BASEL ACCORDS

 Initially named the Committee on Banking

Regulations and Supervisory Practices
 Established by G10 central bank governors
 Precursors
BRIEF  Dissolution of Bankhaus Herstatt (Settlement Risk)
 Arab-IsraeliYom Kippur War (Financi)
HISTORY
 Central aim: Serves as a forum for regular
cooperation between member countries on
banking supervisory matters" and improving
the "quality of banking supervision
worldwide."
  Accord on banks’ capital requirements
 To address concerns on:
 Low capital levels of internationally active banks
 Advantages enjoyed by banks with lower capital
requirements
Basel I  Two ratios required:
 Tier I core capital: 4% of risk-weighted assets
 Tier II total capital: 8% of risk-weighted assets
 Constituents of Capital
 Tier I: Equity capital, retained earnings
 Tier II: Revaluation reserves, loan loss provisions
Risk-weighted
assets

Source: BSP
  Revision of Basel I to give way for other banking
risks aside from credit risk
 Revisions due to increased securitizations of
mortgages, advances in risk management
 Three pillars of bank regulations:
Minimum Supervisory Market
Capital Review Discipline
Basel II
CBs ensure that
Capital charge minimum capital Enhanced
for 3 kinds of risk requirements are disclosure of risk
being followed

Credit Risk May use internal

assessments but
Market Risk Referee system
must be duly
Operational Risk disclosed
  2008 Global Financial Crisis (GFC) sparked concerns on
banks’ exposure to other risks other than those
identified in the Basel II
 Too big to fail banks / financial institutions will actually
fail (e.g. Lehman Brothers, Bear Sterns)
Basel III  Large exposure to less liquid assets such as mortgage-
backed securities
 Two key liquidity ratios:
 Net Stable Funding Ratio (NSFR)
 Liquidity Coverage Ratio (LCR)
  Net Stable Funding Ratio (NSFR)
𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑆𝑡𝑎𝑏𝑙𝑒 𝐹𝑢𝑛𝑑𝑖𝑛𝑔 (𝐴𝑆𝐹)
𝑁𝑆𝐹𝑅 =
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑆𝑡𝑎𝑏𝑙𝑒 𝐹𝑢𝑛𝑑𝑖𝑛𝑔 (𝑅𝑆𝐹)
 The higher, the better
 Higher ASF: assigned to more stable funding
 Higher RSF: assigned to illiquid assets
NSFR and LCR  Liquidity Coverage Ratio
𝐿𝐶𝑅
𝑆𝑡𝑜𝑐𝑘 𝑜𝑓 𝐻𝑖𝑔ℎ 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 𝐿𝑖𝑞𝑢𝑖𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 (𝐻𝑄𝐿𝐴)
=
𝑇𝑜𝑡𝑎𝑙 𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤𝑠 𝑜𝑣𝑒𝑟 𝑡ℎ𝑒 𝑛𝑒𝑥𝑡 30 𝑐𝑎𝑙𝑒𝑛𝑑𝑎𝑟 𝑑𝑎𝑦𝑠
 The higher, the better
 HQLA: reliable source of liquidity even during stressed market
conditions
 RSF ASSETS LIABILITIES ASF

Unencumbered Assets Short Term Funding

Consumer Loans Noncore Deposits

Long-term assets
NSFR
Corporate Loans Core Deposits

Long-term funding
Interbank Loans Long Term Funding

Equity
 Level I Assets Level II Assets

• Cash on Hand • Eligible securities

• Central Bank Reserves issued by CBs, PSEs,
• O/N and term deposits MDBs
with the Central Bank • Corporate Debt
HQLA • Eligible Securities Securities
issued • Common equity
• NG and BSP shares in peso that are
included in organized
• Other sovereigns,
exchange
CBs and multilateral
agencies