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Basel III Goeth112410

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©2010 Deloitte All rights reserved.

Basel III - Design and
Potential Impact
November 2010
Dr. Philip Goeth
©2010 Deloitte All rights reserved.
· The recent financial crisis has lead to material losses, an almost collapse of the financial system and negative repercussions on the real economy
· Regulators are under pressure around the globe to ensure that the systemic soundness of the financial sector is improved materially
· The financial crisis was kicked off
by massive loss of value of US
real estate, triggering loss of
value of subprime related
securities
· Hundreds of tranches of AAA
debt were downgraded and major
stock markets lost more than
60%
Subprime Losses
· The collapse of Lehman lead to a
freezing of the interbank markets,
and previously unseen liquidity
squeezes took place
· The freezing of the credit markets
created a knock on effect on the
real economy, increasing
bankruptcy rates und funding
difficulties
Financial Turmoil
· With the financial markets
tumbling and the repercussions
on the real economy,
Governments intervened on a
global scale
· In total, estimates are that banks
were so far supported with more
than USD 4tr (alone USD 1.8tr in
the US)
Massive Intervention
· In 2009, interbank markets
returned to normal levels, and
various banks have meanwhile
successfully completed capital
issuances
· Central bank liquidity supply at
almost zero rates acted as a
major stabilization factor
Stabilization
· The causes for the turmoil were
analyzed by various institutions,
such as the IMF, World Bank,
BIS, IIF, Group of Governors, as
well as national think tanks
· The almost collapse of the
financial system is seen, amongst
other reasons, as a major failure
of banking regulation and
supervision
Analysis of Failure
· With previously unseen amounts
of tax payers' money spent to
stabilize tumbling financial
markets, politicians are under
pressure to "fix the system¨
· This pressure is passed on
directly to the regulators, who
have been criticized of lax
supervision and weak standard
setting
Political Pressure
· As a result, various institutions
have prepared proposals for an
overhaul of the banking
regulatory framework
· It is broad consensus that the
upcoming changes will material,
covering a whole range of
supervisory fields, such as
capital, risk management,
liquidity, governance and others
Regulatory Tsunami
Financial Institutions Investors
Governments
A Regulatory Reform Tsunami on its Way.
Regulators
Media
Page 2 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Scope of Basel III
"Basel ÌÌÌ" is the response of the Basel Committee on Banking Supervision (BCBS) to the financial crisis, encompassing a comprehensive
set of reform measures to strengthen the regulation, supervision and risk management of the banking sector.
The reform targets both micro and macro economic improvements:
· Bank-level, or microprudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress.
· Regulation that deals with macroprudential, system wide risks that can build up across the banking sector as well as the pro-cyclical
amplification of these risks over time.
3
The Main Documents outlining Basel III
International
LRM Framework
Enhancements to the
BII Framework
Revisions to BII
market risk
Framework
Guidelines for
IRC
calculation
Principles for
sound liquidity RM
Strengthening
the resilience of
the banking
sector
Capital
Calibration Sept
12, 2010
ReguIators'
Consensus July
26, 2010
Page 3 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Reform Environment: Status of the Western FS Ìndustry ("post crisis¨?)
United States
Recovery Crisis
· Back to profit: 7,000-plus
commercial banks overseen
by FDIC reported $21.6bn in
profits Q1 2010 (vs $4.4bn
loss in Q1 2009)
· Bank failures: 294 banks
failed in the US since 2008;
notwithstanding some signs
of recovery, 129 banks failed
in 2010
· Shrinking write offs:
Uncollectable loans fell
$214m during Q1 2010 (first
decrease since 2006)
· Foreclosures: US
foreclosures hit new highs in
summer 2010, with a
particular acceleration in July
and August 2010, according
to LPS
· Large banks, such as JP
Morgan Chase, Goldman and
BofA, have emerged
stronger than pre-crisis, and
are dominating the markets
post crisis in many areas
· Regulatory threats: Threat
to traditional business models
due to regulatory reform
(Dodd Frank Act), particularly
in the field of prop-trading and
hedge fund investments
Europe
Recovery Crisis
· Stress tests: CEBS stress
test revealed that with
aggregate losses of C566bn,
only seven banks' tier 1
capital ratios fell below 6%
· Bad debts: Banks in Greece,
CEE, Spain, Ireland and
Portugal remain in doubtful
conditions; loan losses 2010:
C123bn, 2011e: C105bn
(ECB), with austerity
packages upcoming.
· Euro-Stabilization: The C-
zone has stabilized in late
2010, with the C being seen
as some kind of "emergency
valve" with respect to the
weakening USD
· State debt in doubt: With
budget deficits soaring
(Ireland: 11.6%), banks B/S
are loaded with doubtful State
debt (Greek debt in French
banks: estimated at C 76bn)
· Hiring spree: In July 2010,
London headhunters reported
the biggest wave of mandates
since 2007, particularly in the
area of financial services
· Stand alone funding not
secured: ECB carries a large
bulk of bank financing, with
C1,300bn to be refinanced in
the coming 3 years
· The Western financial markets are showing signs of both recovery and remainders of the crisis
· Clearly, the system is still vulnerable and has not yet reached fully a status of resilience to further volatility and sloppy economic growth
Page 4 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
The Situation in Asia
Asia
Recovery Crisis
· Large Chinese Banks grew
in the range of 20 ÷ 30 %
annually from 2007 to 2009,
with China naming 4 out of
the 10 largest banks in the
world
· Inflation and Asset
Bubbles: Inflation in China
has increased over 3 % in
2010, and the government
has implemented massive
measures to take control of
the looming real estate
bubble
· Shrinking write offs:
Provisions / total loans ratio
dropped massively across the
region until 2008, and stayed
low in major economies
during the crisis
· Currency wars: Withthe
Euro and the USD coming
under pressure due to
increasing state debts and
unsustainable funding needs,
there is increasing pressure
on Asian currencies to
appreciate in value
· Strong profits reported in
2010 in major parts of the
region, such as in China,
India, Australia, Korea and
Singapore
· Japanese banks: Profitability
of Japanese banks lagged
behind the benchmark in
Asia, with key players
reporting massive losses in
2008 and 2009
· The Asian financial system has proved to be rather stabile, with losses and lack of growth hitting mainly Western economies so far
· The stimulus package of the Chinese government has been the key driver to keep the Asian economies floating
Page 5 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
The Dilemma of the Regulators
Cheap money suppIy and Quantitative Easing.
The root of the problem:
Continuing lack of growth of
Western economies
The US economy shows signs of continuous
weakness in the second half of 2010, with
unemployment rates hitting 15.2% in Michigan
(3Q10)
Cheap Money to stimulate growth
Low central bank's lending rates keep the Western
economy floating, with further Quantitative Easing
(QE) announced
Is leverage a sustainable tool to
stimulate private consumption?
Long term, cheap money will not be able to substitute
the weakness of private consumption, which is
created by asset loss, high unemployment, rising
taxes and increased insecurity
Stimulus packages based on QE
create asset and market bubbles
It is to be expected that banks will continue to pass
on cheap money to consumers, leading to
unsustainable asset bubbles and leverage
.create
obstacles to
regulatory
reform
Stimulate Growth / Promote Deleveraging: Regulators have the task to strengthen the capital base
of banks and restrict risky lending, while the Western Central banks are at the same time pushing
cheap lending and further leverage in order to stimulate the economy
Government as Regulator / Central Bank / Shareholder / Growth Agent: With Governments not
only promoting growth through Central Banks, but also being shareholders of major financial
institutions, there is a high likelihood of conflicts of interest to their roles as regulators
Regional Conflicts: With Asia's influence growing and Asian banks not hit that hard by the financial
crisis, it is to be expected that there will be resistance in Asia to be obliged to "use medicine that was
developed to a large extent to cure an illness that occurred elsewhere¨
· Regulators globally face the dilemma that economic growth levels can only be maintained based on widening debt financing, whi le the
financial sector needs deleveraging in order to increase its resilience to crisis
Page 6 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Main Building Blocks of Basel III
Capital Clean Up and Risk Limitation
Clean up of
Regulatory Capital
· The new proposals focus on improvement of quality of Tier 1
· "Predominant¨ form of Tier 1 must be common shares and retained earnings
· Tier 2 capital will be harmonized and simplified; only one class of Tier 2 capital will remain.
· Tier 3 capital (currently available to cover market risk requirements) will be eliminated.
Refining Risk
Management
· July 2009 changes: Ìntroducing "stressed VaR¨ into capital requirement, as well as capital
requirements for an "Ìncremental risk charge¨ (ÌRC)
· Creating addition capital requirements for Counterparty Credit Risk (CCR), especially in the areas
of Annex 4 of the July 2006 accord (Credit Value Adjustment - CVA, Asset Value Correlation ÷
AVC, Wrong Way Risk ÷ WWR)
· Strengthening internal credit risk due diligence, and decrease (sole) reliance on external ratings
Countercyclical
Measures
· Promote more forward looking provisions, in line with the recent IASB proposals
· Introduce additional capital conservation buffer that can be used in stress
· Protect the banking sector from periods of excess credit growth through introduction of additional
capital buffers in such periods
Limitation of Overall
Leverage
· The proposal introduces an overall restriction of leverage (exposure / capital)
· Aim is to reinforce the risk-based requirements with a simple, non-risk-based "backstop¨ measure
based on gross exposure
Liquidity Risk
Management
· Introduction of qualitative LRM standards, relating to Due Process, Emergency Funding Plan
(EFP), stress testing requirements, etc
· Introduction of Liquidity Coverage Ratio (LCR) and Net Stabile Funding Ratio (NSFR)
Systemic Risk · Additional capital and liquidity surcharges for systemically important banks are in discussion
· These rules are not yet clearly fleshed out and will therefore not be discussed further in this pack
Page 7 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Phase in of new Capital and Liquidity Requirements
· The BCBS has recently published its time table under which the new capital and liquidity rules should become applicable.
· Given that the current banking industries capital cushions would not support a "big bang¨ implementation, grand fathering and transitional
provisions are meant to materially support a "soft landing¨ of the new regulatory requirements
2011 2012 2013 2014 2015 2016 2017 2018
As of
1 January
2019
Leverage Ratio Supervisory monitoring
Parallel run
1 Jan 2013 - 1 Jan 2017
Disclosure starts 1 Jan 2015
Migration to
Pillar 1
Minimum Common Equity Capital Ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5%
Capital Conservation Buffer 0.625% 1.25% 1.875% 2.50%
Minimum common equity plus capital
conservation buffer
3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0%
Phase-in of deductions from CET1
(including amounts exceeding the limit for
DTAs, MSRs and financials)
20% 40% 60% 80% 100% 100%
Minimum Tier 1 Capital 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%
Minimum Total Capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Minimum Total Capital plus conservation
buffer
8.0% 8.0% 8.0% 8.625% 9.125% 9.875% 10.5%
Capital instruments that no longer qualify
as non-core Tier 1 capital or Tier 2 capital
Phased out over 10 year horizon beginning 2013
Liquidity coverage ratio
Oberservation
period begins
Introduce
minimum
standard
Net stable funding ratio
Oberservation
period begins
Introduce
minimum
standard
Page 8 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Strategic relevance of the upcoming rules
Basel II - (overall) capital neutral
· In developing the revised Framework in 2006, the BCBS has sought to arrive
at significantly more risk-sensitive capital requirements that are conceptually
sound and at the same time pay due regard to particular features of the
supervisory and accounting systems in individual member countries.
· These are to broadly maintain the aggregate level of such requirements,
while also providing incentives to adopt the more advanced risk-sensitive
approaches of the revised Framework.
Basel III - not capital neutral
· Other than Basel II, Basel III targets to significantly increase capital and
liquidity requirements compared to status quo, with both risk weighted assets
(RWA) and capital percentages rising
· Basel III will thus have a material impact on growth strategies and the
sustainability of current business models of banks
Page 9 Basel III ÷ Design and Potential Impact
Strengthening the Capital Base
©2010 Deloitte All rights reserved.
Background and Goals of the New Rules
Strengthening Core Capital
Flaws of the
existing
system
· Many regulatory adjustments are
not applied to common equity,
allowing to report high Tier 1 ratios
· No harmonized list of regulatory
adjustments
· Hybrid capital proved to be less
valuable in times of stress than
anticipated
· Capital to support trading activities
has minor quality (almost like a
liability)
· Weak transparency
Goals: Quality
and Simplicity
· The definitions of Tier 1 and Tier 2 capital
should correspond to capital which absorbs
losses on a going concern basis and capital
which absorbs losses on a gone concern
basis, respectively.
· Number of tiers and sub-tiers of capital must
be limited
· Minimum set of regulatory adjustments must
be harmonized internationally
· Capital composition must be disclosed in
detail
Tier 1 is King
· Tier 1 capital = highest quality
component of capital.
· Subordinated to all other elements
of funding, absorbs losses as and
when they occur
· Has full flexibility of dividend
payments and no maturity date
· There can be no features which add
additional leverage or which could
cause the condition of the bank to
be weakened during periods of
market stress
· Innovative Tier 1 will be phased out
Changes for Tier
2 and Tier 3
· Tier 2 will be simplified, one set of entry
criteria, removing subcategories of Tier 2
· Subordinated to depositors and general
creditors, original maturity of at least 5 years
· Recognition in regulatory capital will be
