. 16
Basel III
Capital Buffers
Conservation Buffer
To be used by banks
in times of stress
(2.5% of core Tier 1;
to be met with
Common equity only)
Countercyclical Buffer
A range of up to 2.5%
of common equity.
Left to the discretion
of national
regulators

17. 17
Capital Buffers
• In addition to the rise in Tier 1 capital ratios, a new series of
capital buffers will be introduced to further increase the
minimum requirements
(1) Capital Conservation Buffer: which will require banks to
hold (above the minimum 8% total capital) a further 2.5% of
core Tier 1 capital over and above the new 4.5% level; which
brings the total common equity requirement to the level of
7% of RWAs. This buffer must consist solely of common
equity, after deductions.
(2) Capital Countercyclical Buffer: Banks may at certain times
be required to hold another buffer; ranging from 0% to 2.5%
of capital in the form of common equity or other fully loss-
absorbing capital; to be implemented according to national
circumstances. This buffer will only be in effect where there is
an excess credit growth that results in a “system wide build
up of risk” in any given country & will operate as an
extension of the capital conservation buffer.

18. 18
Timing of Capital Buffers
• Both the capital conservation &
countercyclical buffers will be
phased in from January 1st
, 2016 to
January 1st
, 2019 at yearly increments
of 0.625% of RWAs.
• The capital conservation buffer will
be phased in at 0.625% on Jan 1st
,
2016 & increasing each subsequent
year by an additional 0.625%; to
reach 2.5% on Jan 1st
, 2019.

19. 19
Regulators’ Response to LR
• The Basel Committee on Banking Supervision (BCBS)
and some national regulatory authorities are going
to introduce the following:
Limiting the
amount of
leverage
Regulatory
Capital
Buffer

20. 20
Phase-in Arrangements (all dates as of Jan)
l
20112011 20122012 20132013 20142014 20152015 20162016 20172017 20182018 20192019
Min. C. EquityMin. C. Equity
Capital RatioCapital Ratio
3.5%3.5% 4%4% 4.5%4.5% 4.5%4.5% 4.5%4.5% 4.5%4.5% 4.5%4.5%
Capital Conserv.Capital Conserv.
RatioRatio
0.625%0.625% 1.25%1.25% 1.875%1.875% 2.5%2.5%
Min C. Equity +Min C. Equity +
Conservation RatioConservation Ratio
3.5%3.5% 4%4% 4.5%4.5% 5.125%5.125% 5.75%5.75% 6.375%6.375% 7%7%
Phase-inPhase-in
deductionsdeductions
20%20% 40%40% 60%60% 80%80% 100%100% 100%100%
Min Tier 1 CapitalMin Tier 1 Capital 4.5%4.5% 5.5%5.5% 6%6% 6%6% 6%6% 6%6% 6%6%
Min. Total CapitalMin. Total Capital 8%8% 8%8% 8%8% 8%8% 8%8% 8%8% 8%8%
Min Total Capital +Min Total Capital +
Cons. BufferCons. Buffer
8%8% 8%8% 8%8% 8.625%8.625% 9.125%9.125% 9.875%9.875% 10.5%10.5%
CapitalCapital
Instruments (noInstruments (no
longer qualify aslonger qualify as
non-core Tier1 &2)non-core Tier1 &2)
Phased-out over 10 year horizon beginning 2013
Leverage Ratio
Supervisory
Monitoring
Parallel Run Jan 2013-2015
Disclosure starts 2015
Migration
To Pillar 1

21. 21
Basel III
Global Liquidity
Standards
Liquidity
Coverage Ratio
Net Stable
Funding Ratio
Short-term liquidity metric Structural funding metric
It requires banks to maintain high-quality,
unencumbered assets in excess of their
stressed cash outflows over 30-day time.
To promote more medium & long-term
funding of the assets & activities of the
bank over a 1-year horizon
2015 2018

22. 22
Objectives of Basel III Liquidity Standards
• Basel III set out 2 liquidity ratios;
(A)short-term ratio as well as
(B)A longer-term funding ratio by reference to
the amount of “longer-term-stable sources of
funding” relative to the “liquidity profiles” of
the assets funded and the off-balance sheet
exposures.
• The aim is to ensure banks maintain 30 days’
liquidity coverage for extreme stress
conditions

23. 23
Liquidity Coverage Ratio (LCR)
• Various changes to the detailed calculation of
“liquid assets” and other elements of the ratio
are made
• These changes include treating commitments
of sovereigns and central banks in a manner
similar to non-financial corporates and
requiring that all assets in the liquidity pool
for the definition of liquid assets be managed
as part of the pool and be subject to
operational requirement and introducing a
“level 2” of liquid assets which can comprise
up to 40% of the pool.

