What is Basel III

What is Basel III

Copyright © Vedanvi 2012 1

Evolution of Basel Requirements
Pillar II
Pillar I Pillar III Market
Liquidity Ratios Leverage Ratio Supervisory
Capital Ratios Discipline
Review

Capital RWA LCR NSFR

Tier 1 Tier 2

Credit Market Operational Concentration
(EU Large
Exposure)
Standard CCR BIA
Derivative
IRB F Exposure
Standard

IRB A CEM Standard VAR AMA
CVA Brand new with Basel III
Stress
EPE IMA Updated with Basel III
VAR
WWR Updated with Basel 2.5

Source: Moody’s Analytics
IRC No Change from Basel 2


Basel 2.5 Changes

Objectives
• Strengthen Market Risk Framework –
capture key risks
The Changes
• Higher capital charge for market risk
• Regular VaR & Stressed VaR
• Incremental Risk Charge
• Securitisation Charge
• Comprehensive Risk Model (Structured
Credit)
Impact
• Significant increase in aggregated IV RWA
• Increase in Attributed Equity


Key Elements of Basel III

Objectives
• Strengthen global capital and liquidity
rules to promote resilience
The Changes
• Higher Minimum Tier 1 Capital
Requirement
• New Capital Conservation Buffer
• Countercyclical Capital Buffer
• Higher Minimum Tier 1 Common Equity
Requirements
• Liquidity Standard
• Leverage Ratio
• Minimum Total Capital Ratio


Basel III Requirements Explored

Basel III Objective Requirements
Raising quality, consistency & • Tier 1 – common shares and retained earnings
transparency of capital • Hybrid capital instruments phased out
• Tier 3 capital eliminated
• Deductions harmonised
Enhancing risk coverage • Stressed VaR capital requirements based on 12
month period of significant financial stress
• Higher capital for resecuritisation
• Strengthen Pillar 2 and Pillar 3
• Stressed counterparty credit risk capital req.
• CVA – capital charge for mark to market losses
• Strengthening collateral management – longer
margining period
• Move to central counterparty over OTC
• Treatment of wrong way risk & backtesting
Source: Basel Committee on Banking Supervision, Bank of International Settlements



Supplementing risk based capital • Constrain leverage
requirement with leverage ratio • Non risk based backstop measure
Reducing procyclicality and • Dampen cyclicality of the minimum requirements
promoting countercyclical buffers • Long term data for PD and LGD
• Stress test considering downward migration of
credit portfolio in recession
• FSA – scalar converting outputs of underlying PD
models into through the cycle estimates
• Forward looking provisioning
• Capital conservation standards
• Excess credit growth




Addressing systemic risk & • Move to central counterparties for OTC
interconnectedness • High req for trading, derivative, complex
securitization and off balance sheet activities
• High req for inter-financial sector exposures
• Liquidity requirements penalising excessive reliance
on short term, interbank funding to support long
dated assets



Complex Phase In Arrangement



How Far are Banks in
Implementation

9

Basel III Implementation – Some take the
leads……
Germany
Pushes ahead Switzerland
EU To impose stricter
Final Rules delayed requirements to BIII
Japan
Weaker Rules to BIII Final rules published
– Weaker rules
UK
Proposing stricter
USA requirements Russia
Extend comment Implementing Basel
period for Basel II III in 2015
rules
Weaker rules to BIII
China
Early adoption of BIII Philippines
& higher capital Full implementation
Mexico by 2014 for systemic
First country in world India banks
to implement Basel III Brazil Final rules issued
(Sept 2012) Full implementation
Early adoption of
Higher capital req. Mar 2018- Higher
Basel III and higher
capital requirements capital requirements
to BIII

Australia
UAE Capital rules issues Mar
… creating a new world order and new Implement Basel III
earlier – LCR 2015
2012 & Liquidity rules Nov
2011. Implementation 2
arbitrage opportunities? years sooner


Implementation Progress as at End May
2012
Basel II Basel 2.5 Basel III

• 21 of 27 implemented • 20 out of 27 countries • India, Japan & Saudi
Basel II have implemented Arabia – published final
• Indonesia & Russia – • Russia & US – issued Regs.
Pillar 1 implemented but draft Regs. on market • Europe – draft Directive
not Pillar 2 & 3 risk & Regs published – final
• Turkey – compliant by • US Regs modified in Dec Rules delayed to Oct
2012 2011 2012
• China – final Regs issued • Argentina, Indonesia, • Argentina, Hong
• USA – Parallel run – Mexico, Saudi Arabia & Kong, SAR, Indonesia, Ko
Basel 1 legal min Turkey – not rea, Russia, Turkey & US
implemented Basel 2.5 – not issued Draft Regs.

Source Report to G20 Leaders on Basel III Implementation.. Basel Committee on Banking Supervision, Bank of International Settlements. June 2012
11

Copyright © Vedanvi 2012

Is Basel III set to avert future crisis?

12

What’s Missing
Financial
crisis on
Etc. etc. etc...
eave of Is more Capital the only
Basel III
Answer?