"amortised¨ on a straight line basis during
the final 5 years
· Tier 3 capital will be abolished
Page 11 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Capital Components under BII and Proposed New Composition
BII (current version) Proposed new standard
Tier 1
Common Stock and other forms of
Tier 1 (including perpetuals)
Tier 1
Common Equity (common stock
plus retained earnings and OCI)
Disclosed reserves
(including from minority interests)
Additional going concern capital
15% innovative instruments
(Annex 1 to BII)
n.a.
Deduct goodwill and equity from
securitizations
Deduct goodwill and many other
items 1:1 from common equity
Deduct 50% of investments in other
financial institutions
Transformed into 1:1 adjustment
Tier 2
max 100% of
Tier 1
Undisclosed reserves and asset
revaluation Tier 2
Only one form of Tier 2 capital
remains
General loan-loss reserves Unrealized gains will be reviewed
by BCBS until y/e 2010
Hybrid capital instruments n.a.
Subordinated debt (max 50% of Tier 1) n.a.
Tier 3
For market risk coverage
(limitations apply)
Tier 3
n.a.
Common shares will
need to meet a set of
entry criteria before
being permitted to be
included in the
predominant form of Tier
1 capital.
Must be predominant form
of Tier 1 capital
A new system of limits
and minima will apply :
· common equity
component of
Tier 1
· Total Tier 1
· Total capital
Page 12 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Example for Current Tier 1 Composition
Minority interest:
major part of
many institutions'
Tier 1 capital
The bank deducts
intangibles
from core
components
Innovative capital
forms a major
part of Tier 1
XYZ Bank
1)
1) These figures were extracted from a publicly available annual report of a major internationally operating banking group
Page 13 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Tier 2 Capital ÷ Main Features
Main Features of Tier 2 Capital under the New Regime
Subordinated. No agreements that legally or economically enhance the seniority of the claim vis-à-vis depositors and general bank creditors allowed
Minimum original maturity of at least 5 years, amortization over the remaining 5 years of maturity.
No incentives to redeem
Callable, but only under (very) restrictive circumstances
No acceleration rights for payments (coupon or principal), except in bankruptcy and liquidation
No credit sensitive dividend features
No direct or indirect funding through the bank (group)
SPV structures fall under the same rules as for Tier 1
Example for Tier 2 Capital
composition
under the current regime
Some of the debt in
item 3 and 4 will
qualify also under the
new regime
Will be deducted
from Tier 1 in the
future
1) These figures were extracted from a publicly available annual report of a major internationally operating banking group
XYZ Bank
1)
Page 14 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Adjustments to Tier 1 Regulatory Capital
Capital Adjustments
Topic Comments Relevance
Stock surplus
Stock surplus (i.e. share premium) will only be permitted to be included in the
Common Equity component of Tier 1 if the shares giving rise to the stock
surplus are also permitted to be included in the Common Equity component of
Tier 1.
· The new rule ensures that there is no loophole for including instruments
other than common shares in the Common Equity component of Tier 1
· Some banks issued instruments that did not qualify for equity, but created
a surplus which was accounted for as a reserve.
Rare, but if
instruments have
been issued, can be
high volume
Goodwill and other intangibles *)
Goodwill and other intangibles should be deducted from the Common Equity
component of Tier 1, net of any associated deferred tax liability.
Option to use IFRS in determining the level of intangible assets if national
GAAP results in a wider range of assets (e.g. building rights)
· Addresses the high degree of uncertainty that intangible assets would
have a positive realisable value in periods of stress or insolvency.
· Avoids giving acquisitive banks a capital advantage over banks with the
same real assets and liabilities which have grown organically.
· Is quite standard in many jurisdictions
Can have huge
impact, but is new
only with regards to
subcategories of
Tier 1
Deferred tax assets *)
Deferred tax assets which rely on future profitability of the bank to be realized
should be deducted from the Common Equity component of Tier 1.
· Deferred tax assets are capitalized in case of timing differences and
potentially in the form of loss carry forwards
· Assets the worthiness of which depends on future profitability are usually
collapsing in times of stress
· Does not refer e.g. to prepayments to tax authorities
Can be very
material, but is
already standard in
various jurisdictions
Investments in own shares (treasury stock)
All of a bank's investments in its own common shares should be deducted
from the Common Equity component of Tier 1 (unless already derecognized
under the relevant accounting standards)
· Counts for trading and investment portfolios, as well as components of
index securities, investment funds, and forwards to purchase own stock Not too relevant,
given existing IFRS
rules
Investments in the capital of certain institutions *)
For all holdings in banking, financial and insurance entities which are outside
the regulatory scope of consolidation
Goal: remove the double counting of capital in the banking sector and limit the
degree of double counting in the wider financial system, within the appropriate
tier of capital rather than at the total capital level.
· Corresponding deduction approach: the deduction should be applied to
the same component of capital for which the capital would qualify if it was
issued by the bank itself.
· Full deduction: All holdings of capital which form part of a reciprocal cross
holding agreement or are investments in affiliated institutions (e.g. sister
companies)
· Threshold approach: For all other holdings
· Today in many jurisdictions 50/50% deduction
Has potentially
massive implications
for complex affiliated
groups
Shortfall of the stock of provisions to expected losses
The deduction from capital in respect of a shortfall of the stock of provisions to
expected losses under IRB approach will be 100% from the common equity
component of Tier 1 capital.
· The current regime (50/50% deduction) results in the bank with a low
stock of provisions showing more Tier 1 capital, which could be acting as
an incentive for banks to provision at low levels
Depends on
accounting policy
and results of IRB
approach
*) Instead of a full deduction, a bank must deduct the amount by which the aggregate of the three items with *) above exceeds 15% of its common equity component
(for intangibles only applicable for "mortgage servicing rights¨)
Page 15 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Capital Adjustments (2)
Topic Comments Relevance
Minority interest
Minority interest will no longer be eligible for inclusion in the Common Equity
component of Tier 1.
However, the Committee will allow some prudent recognition of the minority
interest supporting the risks of a subsidiary that is a bank (7/2010)
· The proposal addresses the concern that while minority interest can
support the risks in the subsidiary to which it relates, it is not available to
support risks in the group as a whole and
· in some cases banks set up risk free subsidiaries, controlled by 2 entities,
both banks consolidated and used the capital injected by the third party
Potential impact
might be massive,
depending on group
structure
Unrealised gains and losses on financial instruments
No adjustment should be applied for gains or losses recognized on the
balance sheet
· The proposal addresses concerns that the existing policy adopted in
certain jurisdictions of filtering out certain unrealized losses has
undermined confidence in Tier 1 capital.
· It helps ensure that the Common Equity component of Tier 1 is fully
available to absorb losses (both realized and unrealized).
Relevant in many
cases
Cash flow hedge reserve
Remove the positive and negative cash flow hedge reserve from the Common
Equity component of Tier 1 where it relates to the hedging of projected cash
flows which are not recognized on the balance sheet.
· CF reserves give rise to artificial volatility in common equity, as in this case
the reserve only reflects one half of the picture (the fair value of the
derivative, but not the changes in fair value of the hedged future cash flow)
Depends on use of
CF hedging; can be
material
Cumulative gains and losses due to changes in own credit risk on fair
valued financial liabilities
Filter out from the Common Equity component of Tier 1 all gains and losses
resulting from changes in the fair value of liabilities which are due to a
changes in the bank's own credit risk.
· The existing filter established in the 8 June 2004 press release only
applies to gains and losses on liabilities which are fair valued as a result of
the application of the fair value option
· MtM of own debt due to deterioration of own credit risk is currently under
review by the IASB and will potentially be eliminated
Some banks
recorded massive
gains in valuation of
own liabilites in the
crisis
Defined benefit pension fund assets and liabilities
Deduct of any DBO pension fund asset from the Common Equity component
of Tier 1. Assets in the fund to which the bank has unrestricted and unfettered
access can, with supervisory approval, offset the deduction.
· Addresses the concern that assets arising from pension funds may not be
capable of being withdrawn and used for the protection of depositors and
other creditors of a bank
Depends heavily on
pension scheme
used
Remaining 50:50 deductions
All remaining regulatory adjustments which are currently deducted 50% from
Tier 1 and 50% from Tier 2, and which are not addressed elsewhere in the
proposal, should be transformed into assets that need capital coverage
· The 50:50 deductions complicate the definition of capital, particularly in the
application of the limits and so the proposal is that they will receive a
1250% risk weight.
· Examples for current 50/50 deductions: Certain securitization exposures,
Certain equity exposures under the PD/LGD approach; Non-
payment/delivery on non-DvP and non-PvP transactions; Significant
investments in commercial entities
Diverse
Adjustments to Tier 1 Regulatory Capital
Page 16 Basel III ÷ Design and Potential Impact
Strengthening Risk Management
©2010 Deloitte All rights reserved.
Overview of Changes of the RM Framework
Failure to capture major on- and off-balance sheet risks, as well as derivative related exposures, was a key destabilising factor over the past two
and a half years. The proposed changes to the RM framework focus on this area, and on the role of ECAIs
Changes through July 2009 papers
· Raise capital requirements for the trading
book and complex securitization
exposures, a major source of losses for
many internationally active banks.
· Introduces capital requirements for
stressed value-at-risk (VaR) based on a
12-month period of significant financial
stress
· Also introduces higher capital requirements
for so-called re-securitizations in both the
banking and the trading book
· Raise the standards of the Pillar 2
supervisory review process and strengthen
Pillar 3 disclosures.
· To be implemented by the end of 2010
Treasury related changes December 2009
· Calculate effective EPE with stressed
parameters to address general wrong-way risk
· Use bond-equivalent of the counterparty
exposure to capture CVA credit valuation
adjustments for counterparty downgrades
· Raise multiplier asset value correlation for
large financial institutions exposures
· Additional collateral and margining
requirements for illiquid derivate exposures
· Capital charges for bilateral OTC derivative
transactions
· Explicit Pillar 1 capital charge for wrong-way
risk
· Haircut for repo transactions using
securitization collateral (and prohibition of re-
securitizations as eligible financial collateral for
regulatory capital purposes)
· Strengthen back-testing and stress testing
General CR related changes
· Mitigate the reliance on external ratings of
the Basel II framework,
· Requirements for banks to perform their
own internal assessments of externally
rated securitization exposures,
· Elimination of certain "cliff effects¨
associated with credit risk mitigation
practices
· Tightening of the eligibility criteria for the
use of external ratings
Focus of Change
· Tail risks in trading portfolios and
securitization Risks
· Stress testing relating to market risk
· Incremental risk charge (specific MR)
· Counterparty Credit Risk in treasury
transactions
· Scenario analysis and stress
testing relating to CCR
· Dealing with overreliance on
external ratings
Page 18 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Topic Noted Issues
Correlation of defaults
and high EAD
· Defaults and deteriorations in the creditworthiness of trading counterparties occurred at the time when
market volatilities, and therefore counterparty exposures, were higher than usual
· Generally, wrong way risk was not covered adequately
CVA MtM · Potential mark-to-market losses due to credit valuation adjustments (CVA) were not subject to capital
requirements. Within the crisis, roughly two-thirds of CCR losses were due to CVA losses and only about
one-third were due to actual defaults.
Correlation of exposures
to FI
· Large financial institutions were more interconnected than currently reflected in the capital framework. As a
result, when markets entered the downturn, banks' counterparty exposure to other financial firms also
increased.
Close out periods · The close-out period for replacing trades with a counterparty with large netting sets often took much longer
than anticipated on average
Initial margining and EPE · Initial margining typically was very low at the start of the crisis and increased rapidly during the turmoil.
Capital required for EPE was not sufficient
· Note: Expected Positive Exposure (EPE) is the weighted average over time of expected exposures where
the weights are the proportion that an individual expected exposure represents of the entire time interval
Overreliance on OTC
clearing
· Central Counterparties (CCPs) were not widely used to clear trades
Securitizations · Securitizations were treated as if they had the same risk exposure as a similarly rated corporate debt
instrument, while recently securitizations have continued to exhibit much higher price volatility
Stress Testing and Back
Testing
· The use of models with poor backtesting results contributed to an underestimation of actual losses
· Stress testing of counterparty credit risk was not comprehensive
Many institutions were not properly managing their trading book related CCR exposures
Lessons learnt from RM Failures relating to CCR
Page 19 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
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Bank B
Current Framework to Capture CCR
C
u
r
r
e
n
t
N
e
t
E
x
p
o
s
u
r
eOptions
Futures
Swaps
E
s
t
i
m
a
t
e
d

