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Basel III and Ifrs 9a

Basel III and Ifrs 9a

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Published by creditplumber
RBS assessment of incoming Basel Regulation & IFRS amendments to Asset Derecognition
RBS assessment of incoming Basel Regulation & IFRS amendments to Asset Derecognition

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categoriesBusiness/Law, Finance
Published by: creditplumber on Feb 25, 2011
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02/25/2011

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‘Basel III’ and IFRS 9
1
Summary
During the second hal o 2010,the Basel Committee on BankingSupervision (BCBS) has providedurther clarifcation and quantifcationo the required global standards or capital and liquidity. In this briefngwe summarise the new regulationsand look at their impact.
B
ack in 2009, in response to the nan-cial crisis, the BCBS published twopapers that set out major revisionsand enhancements to the Basel II rame-work. These were ollowed in December o the same year by two consultation paperson capital and liquidity.In July 2010, ollowing lobbying rom thenancial sector and a parallel impact study,changes to the BCBS 2009 papers wereagreed. In addition the BCBS published anew consultative document that laid outtheir proposal or a countercyclical capitalbuer.In September 2010 the Group o Governorsand Heads o Supervision, the oversightbody or the BCBS, announced how theminimal capital requirements would be set.Assuming ratication by the G20 inNovember 2010, we would expect the Baselcommittee to meet in December to nallyadopt the standards, with complete imple-mentation between 2013 and 2019.
Although there may yet besome nal changes andadjustments to come, it isnow clearer what theregulations are, how theywill be applied and whenthey will come into orce.
While the December 2009 proposals cre-ated major challenges and uncertaintyabout the impact o Basel III, the new papersand announcements provide much-neededclarication. In essence, they address andmitigate some o the most contentiousissues that were raised in the 2009 docu-ments. In addition they provide more detailin areas that were previously fagged up or increased regulation, oering ormal guid-ance on proposed standards and how toapply them in practice.Key areas include a modied denition o capital, the introduction o a leverage ratioand countercyclical capital buer, and theimplementation o a global liquidity require-ment. While implementation dates varyaccording to the specic regulatory areas,the consensus is that the deadlines aredemanding but not unduly onerous.The drating and phasing in o IFRS 9 alsocontinues to move orward and we examine,in this update, the latest developments andtheir impact.
Looking ahead
The uncertainties and worst-case projectionsabout the impact o ‘Basel III’ have beenreplaced by clarity and acceptance.However, now the hard work must begin or banks – applying the standards right acrosstheir business and ensuring that they continueto monitor and meet them.
The fve key changes
1.Higher quality capital, and clarityover regulatory deductions to be takenat Tier 12.Increased capital requirements or trading book, securitisation and coun-terparty credit3.Introduction o a leverage ratio4.Establishment o countercyclicalcapital buer 5.Minimum liquidity standards
November 2010
 ‘Basel III’ and IFRS 9
A tightening o the regulations
 
2
‘Basel III’ and IFRS 9
CommonEquity
InitialComplianceFullCompliance
ConservationBuffer 
InitialComplianceFullCompliance
LCR
RegulatoryReportingFullCompliance
NSFR
RegulatoryReportingFullCompliance
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019LeverageRatio
RegulatoryReportingPublicReportingFullCompliance
CountercyclicalCapital Buffer 
AnticipatedApplication
Other 
G20Ratication– NovBaselRatication– DecCDR IIIadoptionCDR IIICompliance(anticipated)Translationo rules intolocal laws
‘Basel III’ – timeline
Basel in brie 
The key papers
In 2010 the BCBS published urther clarication:
•Calibrationandphase-inarrangements
were agreed
•ChangestobothoftheDecember2009
BCBS documents were agreed
•Publicationoftheconsultativedocument
Countercyclical Capital Buer Proposal
CRD summary
So many regulations, a little more time
T
he ollowing summary identies whatnew regulations are due to be intro-duced and when they will take eect,as well as those proposals that are still under-going consultation. A key change is that theapplication o the Capital RequirementsDirective III (CRD III) has now been pushedback to December 2011. Full implementationo CRD IV is now between 2013 and 2019.
Technical Provisions AmendmentDirective (adopted July 2009)
•Newrulesonsignicantrisktransfer
(SRT), not in Basel II
•Riskweightingofliquidityfacilities
increased
•Memberstatesrequiredtoapplyfrom
 31 December 2010
CRD II (adopted September 2009)
•Tier1hybridcapitaleligibility•Largeexposurelimitstosingle
counterparties
•NewArticle122(a)forsecuritisations
 (not in Basel II)
•Certainqualitativemeasuresrelatingto
liquidity management
CRD III (proposed)
•ConsistentwithJuly2009BCBSpaper •Resecuritisationsriskweightsintroduced•Securitisation6%(IRB)riskweight
removed
•SecuritisationTBvBBharmonisation•Tradingbookcapitalrequirements
stressedApplication pushed back to 31December 2011
CRD IV (consultation phase)
•ConsistentwithBCBSDecember2009
Papers
•Subjecttoamendmentsproposedin
 July and September 2010 ollowing theconsultation process
•IncludingtheCountercyclicalBuffer
 consistent with the BCBS 2009 paper 
•Implementationproposedbetween2013
and 2019
The fve key changes in more detail
1. High quality capital
A clearer picture
Common equity has now been dened asshare capital, plus retained earnings, minusregulatory deductions. This denition o common equity will be applied in 2013, butthe deductions (set out in the table opposite)will not be implemented until 2014. The mini-mum common equity requirement is set at
3.5%in2013,4.0%in2014and4.5%in
2015. The regulatory deductions will be
appliedatarateof20%p.a.from2014
through 2018.Certain orms o common equity that metthe old regulations but do not meet the newdirective will cease to qualiy in 2013 butcan be grandathered out over 10 years.This will provide the opportunity or non-joint-stocks companies or others without
sharecapital(suchastheLandesbanks
and the mutual building societies) to meet‘Basel III’ while making the necessaryadjustments over an extended timescale. Inaddition, capital instruments that no longer qualiy as non-common equity Tier 1 or Tier 2 instruments will also be phased out over ten years.
Common equity transition
•January2013:commonequitywithno
regulatory adjustments applied
 
