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Basel III News June 2011

Basel III News June 2011

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Published by George Lekatis
Basel III News June 2011.

Basel iii Compliance Professionals Association (BiiiCPA)
http://www.basel-iii-association.com

The Basel iii Compliance Professionals Association (BiiiCPA) is the largest association of Basel iii Professionals in the world. It is a business unit of the Basel ii Compliance Professionals Association (BCPA), which is also the largest association of Basel ii Professionals in the world.

Receive (at no cost) the New Member Orientation newsletters:
http://www.basel-iii-association.com/New_Member_Orientation_Newsletters.html

Subscribe to Receive (at no cost) Basel II / Basel III Related News, Alerts, Opportunities, Updates, our Monthly Newsletter and Limited Time Offers for our Basel II / Basel III Training and Certification Programs:
http://forms.aweber.com/form/42/1586130642.htm
Basel III News June 2011.

Basel iii Compliance Professionals Association (BiiiCPA)
http://www.basel-iii-association.com

The Basel iii Compliance Professionals Association (BiiiCPA) is the largest association of Basel iii Professionals in the world. It is a business unit of the Basel ii Compliance Professionals Association (BCPA), which is also the largest association of Basel ii Professionals in the world.

Receive (at no cost) the New Member Orientation newsletters:
http://www.basel-iii-association.com/New_Member_Orientation_Newsletters.html

Subscribe to Receive (at no cost) Basel II / Basel III Related News, Alerts, Opportunities, Updates, our Monthly Newsletter and Limited Time Offers for our Basel II / Basel III Training and Certification Programs:
http://forms.aweber.com/form/42/1586130642.htm

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Categories:Types, Research
Published by: George Lekatis on Jun 12, 2011
Copyright:Attribution Non-commercial

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Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
1
Basel iii Compliance Professionals Association (BiiiCPA)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA  Tel: 202-449-9750 Web: www.basel-iii-association.com
Basel III News, June 2011
Dear Member,
 
Deutsche Bank analyst Matt O’Connor warned that
forcing banks to holdtoo much capital could backfire,and:1. Banks could charge more for loans, hurting consumers and smallbusinesses2. Banks might take even bigger risks in order to generate more return,creating the possibility of an even bigger financial crisis.Matt is right. But there are two other very important risks:1. Much reduced lending capacity available - reduction in the supply of credit in order to return equity to shareholders.Most banks are in the business of attracting shareholders, and mustgenerate return on equity (RoE) that is greater than cost of equity (CoE). The Basel III changes will cause RoE to fall below CoE. As a result banksneed to change their business models.2. Bank customers will look elsewhere for credit: To unregulated entities. This would increase the systemic risk. Although at the November 2010 Seoul Summit, in view of the completionof the new capital standards for banks (Basel III), the G20 Leadersrecognized the potential for regulatory tightening to increase the
 
 
Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
2
incentives for business to migrate to the shadow banking system, we havenot seen any concrete measures yet.Make no mistake, shadow banking is inherently complex as it mutatesover time and varies across jurisdiction.
 We have a (June 2011) Basel III revision
Before we cover the new requirements, we will travel to the European
Union’s
counterparty credit risk - frequently asked questions. It will helpus understand the Basel III amendment.  The financial crisis highlighted that banksmassively underestimated thelevel of counterparty credit risk associated with over-the-counter (OTC)derivatives. This prompted G20 leaders at the September 2009 Pittsburgh summit tocall formore OTC derivatives to be cleared through a CentralCounterparty (CCP). They also asked thatOTC derivatives that could not be cleared centrallybe subjected to higher capital requirementsin order to properly reflect thehigher risks associated with them.Following the G20 leaders' call, the Basel Committee on BankingSupervision (BCBS) started to review the regulatory capital treatment forcounterparty credit risk. The BCBS identified insufficiencies and that CCPs were not widely usedto clear derivatives trades. As part of the Basel III reforms, the BCBS has changed the counterpartycredit risk regime substantially.
 
 
Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
3
 The new regime willstrengthen the capital requirements for counterparty
credit exposures arising from institutions’ derivatives, repo and securitie
sfinancing activities.It will create the right incentives for banks to use CCPs wherever practicable, thus helpingreduce systemic risk across the financial system.Specifically, the objective of these amendments will be:1. Raise the amount of capital backing these exposures,2. Reduce procyclicality, i.e. dampen the impact of economic fluctuationthroughout the cycle and provide additional incentives to move OTCderivative contracts to central counterparties;In effect helping to reduce systemic risk across the financial system.
 What are OTC derivatives?
 A derivative is a financial contract linked to the future value or status of the underlying to which it refers (e.g. the development of interest rates orof a currency value, or the possible bankruptcy of a debtor).Over-the-Counter (OTC) derivative contracts arenot traded on anexchange(for example the London Stock Exchange) but instead privatelynegotiated between two counterparts (for example a bank and amanufacturer).OTC derivatives account for almost 90% of the derivatives markets.In mid 2010, the notional value of outstanding OTC derivatives was
around $583 trillion or €476 trillion.
 At the same point in time, the notional value of derivatives traded on
exchanges was roughly $66 trillion or €54 trillion.
 

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