F
u
t
u
r
e
N
e
t
E
x
p
o
s
u
r
e
Forecast market
parameters
C
o
l
l
a
t
e
r
a
l
Forecast
collateral values
Bank A
Calculate EPE
E
s
t
i
m
a
t
i
o
n









o
f

M
(Standard
or model)
Page 20 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Summary of Proposed Capital Requirement Changes for CCR
Add CVA loss capital coverage
to credit risk calculation
· Calculate correlation adjustment
· Calculate Maturity adjustment (if
applicable)
· Calculate Capital requirement
· Calculate RWA
Factor specific WWR into
EAD estimates
Raise
AVC for Financial
Institutions
Trading example from slide 31
Calculate
Unexpected Loss (UL)
Increase standard add ons if EPE is
modeled without margin
agreements
Page 21 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Credit Valuation Adjustment (CVA) - Introduction
Definition
· CVA is the price of counterparty risk (Expected Loss)
· CVA = Value of the derivative under default free assumption minus value of the derivative accounting for failure to
pay.
CVA Development
· 1999/2000:
Banks first start using CVA to assess the cost of counterparty risk
Treated in an "insurance style approach¨ (passive management)
· 2006:
Accounting rules (FAS 157, IAS 39) imply that the value of derivatives positions must be corrected for counterparty risk
· Post Lehman:
Since the collapse of Lehman, CVA is a key issue of managing counterparty risk
Treated in a "trading desk approach¨ (active management)
CVA has material impact on pricing considerations
CVA T t V T t V , ,
~
Page 22 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Capital Add on based on Bond-equivalent to capture CVA losses
Background Original Proposal (12/2009)
· This proposed change also refers to Annex 4 of
the June 06 BII framework.
· Banks must calculate an additional capital
charge to cover potential mark-to-market
counterparty risk losses.
· For this purpose, it is proposed that banks
should implement the "bond-equivalent of the
counterparty exposure¨ approach
· In practice, this proposal provides a capital
add-on by using a bond equivalent as a proxy
for CVA risk
· Single name CDS can also be used as an
alternative
· Each counterparty is long a hypothetical bond
issued by the counterparty where:
! the notional of the bond is the total current
EAD of a counterparty (treated as fixed)
! the maturity of the "bond¨ is the effective
maturity of the longest dated netting set of a
counterparty
· type of bond: zero-coupon
· When using the internal model for market risk, a
bank has to calculate a 99% VaR.
· The time horizon is one year
· Calculation on standalone basis (without
accounting for hedging)
· Exception: Single name CDS or other equivalent
instruments directly referencing the counterparty
Page 23 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
July 2010 Modifications to CCR Methodology
Modifications to the CCR Calculation
Modify the bond equivalent approach to address hedging, risk capture, effective maturity and double
counting
To address the excessive calibration of the CVA, eliminate the 5x multiplier that was proposed in December
2009
Keep the asset value correlation adjustment at 25% to reflect the inherent higher risk of exposures to other
financial entities and to help address the interconnectedness issue, but raise the threshold from $25 billion
to $100 billion
Banks' mark-to-market and collateral exposures to a central counterparty (CCP) should be subject to a
modest risk weight, for example in the 1-3% range, so that banks remain cognizant that CCP exposures are
not risk free
More advanced alternatives to the bond equivalent approach could be considered as part of the
fundamental review of the trading book
Page 24 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
· Moody's
Investor
Services
· Standard &
Poors
· Fitch
Ratings
M
a
i
n