‘Basel III’ and IFRS 9
3
•January2014to2018:additional20%of
regulatory adjustments applied each year 
•Publicsectorcapitalinjectionsgrandfa
-thered until January 2018
•Non-qualifyingcommonequityexcluded
rom January 2013
•Non-qualifyingadditionalTier1andTier
2 capital instruments phased out evenlyover ten years
Conservation buer 
In addition, the introduction o a conserva-tion buer will require urther commonequity to be held or use in times o stress.Banks will be allowed by the regulator to usethe buer at such times, but will need todemonstrate a clear plan to go back abovethe minimum requirement. They may alsobe restricted in making distributions duringits use.
Thisregulationwillbeappliedfrom2016,requiringanallocationof0.625%ayear.
This means that over the our years to 2019the Conservation Buer will reach its
requiredlevelof2.5%.
Transition period
•January2016toJanuary2019,increasingby0.625%eachyearupto2.5%•Subjecttoaccelerationbylocalregulators
2. Increased capitalrequirements
Trading book, securitisationand counterparty credit
T
hese are the ‘quick xes’ to Basel II.They are the areas that were per-ceived to have been leading contribu-tors to the market turmoil and thereoreneeded to be addressed rst.
Trading book
Value at Risk (VaR) will be replaced with astressed VaR. In essence, trading books willmove rom looking at the volatility o theunderlying instruments over the last year tolooking at the worst volatility experience or a one year period during the last three years.
Securitisation
There will be increased discloser and duediligence requirements. Originators will berequired to retain ‘skin-in-the-game’ to aligninterests and there will be increased require-ments or and around ‘signicant risk transer’.Increased capital will be required or  re-securitisation requirements and there will be an alignment o trading book andbanking book capital requirements.
The expectation is thatmost banks alreadymeet the new capitalrequirements or will doso shortly. This may meanthat regulators will, ociallyor unocially, bring theadoption rates orward.
Too big to ail
The Basel committee has not yetaddressed the issue o imposing extracapital requirements on banks that aresystemically important to the nancialsystem. However, they have indicated thatthey will return to this subject, perhapsater the introduction o the current capitalrequirements has been completed. In themeantime some regulators are takingtheir own view on it. For example the Swisshave set their major banks a capital ratio
of19%(10%commonequity+9%other
loss-absorbing equity). It is likely thatother local regulators will ollow, withoutwaiting or the relevant Basel directive.
Regulatory deductions
Item Core Tier 1deduction?Detail Impact
Stock surplus No Unless, or example, preerence sharesMinority interest Yes MI share oexcess capital within the subsidiary to be deductedUnrealised gains and losses No Irecognised on balance sheet (i.e. ully disclosed)Cash fow hedge reserve relating to projectedcash fows not recognised on balance sheetYes Remove this component rom Core Tier 1 calculationGoodwill and other intangibles Yes Net o extinguishable deerred tax liabilities. IFRS may be used.Deerred tax assets which rely on uture protability Yes Net o deerred tax liabilitiesInvestment in own shares Yes Including stock contractually obliged to be purchased, ater netting(o short positions) and look-through (to indices)Investment in FIs Yes A) Corresponding deductionor regulatory non-consolidated FIs;B) Deduction to all holdings in aliates and reciprocal cross-holdings.C)Other holdings o common stock, thresholds apply:
(i)>10%ofasingleFI’sstock,fulldeduction;
 
(ii)aggregateholdingsinFIs>10%ofthebank’sstock,deductexcessover10%.NettingandunderwritingexemptionsapplyShortfallofstockprovisionstoEL
Yes
AnIRBparameter,now100%fromCommonEquity
Fair value movements on own liabilities Yes Remove own credit risk gains/losses rom Common Equity calculationDened benet pension und assets Yes With some oset on plan assets with unettered access(i supervisor approved); No deduct i pension liabilityAll other adjustments that currently carry
50%Tier1/50%Tier2allocation
N/A
Alltoreceive1,250%deduction
Unconsolidated FIs, mortgage servicing rights anddeerred tax assets resulting rom timing dierenceYes
Recognitionofanyoneitemupto10%oftheCommonEquityamount(priortothesedeductions),subjecttoamaximumof15%inaggregate
Impact key:
 
high;
 
medium;
 
low.

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