Libor Scandal
Failed Money
Laundering
Controls

Jamie Dimon, blamed
“errors, sloppiness and bad
judgment” for the loss.
RBS Systems Out

Unintended Consequences

• Reduced lending & subsequent impact on economic growth
(covered above)
• Reduce appetite of investors to invest in banks – at a time when
capital most needed
• Inconsistent implementation – opening regulatory arbitrage
opportunities
• Incentives to move risks to “shadow banking sector”
• End of free banking?
• Increased cost of banking & loans
• ………..


Level of Implementation
Main Countries Basel II Basel Basel III Notes
2.5
Belgium 4 4 2 Basel III Follow EU Process

France 4 4 2 Basel III Follow EU Process

Germany 4 4 2 Basel III Follow EU Process

Italy 4 4 2 Basel III Follow EU Process

Luxembourg 4 4 2 Basel III Follow EU Process

The Netherlands 4 4 2 Basel III Follow EU Process

Spain 4 4 2 Basel III Follow EU Process

Sweden 4 4,1 2 Basel 2.5 –
(4) Final rules for the Basel 2.5 agreement are in force.
(1) A new national ICAAP guideline is still under development.
Basel III Follow EU Process
United Kingdom 4 4 2 Basel III Follow EU Process
Key
Number and colour code: 1 = draft regulation not published; 2 = draft regulation published; 3 = final rule published; 4 = final rule in force. Green = implementation completed; Yellow
= implementation in process; Red = no implementation.



2.5
Australia 4 4 2 Basel III - Draft rules for capital requirements issued on 30 March 2012.
Draft rules to implement liquidity requirements issued in November 2011 for
public consultation until 17 February 2012.

Brazil 4 4 2 Basel III - Draft regulation published for public consultation on 17 February 2012.

Canada 4 4 2 Basel III - On 1 February 2011, banks were directed to meet the 7% CET1 standard
as of January 2013.
Regulations for (i) non-viability contingent capital and (ii) transitioning for non-
qualifying instruments published August and October 2011 respectively.
Draft regulation for definition of capital and counterparty credit risk issued to
banks in March 2012.

Source: Basel Committee on Banking Supervision



2.5
China 4 4 2 Supervisory guidelines released between 2007 and 2010 which will be integrated
into new capital regulation combining BII, B2.5 and BIII. Large banks submitted
application for advanced approaches currently assessed by CBRC.
Basel III - Draft regulation combines BII, B2.5 and BIII. Public consultation ended in
2011. Final rule expected to come into force in Q3 2012. Will be applied to all
banking institutions.
Hong Kong 4 4 1,3 Basel III - (3) Bill passed by the Legislative Council on 29 February 2012 and
published for the purpose of creating rule-making powers for the implementation
of Basel III.
(1) Industry consultation underway on policy proposals for inclusion in rules.
Consultation on draft text of rules scheduled for second half of 2012.

India 4 4 2 Basel III - Draft regulation released for comments on 30 December 2011.



2.5
Japan 4 4 3 Basel III - Draft regulation published on 7 February 2012 – Final rules published on
30 March 2012

Russia 1, 4 1,2 1 Basel II - 1) Pillar 2 expected to be implemented not earlier than in 2014.
(4) Simplified standardised approach for credit risk, simplified approach for market
risk and the Basic Indicator Approach for operational risk implemented.
Basel 2.5
(1) Pillar 2 expected to be implemented not earlier than in 2014.
(2) Final regulation (revision to the simplified approach for market risk) expected
shortly - regulation expected to come into force during Q2 2012.
Basel III - Draft regulations under development.
Saudi Arabia 4 3 3 Basel III - Final regulation issued to banks.

Singapore 4 4 2 Basel III - Public consultation on draft ended in February 2012. Final rule is
expected to be published in mid-2012.



2.5
South Africa 4 4 1 Basel III - Draft amendments to legislation issued on 30 March 2012 for
consultation.
Switzerland 4 4 2 Basel III
Public consultation on draft regulation on Basel III has been finished in January
2012. Decision on final rules text expected until mid-2012. Final SIFI regulation
(level: Banking Act) adopted by Parliament on 30 September 2011 – Draft SIFI
regulation (level: accompanying ordinances) was published in December 2011;
decision on final rule text expected before end-2012.



2.5
United States 4 1.2 1 Basel II
Parallel run on-going –Basel II mandatory institutions required to implement the
advanced approaches to credit risk and operational risk. Those Banks have made
significant progress in implementation efforts Basel 2.5
(2) Market risk capital requirements have been proposed and remain to be
finalised. These proposed requirements were modified in December 2011 to
incorporate restrictions on the use of credit ratings as set forth in the Dodd-Frank
regulatory reform legislation.
(1) Other Basel 2.5 revisions are under development as part of the proposed Basel
III rule currently expected to be issued for comment during Q2 2012.
Basel III
Draft regulation for consultation planned during Q2 2012. Basel 2.5 and Basel III
rulemakings in the United States must be coordinated with applicable work on
implementation of the Dodd-Frank regulatory reform legislation.


What is Basel III

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