I
n
t
e
r
n
a
t
i
o
n
a
l

R
a
t
i
n
g

A
g
e
n
c
i
e
s
· External credit rating agencies were a major contributor to the
financial crisis, with lax rating practices, commercial involvement in
structures that were subject to rating, and massive downgradings,
also to below investment grades, of previously AAA rated
investments
· As a consequence, the regulatory framework for CRAs was
tightned both in the US and in Europe
· Changes in the BII Framework also reflect the loss in trust in the
activities of credit rating agencies
Addressing (Over-)Reliance on External Ratings
Page 25 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Reform Proposals Relating to CRAs
July 2009 Measures
· Banks must supplement regulatory capital requirements based on externally
rated securitizations with their own credit analysis and capital estimates of the
exposure
· Need to collect a range of information on the underlying collateral supporting
securitizations exposures
· Failure to conduct such due diligence will result in the bank having to deduct
the exposure from capital
IOSCO Code and
operational requirements
· CRAs must comply to the IOSCO Code of Conduct Fundamentals for Credit
Rating Agencies
· Rating must be published in an accessible form and included in the ECAÌ's
transition matrix
· Loss and cash-flow analysis as well as sensibility of ratings to changes in the
underlying ratings assumptions should be publicly available
Cliff Effects
· Currently, "eligible guarantors" for the SA and FÌRB are defined as "externally
rated A- or better¨ or "internally rated and associated with a PD equivalent to
A- or better¨
· Ìf a guarantor falls under this threshold, "cliff effects¨ might take place,
triggering a material change in the capital treatment
· The new proposal departs from a single requirement, while maintaining a
requirement in the Standardised Approach that a guarantor ÷ other than
sovereigns, PSEs, banks, and securities firms - be externally rated.
Page 26 Basel III ÷ Design and Potential Impact
Introduction of an Overall Leverage Ratio
©2010 Deloitte All rights reserved.
Current Version of Overall Leverage Ratio (7/2010)
Draft 12/2009
Definitionof Total
Exposure
12/2009
· Include all assets (including high quality liquid
assets) in the measure of exposure
· Net of provisions and valuation adjustments
(e.g. credit valuation adjustments)
· Derivatives: Either accounting approach but
with no netting or current exposure method to
measure potential exposure but with no
netting
· Credit derivatives: exposure is effectively the
same as providing a guarantee, and therefore
a 100% credit conversion factor will be
applied.
· Commitments: 100% credit conversion factor
· No reduction by physical or financial
collateral, guarantees or credit risk mitigation
no netting of derivatives, repo style
transactions and of loans / deposits
Modifications 7/2010
Definitionof Total
Exposure
7/2010
· For off-balance-sheet (OBS) items, use
uniform credit conversion factors (CCFs), with
a 10% CCF for unconditionally cancellable
OBS commitments (subject to further review
to ensure that the 10% CCF is appropriately
conservative based on historical experience).
· For all derivatives (including credit
derivatives), apply Basel II netting plus a
simple measure of potential future exposure
based on the standardised factors of the
current exposure method. This ensures that
all derivatives are converted in a consistent
manner to a "loan equivalent¨ amount.
· BCBS proposes a minimum Tier 1 leverage ratio of 3% during the parallel run period (33,3x), tracking LR quarterly
· The supervisory monitoring period commences 1 January 2011 and focus on the developing templates to track the ratio
· Parallel run period commences 1 January 2013 and runs until 1 January 2017, tracking LR and its components
· Bank level disclosure of the leverage ratio and its components will start 1 January 2015. The Committee will closely monitor disclosure
of the ratio
Page 28 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Illustrative Example
Balance Sheet and Off Balance Sheet Volumes
· Tier one Common Equity: 1.500
· Capital Adjustments: 400
· Total balance sheet volume: 18.000
· Derivatives (CCR) 4.600
· Guarantees, CDS 6.200
· Outstanding Commitments: 3.200
Calculation of Exposure Calculation of Leverage Ratio
Balance Sheet Volume 18,000 Balance Sheet Volume 32,000
Off Balance Sheet Volume Total Capital
Derivatives (CCR) 4,600 Tier 1 Common Equity 1,500
Guarantees 6,200 Adjustments 400
Commitments 3,200 Total eligible capital 1,100
Total OBS 14,000
Total Exposure 32,000 Leverage Ratio 29x
Page 29 Basel III ÷ Design and Potential Impact
Dealing with Procyclicality
©2010 Deloitte All rights reserved.
Dealing with Pro-Cyclicality
Current measures to address procyclicality:
÷ Requirement to use long term data horizons to estimate probabilities of default
÷ The introduction of so called downturn loss-given-default (LGD) estimates
÷ Appropriate calibration of the risk functions, which convert loss estimates into regulatory capital requirements
÷ Stress tests that consider the downward migration of their credit portfolios in a recession.
The proposals to further counterbalance pro-cyclicality focus on:
÷ Forward looking provisioning (see next slides)
÷ Capital conservation
÷ Building capital buffers in times of excessive credit growth
In its proposal to strengthening the resilience of the banking sector, the BCBS also tries to address procyclical features of current
regulation. As it is in the nature of micro economic behavior to reduce lending in times of increased risk, it is of particular difficulty for
regulators of privately owned banks to balance the need for proper risk management and macro-economic goals.
Establish a buffer range above the regulatory minimum
capital requirement
Capital distribution constraints are imposed on the bank
when capital levels fall within this range (only on
distribution, not on business operations)
Distribution constraints increase as the banks' capital
levels approach the minimum requirement
Should not result in the range being viewed as
establishing a new minimum capital requirement
Capital Conservation
Build up a capital buffer in times of excessive credit
growth (ave credit growth exceeds GDP growth
materially)
Adjust the capital buffer range when there are signs that
credit has grown to excessive levels
This will ensure that banks build up countercyclical
capital buffers, increasing their ability to absorb losses
Expected to be fully fleshed out approach at the BCBS'
July 2010 meeting
Capital Buffer for ,excessive credit growth"
Page 31 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Measures against Pro-Cyclicality
The BCBS and the G20 have, in various documents, made clear that current banking and accounting
regulation have certain pro-cyclical effects, meaning that those rules may exacerbate an economic crisis by
producing pro-cycIicaI feedback and second round effects, which might end up in a vicious cycIe ("downward
spiraI"):
"One of the most destabilizing elements of the crisis has been the procyclical amplification of financial shocks throughout the banking system,
financial markets and the broader economy. The tendency of market participants to behave in a procyclical manner has been amplified through a
variety of channels, including through accounting standards for both mark-to-market assets and held-to-maturity loans, margining practices, and
through the build up and release of leverage among financial institutions, firms, and consumers. The Basel Committee is introducing a number of
measures to make banks more resilient to such procyclical dynamics. These measures will help ensure that the banking sector serves as a shock
absorber, instead of a transmitter of risk to the financial system and broader economy."
Regarding forward looking provisioning, the BCBS outlines:
"The Committee strongly supports the initiative of the IASB to move to an expected loss approach. The goal is to improve the decision usefulness
and relevance of financial reporting for stakeholders, including prudential regulators. It has issued publicly and made available to the IASB a set of
principles that should govern the reforms to the impairment standards. In particular, loan loss provisions should be robust and based on sound
methodologies that reflect expected credit losses in banks' existing loan portfolios over the life of the portfolio. The accounting model for provisioning
should allow for early identification and recognition of losses by incorporating a broader range of available credit information than is permitted under
the incurred loss model."
The envisaged changes in accounting regulation will have a massive impact on both profitability and regulatory
capital, as the key effect will be that banks need to build up loan loss reserves from day 1, based on loss
expectations, rather than waiting for an impairment trigger to occur.
32
Page 32 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Building up Forward Looking Reserves
IASB Roadmap to IAS 39 Overhaul
· The IASB has revised its schedule for IAS 39 overhaul several times
· As most of the issues are joint projects with the FASB, coordination takes
time and requires multi-channel communication; further, the process to
obtain comment letters is also time consuming
· Most projects are expected to be completed by Q4 2010
· The IASB has issued ED 2009/12 on amortized cost and impairment in
Q4 2009. A final IFRS on the matter is expected to be issued in Q2 2011
Focus on Loan Loss Accounting
· The BCBS promotes vigorously the building
up of foward looking reserves
· It supports the expected loss (EL) approach
as recently promulgated by the IASB
· IASB issued an ED to change from an
incurred loss approach to EL approach
· Part of the larger agenda to overhaul IAS 39
· Committee considers EL approach to be less
procyclical than the current "incurred loss¨
approach
· IASB has not yet finally defined their
approach.
· FASB is currently in the process of
developing its own approach, with the recent