24. 24
Net Stable Funding Ratio (NSFR)
• It effectively assesses the behavioral maturity
of each side of the balance sheet over a one-
year horizon.
• More particularly, haircuts are applied to
each category of assets and liabilities
according to their expected stability through
a stress scenario, and the available stable
funding must exceed the required stable
funding.

25. 25
NSFR ….in a nutshell
• NSFR, as a metric, highlights the level of long-
term funding compared with short-term
liabilities.
• At this stage, no limit for the NSFR has been
set, and such a limit is unlikely.
• However, regulators are expected to compare
each bank’s figure against its peer group
average and range.
• By end of 2011, the exact calculation of the
metric has not been specified
 The main objective of NSFR is to encourage
more medium-term funding

26. 26
Objectives of NSFR
The main objective of NSFR is
to encourage more medium-
term funding
Control the level of maturity
transformation that an
institution undertakes

27. 27
Quantitatives of NSFR
 British Bankers Association (BBA) suggested either of the
following definitions for calculating NSFR:
(1) Capital + term funding with residual maturity of 1-year +
non-wholesale funding divided by assets not marketable
within 1 year
Capital + Term funding ( > 1 year) + Retail funding
Assets > 1 year
(2) Given that the problem during the 2008 crisis was one of
over-reliance on ST wholesale funding, an alternative
calculation of the metric could be by the following formula:
Unsecured wholesale funding > 1 year
Total deposits + Debt securities in issue + Capital

28. 28
Timing of Basel III Liquidity Standards
TestedTested
(Observation(Observation
Period)Period)
MandatoryMandatory
Liquidity Coverage RatioLiquidity Coverage Ratio
(LCR)(LCR)
20112011 Jan 1Jan 1stst
, 2015, 2015
Net Stable Funding RatioNet Stable Funding Ratio
(NSFR)(NSFR)
20122012 Jan 1Jan 1stst
, 2018, 2018

29. 29
Basel III
Capital Standards
125% increase of Tier 1 Capital from
2% to 4.5% of RWAs.
50% increase in Total Tier 1 Capital
from 4% to 6% of RWAs.
Redefining Common Equity and its
Structure & Content
Simplifying Tier 2 & Abolishing Tier 3
Capital Ratios
Capital Buffers
2.5%
Conservation
Buffer
0%-2.5%
Countercyclical
Buffer
New 3% Leverage Ratio of Tier 1
Capital; as part of Pillar 2.
Total Tier 1 Capital
+
Capital Buffer
= 7% of RWAs
up from 2%
Increase of 250%

30. 30
Key dates: Capital Requirements
DateDate Milestone: Capital RequirementsMilestone: Capital Requirements
20132013 Minimum capital requirementMinimum capital requirement:: Start of the gradualStart of the gradual
phasing-in of the higher minimum capital requirementsphasing-in of the higher minimum capital requirements
20152015 Minimum capital requirementMinimum capital requirement: Higher minimum capital: Higher minimum capital
requirements are fully implementedrequirements are fully implemented
20162016 Conversion Buffer:Conversion Buffer: Start of the gradual phasing-in of theStart of the gradual phasing-in of the
conversion bufferconversion buffer
20192019 Conversion BufferConversion Buffer: The conversion buffer is fully: The conversion buffer is fully
implementedimplemented

31. 31
Key dates: Leverage Ratio
DateDate Milestone: Leverage RatioMilestone: Leverage Ratio
20112011 Supervisory monitoringSupervisory monitoring:: Developing templates to track theDeveloping templates to track the
leverage ratio and the underlying componentsleverage ratio and the underlying components
20132013 Parallel run I:Parallel run I: The leverage ratio and its components will beThe leverage ratio and its components will be
tracked by supervisors, but not disclosed and not mandatorytracked by supervisors, but not disclosed and not mandatory
20152015 Parallel run II:Parallel run II: The leverage ratio and its components will beThe leverage ratio and its components will be
tracked and disclosed, but mandatorytracked and disclosed, but mandatory
20172017 Final adjustmentsFinal adjustments:: Based on the results of the parallel runBased on the results of the parallel run
period, any final adjustments to the leverage ratioperiod, any final adjustments to the leverage ratio
20182018 Mandatory requirementsMandatory requirements:: The leverage ratio will become aThe leverage ratio will become a
mandatory part of Basel III requirementsmandatory part of Basel III requirements

32. 32
Key dates: Liquidity Requirements
DateDate Milestone: Liquidity RequirementsMilestone: Liquidity Requirements
20112011 Observation PeriodObservation Period: Developing templates & supervisory: Developing templates & supervisory
monitoring of the liquidity ratiosmonitoring of the liquidity ratios
20132013 Introduction of the LCRIntroduction of the LCR: Introducing Leverage Coverage: Introducing Leverage Coverage
RatioRatio
20182018 Introduction of NSFRIntroduction of NSFR: Introducing Net Stable Funding: Introducing Net Stable Funding
RatioRatio

33. Any Questions?
Thank you for your time.