draft on FI diverging from the IASBs concept
in various aspects
Page 33 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
High Level Overview of ED 2009/12
· Asset by asset or groups of
similar assets
· Estimate expected cash
flows taking into account
expected future credit
losses over the life of the
asset
· Probability-weighted
possible outcome approach
even if most likely outcome
is full repayment
· No initial loss is recognized
immediately
· ED 2009/12 requires PIT
estimates ÷ TTC estimates
not allowed
Initial recognition: Estimate
future credit losses over life
of asset
Net interest revenue
recognized: Less margin
to reflect estimated future
credit losses
Allowance for
credit losses built
up over time
Ongoing
adjustments to
estimates of
future credit
losses
· Adjustment to the effective
interest rate method (EIR)
· Margin deducted from EIR
rate for estimate of future
credit losses
· Applies to fixed rate, floating
rate or combination rate
financial assets carried at
amortized cost
· Solve for effective interest
rate that equates (1) the initial
carrying amount with (2) the
PV of expected future cash
flows incorporating initially
expected credit losses
· Margin for initially expected
credit losses that is
deducted from gross
interest revenue in each
period is set aside to
gradually build-up an
allowance for expected
future credit losses
· Applies even if no actual
losses have yet been
incurred
· Does not require objective
incurred loss evidence as
under current IAS 39 rules
· Each period, the entity must
reassess the asset's
expected cash flows , taking
into account expected future
cash flows
· Any changes in credit loss
expectations ÷ both
favourable and
unfavourable ÷ are
recognized immediately on
a discounted cash flow
basis as a gain or loss in
earnings.
· Discount revised expected
future cash flows at asset's
original EIR
Page 34 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Existing Impairment Model (IAS 39) vs. Proposed Model
Aspect Incurred Loss Approach Expected Loss Approach
Initial determination of the
effective interest rate (EIR)
Based on initial net carrying amount and
expected future cash flows ignoring future
credit losses
Based on initial net carrying amount and expected
future cash flows that are adjusted for future
credit losses
Trigger for impairment
Required ÷ indicator based (objective
evidence of impairment)
No trigger
Measurement of revised
carrying amount
Expected cash flows reflecting incurred
losses discounted at original EIR
No fair value adjustments
No reflection of future credit losses
Continually updated expected cash flows
Discounted at original EIR (fixed rate instruments)
or combination of spot curve for benchmark rate
and a spread (floating rate instruments)
No fair value adjustments
Reflects expected future credit losses
Recognizing impairment Profit or loss Profit or loss
Subsequent impairments If further losses have been incurred
Recognized automatically through continual re-
estimation of cash flows
Revenue recognition after
impairment
Based on EIR
Compatible with cost-based measurement
objective
Based on EIR
Compatible with cost-based measurement
objective
Reversals
Required if triggered by event after
recognition of impairment loss
Limit to reversal up to amortized cost
Automatically by adjusting the expected future
cash flows (no trigger)
Upper limit is full contractual flows discounted at
EIR
Page 35 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Comparison of Basel II and ED 12/2009
· Estimates of PD represent probability of default over 12
month horizon.
· PD is calculated using statistical methods on the basis of
long run historical average.
· Estimates of loss inherent in cash flows are required over
the life of a loan.
· Point in time estimates need to be made; over the cycle
estimates are not permitted.
· LGD is an economic loss concept. It includes direct and
indirect collection costs, such as allocations of internal
overheads and other non-cash costs.
· Losses are discounted to the point of default using an
entity's cost of capital / Funding Cost.
· At the default point, Basel 2 requires estimation of the
present value of expected future cash flows.
· ED 12/2009 impairment calculations are cash flow driven.
They may include direct cash collection costs, but should
exclude non-cash costs.
· ED 12/2009 requires recoveries to be discounted by the
original effective interest rate
· At each payment date (and therefore potential default
point), requires estimation of the expected future CF.
· For Banks using the advanced approach, with the
exception of certain short term exposures, the maturity
will be the greater of 1 year / remaining effective
maturity.
· This mainly equates to the remaining contractual period
of the exposure.
· IAS 39 Impairment requires an estimation of the amount
and timing of prepayment over the instrument's effective
life.
· In respect of credit facilities, EAD takes into account
expectation of future draw-downs through a credit
conversion factor.
· Uses Carrying Value and Actual Cash Flow as the basis for
estimations.
P
D
L
G
D
E
A
D
M
Synergies and Differences
Basel II ED 2009/12
Page 36 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Incurred Loss, Expected Loss and Basel II
Incurred Loss Model
IASB Expected Loss Model
Basel II Expected Loss Model
y/e 2010
y/e 2011
PD 1 year
Loss event
Loss event
Default
EL = EAD * PD * LGD
Impaired, no consideration of emergence
period as loss is already identified
Extrapolationof loss events through LEP
Calculation
IL = EAD * PD * LGD * LEP
Emergence Period
Emergence Period
Loss Identification
Loss Identification
NAV of CF(t)
= f(PD(t), LGD(t), EIR)
Past default and loss data is used to estimate PD and
LGD (usually 5 years)
t
Page 37 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
"Decoupling¨
· In practice, the ECF approach would give rise to operational difficulties because
financial institutions and others typically store comprehensive contractual and
accounting data (in particular effective interest rate data) and EL data
information in separate systems ('accounting' and 'risk' systems).
· These operational difficulties were a major concern raised by members of the
EAP. (The ECF approach proposed by the IASB features an integrated EIR
calculation that would require integration of the data in the accounting and risk
systems.)
· The ECF approach (as an approximation) could be simplified by 'decoupling' ÷
separately sourcing the information in accounting systems (interest revenue as
determined today under IAS 39 Financial Instruments: Recognition and
Measurement that excludes EL estimates) and the information in risk systems.
Such an approach would adjust the interest revenue calculated in the accounting
system using an allocation profile for expected credit losses derived from EL
data in the risk system.
· In order to better understand a possible decoupling approach, the following
slides give some details on how banks typically manage credit risks, based on
the Basel II methodology, and make a comparison of the ECF and credit risk
methodology.
· Based on existing differences, we also analyze practical issues, such as data
requirements (and limitations) and the like.
Page 38 Basel III ÷ Design and Potential Impact
Management of Liquidity Risk
39
©2010 Deloitte All rights reserved.
Fundamental principle
1. A bank needs to establish a robust liquidity risk management framework
Governance of liquidity risk management
2. A bank should clearly articulate a LR tolerance appropriate for its business strategy and role
3. Senior management needs to be actively involved in LRM
4. Liquidity costs need to be factored into internal transfer pricing, so that LR is considered adequately
Measurement & management of liquidity risk
5. A bank should have sound a process for identifying, measuring, monitoring and controlling LR
6. A bank should actively monitor and control LR exposures throughout the group and take into account legal,
regulatory and operational limitations to the transferability of liquidity
7. A bank should establish a funding strategy for effective diversification of sources / tenor of funding
8. A bank should actively manage its intraday liquidity positions and risks
9. A bank should actively manage its collateral positions
10. A bank should conduct stress tests regularly and use the results to adapt strategy / positions
11. A bank should have a formal contingency funding plan
12. A bank should maintain a cushion of high quality liquid assets as insurance against a range of liquidity stress
scenarios (see International framework for LRM)
Public Disclosure
13. A bank should issue regular public disclosure on LRM and positions
Role of supervisors
14. Comprehensive assessment of liquidity risk management framework
15. Monitoring of internal reports, prudential reports & market information
16. Effective and timely intervention (New)
17. Communication with other supervisors and public authorities
The 17 BCBS Principles
Fundamental Principles
Governance of
Liquidity Risk
Public
Disclosure
Measurement
and
Management
of Liquidity Risk
Role of
Supervisors
Framework for
Liquidity Risk Management (LRM)
BCBS Paper on Fundamental Principles of LRM
Page 40 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
The core of the framework consists of two ratios, which have been developed to achieve two separate but complementary objecti ves.
BCBS International Liquidity Framework
· Aim to strengthen short-term liquidity profile
· Defines level of liquidity buffer to be held to
cover short-term funding gaps under severe
liquidity stress
· Cash flow perspective
· Predefined stress scenario
· Time horizon: 30 days
· Aim to strengthen medium- to long-term
liquidity profile
· Defines minimum acceptable amount of
stable funding in an extended firm-specific
stress scenario
· Balance sheet perspective
· Predefined stress scenario
· Time horizon: 1 year
LCR
Stock of high quality
liquid assets
Net cash outflows
over 30-day horizon
NSFR
Available amount of
stable funding
Required amount of
stable funding
L
i
q
u
i
d
i
t
y

C
o
v
e
r
a
g
e

R
a
t
i
o
N
e
t

S
t
a
b
l
e

F
u
n
d
i
n
g

R
a
t
i
o
2 100%
2 100%
Overview of BCBS Liquidity Ratios
Page 41 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Banks must maintain an adequate level of unencumbered, high quality assets to meet their liquidity needs for a 30-day time horizon under an acute
stress scenario.
· 'Net cumulative liquidity mismatch position under stress scenario' based on contractual maturities
· Survival period of 30 days
· Stress scenario is a combination of idiosyncratic and systematic factors, defined through asset and runoff factors
specified by regulators
· 'One size fits all' philosophy reduces risk sensitivity for the sake of harmonisation ÷ internal stress tests at banks
based on BIS sound principles are required to complement ratio
LCR
Stock of high quality
liquid assets
Net cash outflows
over 30-day horizon
Market value
Cash Outflows
Cash Inflows
Asset factor
Cash Outflows
_
Cash Inflows
Runoff Factor
Runoff Factor
_
_
_
_
· Three-notch credit rating
downgrade
· Partial run-off of deposits
· Partial loss of wholesale
funding capacity
· Increased market volatility
÷ higher collateral haircuts
· Unscheduled draws on
committed facilities
S
T
R
E
S
S

S
C
E
N
A
R
I
O
2 100%
Liquidity Coverage Ratio
Page 42 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
· Conservative approach and restrictive wording
by BIS as a result of the crisis
· Additional restrictive criteria for corporate &
covered bonds e.g. max. 50% of buffer
· Note ÷ no blanket inclusion of sovereign bonds,
additional criteria e.g. 0% risk weight apply
· Bank deposits are not part of the liquid assets
buffer, but can count as "cash inflow¨ when
calculating the potential net cash outflow in the
stress scenario
The nominator of the LCR is composed of a 'stock of unencumbered, high quality liquid assets'. The exact composition of the buffer remains a
matter of intense discussion.
List of quaIifying 'high quaIity Iiquid assets' Factor
1
Cash
100%
Central bank reserves
Marketable securities issued or guaranteed by sovereigns, central
banks, PSEs and multilateral development banks
Domestic sovereign /central bank debt in domestic currency
2
Specific plain vanillacorporate bonds, rating > A+
80%
Specific plain vanillacovered bonds, rating > A+
3
Specific plain vanillacorporate bonds, rating A+/A/A-
60%
Specific plain vanillacovered bonds, rating A+/A/A-
i
n

d
i
s
c
u
s
s
i
o
n
· Low market and credit risk
· Ease and certainty of valuation
· Listing on a developed exchange
Characteristics of 'high quaIity Iiquid assets'
Fundamental
characteristics
Market
characteristics
Operational
requirements
· Active and sizeable market
· ,Safe-Haven' Assets
· Ideally central bank eligible
· Unencumbered and freely available
High Quality Liquid Assets as Nominator
Page 43 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Outflows Inflows
Deposits
Unsecured
wholesale
funding
Committed
credit/liquidity
facilities
ABS/
ABCP
Secured
wholesale
funding
Collateral/
derivates
Various
Retail customers
Stable: 7,5%
Instable: 15%
10%
100%
Repos:
Buffer Assets
0%
Other Assets
100%
3-notch
Downgrade
Triggers:
100%
Negative market
value changes
Collateral:
20%
Derivatives:
tbd**
Retail/
Wholesale:
100%
Repos:
Buffer Assets
0%
Other Assets
100%
Credit facilities:
0%
SME
Stable: 7,5%
Instable: 15%
Credit
facilities:
10%
Liquidity
facilities:
100%
Non-Financials (with operational
relationships)
25%
Non-Financials (without
operational relationships)
75%
Sovereigns (with operational
relationships)
25%
Credit and
liquidity
facilities:
100%
Sonstige* & Sovereigns (w/o
operational relationships)
100%
Current Categorizations for Liquidity Coverage Ratio (LCR)
Changed to 5%/10%
Introduce new bucket
(custody and
clearing), 25% outflow
Changed to 75%
Only recognise roll-
over of transactions
backed by liquidity
buffer eligible assets
Lower to 5%
For sovereigns etc:
10% run-off for credit
lines and 100% run-
off for liquidity lines
Page 44 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
This metric establishes a minimum acceptable amount of stable funding based on the liquidity characteristics of an institution's assets and activities
over a one year horizon.
· NSFR promotes medium to long-term funding thus reducing incentives for short-term wholesale funding and
supplements the LCR (by also counterbalancing "cliff-effects¨)
· The stress scenario is defined differently from the one underlying the LCR ÷ idiosyncratic stress over 1 yr
· "Stable funding¨ is defined as those types of equity and liabilities expected to be reliable sources of funds under an
extended stress scenario of one year
· For determination of the required funding amount accounting and regulatory treatment is irrelevant ÷ required
funding amount depends solely on the respective instrument's liquidity characteristics
NSFR
Available amount of stable
funding (ASF)
Required amount of stable
funding (RSF)
Carrying Value
Carrying Value
RSF Factor
ASF Factor
_
_
_
· Significant decline in
profitability
· Significant decline in
solvency
· Potential downgrade by
any nationally recognised
credit rating organisation
· Material event which calls
into question the reputation
or credit quality of the
institution
S
T
R
E
S
S

S
C
E
N
A
R
I
O
2 100%
Net Stabile Funding Ratio
Page 45 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
RSF Categories (denominator) Factor
1
Cash, money market instruments
0%
Securities, loans to financial entities, effective maturity< 1 Y
2
Specific unencumbered government/quasi-sovereign bonds
with excellent rating, active repo-markets, < 1 Y
5%
3 Specific credit and liquidity facilities 10%
4
Specific unencumbered corporate bonds or covered bonds with
excellent rating, active and liquid markets, < 1 Y
20%
5 Gold, loans to non-financial corporate clients < 1 Y, etc. 50%
6 Loans to retail clients, < 1 J 85%
.
7 All other assets 100%
8 Other (non-contractual) contingent funding obligations tbd*
ASF Categories (numerator) Factor
1
Total amount of capital, including both Tier 1 and Tier 2
100% Preferred stock not included in Tier 2, effective maturity < 1 Y
Total amount of secured and unsecured borrowings and
liabilities < 1 Y
2 Stable Retail/SMEdeposits < 1 Y 85%
3 Less stable Retail/SME deposits < 1 Y 70%
4
Unsecured wholesale funding and deposits provided by non-
financial corporate customers< 1 Y
50%
5 All other liabilities and equity categories 0%
Current Version of ASF / RSF Percentage Weighting for NSFR
Raise to 80%
Raise to 90%
Lower to 65% for
residential
mortgages and other
loans that would
qualify for the 35%
or better risk weight
under StA for CR
Lower to 5%, insofar
as pre-funded
Transition: Carry out an "observation phase" to address any unintended consequences across business models or funding structures
before finalising and introducing the revised NSFR as a minimum standard by 1 January 2018.
Page 46 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
On top of the LCR and the NSFR the framework introduces four tools which enable the regulator to monitor the liquidity situat ion of the respective
bank.
Tool Definition Aim
Contractual
Maturity
Mismatch
· Reporting of contractual maturity mismatch profile ÷
Mapping of inflows and outflows of both on- and off-
balance sheet positions to defined time bands based
on their contractual maturities
· Insight into the extent to which the bank relies on
maturity transformation, based on (very)
conservative assumptions
· Supplemented by internal profiles including
behavioural assumptions (Going Concern, Stress)
according to the BIS Sound Principles
Concentration of
Funding
· Reporting of ¨significant" concentrations within the
wholesale funding profile
· For: counterparts, products, currencies; reported
e.g. as simple, pre-defined ratios; "significant¨
defined as > 1% total liabilities
· Diversification of funding sources, as required
within the BIS Sound Principles
· Liability equivalent to "Large Exposure¨ regulation
on the asset side
Available
Unencumbered
Assets
· Reporting of available unencumbered assets, that
could serve as collateral in secondary markets or
are eligible for central banks' standing facilities
· Insight into available additional funding
Market-related
monitoring tools
· Regulator's monitoring of market-wide information,
information on the financial sector as well as bank-
specific information
· Early warning signals for potential liquidity crisis
situation
LRM Monitoring Tools
Page 47 Basel III ÷ Design and Potential Impact
Potential Impact Analysis and Forward
Looking Actions
©2010 Deloitte All rights reserved.
Topic Proposed Actions
Overall Approach
While the details of various approaches to limit leverage and stronger regulatory scrutiny and restrictions
on business activities will unfold in the near future, we believe that it is already now necessary to
anaIyze an institution's vuInerabiIity to the proposed measures
Regulatory Capital
· The impacts of the upcoming definitions of Tier 1 and Tier 2 capital can be massive
· The same counts for the new deduction requirements
· Banks need to run a test calculation what the implementation of the new rules would mean
Risk Management
· RM of treasury and trading departments should be reviewed and the impact of the new regulations on
capital requirements analyzed
· Credit risk management departments need to analyze the impact of the new requirements for the use of
external ratings
Leverage Ratio
· Banks should calculate their current leverage ratio under the new proposals and monitor the calibration
efforts of the BCBS closely
Provisioning
· Banks should perform quantitative impact analysis of the proposed expected loss methodology and
monitor closely the latest developments on this front
· The level of granularity depends on the available data. Data gaps should be analyzed
Capital Buffers
· Banks should analyze if they are operating in environments of excessive credit growth and prepare for
additional capital requirements for such business activities
Liquidity Risk
Management
· LRM should be reviewed, as part of pillar 2 process, and strengthened in accordance with the BCBS
basic principles
· Meaningful stress tests and CFPs should be designed and implemented
Liquidity Ratios
· Banks should perform a pro forma calculation of the new liquidity ratios and assess the impact on
business activities
The proposed changes to the regulatory framework necessitates various actions in well managed banks, to assess the impact of the various
new measures and prepare for potential concrete actions ÷ with an impact analysis being the predominant aspect at this time
How to Prepare for the Upcoming Changes?
Page 49 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Example for an Impact Analysis: Introducing XYZ Bank
· In order to outline the strategic consequences of Basel III in more detail, we modeled the impact of the new regulations on XYZ Bank, a stylized
retail and wholesale bank in Asia which is ambitious to expand their loan and derivatives trading business
· The following slides are based on XYZ Bank's growth plan, first outlining Basel ÌÌ compliance and then analyzing effects of Basel III
· The table below shows the (simplified) growth projections for assets, liabilities and off balance sheet volumes, as a starting point of the analysis
Growth Plan XYZ Bank (Basel II) 2011 2012 2013 2014 2015 Growth
ASSETS In bn CUR units In %
Deposits (CB, other banks) 740 814 895 985 1,083 10%
Net trading assets 50 60 72 86 104 20%
Loans to customers 1,950 2,438 3,047 3,809 4,761 25%
Investment securities 450 495 545 599 659 10%
investments in affiliates 45 45 85 85 85 Acquisition
Deferred tax assets 18 23 28 35 44 25%
Other assets 150 165 182 200 220 10%
Total 3,403 4,039 4,853 5,799 6,955
LIABILITIES
Due to other banks 320 384 461 553 664 20%
Due to customers 2,700 3,240 3,888 4,666 5,599 20%
Debt issued 50 63 78 98 122 25%
Tier 2 capital bonds 104 114 126 138 152 10%
Other 50 39 75 85 118
Total 3,224 3,840 4,628 5,539 6,654
OFF BALANCE SHEET VOLUME
Commitments 230 288 359 449 562 25%
Underwriting, Derivatives 1,250 1,500 1,800 2,160 2,592 20%
Total 1,480 1,788 2,159 2,609 3,154
Page 50 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
XYZ Bank ÷ Basel II Capital and Risk Weighted Assets Forecast
Growth Plan XYZ Bank (Basel II) 2011 2012 2013 2014 2015
EQUITY, REGULATORY CAPITAL
Share Capital 50 50 50 50 50
Share Capital Surplus 55 55 55 55 55
Innovative Tier 1 15 15 15 15 15
Retained earnings 59 79 105 139 181
Tier 1 capital before deductions 179 199 225 259 301
Deduction: 50% Associated Entity -23 -23 -43 -43 -43
Net Tier one capital 157 177 183 217 259
Tier 2 Capital 104 114 126 138 152
Deduction: 50% Associated Entity -23 -23 -43 -43 -43
Total Tier 2 capital 82 92 83 96 110
Total regulatory capital 238 291 309 355 411
RISK WEIGHTED ASSETS
RWA banking book (bank's systems) 1,600 1,899 2,282 2,726 3,270
Trading book capital (VaR based) 25 29 33 38 44
RWA Trading book (x12.5) 313 359 413 475 547
Total RWA 1,913 2,258 2,695 3,202 3,817
· XYZ Bank's regulatory capital is a function of core capital, deductions under Basle ÌÌ, and of tier 2 capital.
· Innovative Tier 1 capital has been issued in order to achieve a more flexible capital composition
· As can be seen in the table below, XYZ Bank plans to increase its regulatory capital by retaining earnings over the coming years
· Risk weighted assets reflect mainly loans to customers, as deposits and investment securities achieve low ratings due to the standing of the
debtors
Page 51 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
XYZ Bank ÷ Basel II Capital Compliance and Profitability Forecast
Growth Plan XYZ Bank (Basel II) 2011 2012 2013 2014 2015
BASEL II CAPITAL REQUIREMENTS
Minimum required Tier one capital
(0.5% over reg-floor) 4.5% 4.5% 4.5% 4.5% 4.5%
Minimum required tier one capital 86 102 121 144 172
Tier one surplus / deficiency 70 75 61 73 87
Required Total capital percentage
(1% over minimum) 9.0% 9.0% 9.0% 9.0% 9.0%
Required capital (credit risk, market risk) 172 203 243 288 344
Total capital GAP (-) / surplus (+) 66 88 66 67 67
PROFITABILITY AND PERFORMANCE
Annual consolidated profit 25 31 39 49 61
Dividend 5 5 5 7 7
ROE 14.0% 15.7% 17.3% 18.8% 20.3%
Number of shares (m) 50 50 50 50 50
Earnings per share (in CUR units) 500 625 781 977 1,221
Expected share price
(in CUR units; multiple: 10x)
5,000 6,250 7,813 9,766 12,207
· The table below outlines that the capital increases through earnings retention are sufficient to fund the projected business growth under
Basel II requirements
· The bank's plan shows both tier 1 and total capital levels well above the minimum capital requirements, which have been raised by the board
of directors by 1 %age point
· Given the increase of profitability and EPS, the bank expects material improvements of their share price on the stock market, assuming a
multiple of 10x EPS for market capitalization
Page 52 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Basel ÌÌÌ Ìmpact on XYZ Bank's Regulatory Capital
Basel III Impact 2011 2012 2013 2014 2015
Capital deduction requirements under Basel III
Net Tier 1 capital under Basel II 1) 157 199 225 259 301
Investment in Subsidiaries (50%) 23 23 43 43 43
Deferred Tax Asset 18 23 28 35 44
41 45 71 78 86
minus 15% capital threshold 2) 23 30 34 38 44
Effectivededuction requirement 17 15 37 39 41
Phase in 0.0% 0.0% 0.0% 20.0% 40.0%
0 0 0 -8 -17
Innovative Tier1 Phase out 0.0% 0.0% 10.0% 20.0% 30.0%
0 0 -2 -3 -5
Profit impact of IASB impairment project
As a percentage of RWA (simplification) 0.0% 0.0% 0.75% 0.75% 0.75%
Impact on Tier 1 capital 0 0 -17 -20 -25
Impact on Tier 2 capital
Tier 2 capital 104 114 126 138 152
Phase out 50% sub-deduction -23 -23 -43 -43 -43
Phase out percentage 0.0% 0.0% 10.0% 20.0% 30.0%
Effective deduction -23 -23 -38 -34 -30
Tier 2 capital under Basel III 82 92 88 104 123
Adjusted capital under Basel III
Adjusted Tier 1 Capital under Basel III 157 199 207 228 256
Tier 2 capital under Basel III 82 92 88 104 123
Adjusted Total Capital under Basel III 238 291 294 333 378
· The Table below outlines the impact of Basel III on regulatory capital of XYZ-Bank
· Main effects are derived from deferred tax assets, investments in affilates, and the phase out of innovative capital forms
· Ìn line with the BCBS's support of the ÌASB expected loss credit risk provision model, the impact of ÌASB ED 12/2009 is modelled as well
1) Deduction under BII stays fully in force until BIII transition is completed (subjective interpretation)
2) Innovative Tier 1 stays in the base until it is phased out (subjective interpretation)
Page 53 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Basel III Additional Capital Requirements
Basel III Impact 2011 2012 2013 2014 2015
Basel III Capital Requirement
Basel 3 Minimum Tier 1
Requirement 4.0% 4.0% 4.5% 5.5% 6.0%
Discretionary board add on 0.5% 1.0% 1.0% 1.0% 1.0%
4.5% 5.0% 5.5% 6.5% 7.0%
Basel 3 Minimum Total Capital 8.0% 8.0% 8.0% 8.0% 8.0%
Discretionary board add on 1.0% 1.0% 1.0% 1.0% 1.0%
Countercyclical Capital Buffer 0.0% 0.0% 1.5% 1.5% 1.5%
9.0% 9.0% 10.5% 10.5% 10.5%
Trading book capital requirement (incorporating the 6/2009 changes and Basel III)
Current 25 29 33 38 44
Stressed VaR capital add on (150%) 38 43 50 57 66
CCR add on (50%) 13 14 17 19 22
Total add on 50 58 66 76 87
Total TB capital requirement 75 86 99 114 131
· The Basel capital requirements increase based on the BCBS published phase in plan of additional Basel III capital needs, as well as based
upon the 2009 enhancements to capital requirements of trading activities
· Stressed VaR as part of the capital formula is deemed to have an impact of 1.5x (total: 2.5x), with QIS conducted by BIS outl ining potentially
higher impact levels
· CCR is modeled as a simiplified 50% add on to BII capital requirements
Page 54 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
XYZ Bank's Capital and Liquidity GAP under Basel ÌÌÌ
Basel III Impact 2011 2012 2013 2014 2015
RWA under Basel III
RWA banking book 1,600 1,899 2,282 2,726 3,270
RWA trading book (x12.5) 938 1,078 1,240 1,426 1,640
Total RWA 2,538 2,977 3,522 4,152 4,910
Required Tier 1 Capital under Basel III 114 149 194 270 344
Required total capital under Basel III 228 268 370 436 516
Capital Shortfall under Basel III
Tier 1 Capital Shortfall 42 50 13 -42 -88
Total Capital Shortfall 10 23 -76 -103 -137
Leverage Ratio Limitations
Leverage Ratio under Basel III 31x 29x 34x 37x 40x
maximum leverage (3%) 33x 33x 33x 33x 33x
Adjustment need 2x 4x -1x -4x -7x
Liquidity Ratios
Basel III LCR Funding GAP 0 0 0 0 - 200
Basel III LTFR (observation only) 141% 137% 130% 126% 123%
· As can be seen in the table below, XYZ bank faces material shortfalls of both tier 1 and tier 2 capital under Basel III
· The planned business growth leads to a potential material breach of the upcoming maximum leverage ratios
· Under the upcoming mandatory liquidity ratios, the bank would be obliged to hold at least 200m additional liquid funds in order to sustain the
LCR Funding test
· As a consequence, the bank's plans need to be materially adapted in order to reflect the additional capital and liquidity needs of Basel III
Page 55 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Potential Plan Adaption: Reduction of Trading Business
Impact Mitigation 2011 2012 2013 2014 2015 growth
Reduction of trading and underwriting volumes
Adapted net trading assets 50 60 72 86 104
Adapted trading OBS volume 1,250 1,375 1,513 1,664 1,830 10%
Adapted capital requirement 25 26 28 29 31
Scale down in volume 0.0% -8.3% -16.0% -23.0% -29.4%
Impact on profitability
Trading part of profitability 6.7 8.5 10.6 13.3 16.6
Profitability of reduced trading activity 6.7 7.8 8.9 10.2 11.7
Impact 0.0 -0.7 -1.7 -3.0 -4.9
Impact on capital
Tier 1 capital before trading
reduction 157 199 207 228 256
Profitability reduction 0.0 -0.7 -2.4 -5.4 -10.3
Tier 1 capital after profitability reduction 156.5 198.3 204.2 222.7 245.3
Tier 2 capital 81.5 91.9 87.6 104.4 122.5
Total capital 238.0 290.2 291.8 327.1 367.8
Impact on RWA
RWA banking book 1,600 1,899 2,282 2,726 3,270
RWA trading book 938 988 1,042 1,098 1,158
Total RWA 2,538 2,887 3,324 3,825 4,428
· XYZ Bank decides to model a reduction of their planned trading business, growing derivative and underwriting volumes by 10 % instead of the
envisaged 20%
· This downsizing (30% by 2015) impacts both profitability and RWA / VaR growth (the latter reducing capital requirements and l everage ratio)
Page 56 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Additional Plan Adaption: Capital Increase to Mitigate Capital GAP
Impact Mitigation 2011 2012 2013 2014 2015
Required Tier 1 capital 114 144 183 249 310
Required total capital 228 260 349 402 465
Tier 1 GAP 42 54 21 -26 -65
Total capital GAP 10 30 -57 -74 -97
Impact on leverage ratio
Maximum leverage ratio 33x 33x 33x
Leverage ratio 33x 36x 38x
Required Tier 1 capital 114 144 183 249 310
Tier 1 Capital Increase
Number of shares (m CUR units) 13
Share price (CUR unit) 7,813
Total increase tier 1 100 100 100
Impact on profitability: 2% risk free return (cumulated) 2 4
Total impact on Capital and Leverage Ratio
Tier 1 Capital GAP 42 54 121 76 39
Total Capital GAP 10 30 43 28 7
Leverage ratio 31x 29x 22x 24x 27x
· In addition, the bank deems it necessary to increase its capital by 2013, in order to achieve compliance with the Basel III capital and leverage
ratio requirements
· The capital increase is done based on the share price predictions as contained in the unchanged plan, and may therefore need to be
discounted if using a more conservative planning approach
· As a result of the two plan adaptions (scale down of trading business, capital increase), XYZ Bank is back on track in projecting sufficient
capital levels to comply with regulatory requirements, both for RWA and leverage ratio
Page 57 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Impact of Plan Adaption on Profitability and Performance
Impact Mitigation 2011 2012 2013 2014 2015
Impact on ROE
Annual consolidated profit 25 31 20 27 36
Dividend 5 5 5 7 7
ROE after plan adaptations 14.0% 13.8% 8.3% 10.7% 13.4%
Planned ROE 14.0% 15.7% 17.3% 18.8% 20.3%
Impact on ROE (percentage points) 0.0% -1.9% -9.1% -8.1% -6.9%
ROE Delta (in percent) 0.0% -11.9% -52.4% -42.9% -34.1%
Share Price Impact
Number of shares (m) 50 50 63 63 63
Earnings per share (in CUR units) 500 611 323 435 567
Expected share price in CUR units
(multiple: 10x) 5,000 6,109 3,226 4,353 5,675
Planned share price 5,000 6,250 7,813 9,766 12,207
Impact on Share Price vs. expected 0 -141 -4,586 -5,413 -6,532
Share price vs. starting point 22.2% -35.5% -12.9% 13.5%
· However, as can be seen in the tables below, XYZ Bank's measures to maintain compliant with regulatory capital requirements have a
material impact on the bank's profitability and share price
· Given the reduced trading growth ambitions and that the capital increase can not be used to leverage additional business but only t o maintain
the growth expectations of the original plan, ROE reaches initial levels only after 2015
· EPS are equally impacted, resulting into material loss of share price in 2013, reaching initial levels only in 2015.
· Thus, there is a clear trade off between regulatory compliance and gorwth and profitability goals under Basel III.
Page 58 Basel III ÷ Design and Potential Impact
©2010 Deloitte All rights reserved.
Strategic Consequences
Ensure Capital and
Liquidity Funding
· Enable capital planning
based on growth plans
· Plan, prepare and execute
capital raising seamlessly
· Diversify funding sources
and investors
· Build liquidity management
capabilities
· Introduce a leading cost of
capital and funds concept
Build sustainable Trust
· Improve corporate
governance
· Improve risk culture and
ICAAP implementation
(involving top leadership)
· Anticipate risks (expecially
bubbles and aggregation
risks) early, and prepare for
market stress
· Avoid regulatory failure and
reputational risks
· Focus on meaningful
disclosure
Enhance Profitability and
Operative Excellence
· Optimize target operating
model, focusing on scale
where possible and on
individualization where
profitable
· Create a world class IT
platform, focusing on
functionality and economies
of scale
· Lead through world class
finance management (client
/ product profitability, risk /
reward, etc)
· Attract and maintain world
class talent
Focus on "Good Growth"
· Focus on highly profitable
customer segments (affluent ,
private banking etc)
· Target customer segments
with high future growth
potential (green industry etc)
· Optimize use of capital (e.g.
through collateral etc)
· Enhance the customer
experience to outplay the
competition
· To sum it up: With Basel III creating additional requirements for capital and liquidity, the new rules will have a material impact on both
growth and profitability.
· With many major financial institutions reaching out to the stock market to recapitalize, it is to be expected that there will be
a ,battIe for capitaI" in the banking industry
· It is thus impediment that the strategic direction of banks are designed to stay ahead of the curve and to outplay the compet ition, in order to be
an outstandingly attractive and reliable counterpart for investors and customers over the coming challenging years.
Page 59 Basel III ÷ Design and Potential Impact

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