Basel III and Liquidity Standard – Status Quo and Next Steps

Dr. Georg von Pföstl PRMIA Frankfurt Chapter, Sept. 2011
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2 .Agenda Basel III – Status Quo Basel III – Implications & Implementation Challenges Basel III – Liquidity Standard Copyright © 2011 Accenture All Rights Reserved.

. 2012. Regulation: no national translation required 01 Jan. 2010 (rev. 2010) (CRD III) partially transposed into national law “Basel III” „CRD IV“ (package of two legal instruments: Directive and Regulation) Status European/ national implementation and coming into force „Basel III“ published by the BCBS in Dec. 2013 (with transition periods till 2019) Regulation definition of capital liquidity risk leverage ratio counterparty credit risk single rule book (through Regulation) Directive capital buffers enhanced governance sanctions enhanced supervision 3 Coming into force Topics 31 Dec.5” Legal basis (EU) CRD (2009/111/EC) published in the Official Journal (Nov.. 2009) (CRD II) transposed into national law CRD (2010/76/EU) published in the Official Journal (Dec. 2010 large exposures securitization hybrid capital instruments liquidity risk management cross border supervision 31 Dec. version of capital framework June 2011) Proposals of Directive and Regulation published by the European Commission in July 2011 Directive: to be translated into national law till 31 Dec.Key topics of Basel III will be implemented through an EU Regulation – no further translation into national law required From Basel II to Basel III “Basel 2. 2011 re-securitization disclosure securitization risks trading book Remuneration policies Copyright © 2011 Accenture All Rights Reserved.

impact depends on bank specifics ** Depending on trading book and investment bank activities Copyright © 2011 Accenture All Rights Reserved. e. by issuing capital instruments or retaining earnings Leverage Ratio (design: Tier 1 capital/total exposure. Further banks are expected to adhere to the sound principles of liquidity risk management Enhanced risk coverage (CCR.The new liquidity ratios are the key challenge for most banks as they influence liquidity and funding strategy. pricing and the business model Accenture estimated impact of Basel III (1/2) Topic Definition of capital Brief description Impact New definition of capital to increase quality. gross ratio – calibration: 3%) might narrow the scope of action for banks given the existing capital Ratios require increase of high quality liquid assets and change of funding mix which leads to higher liquidity costs. repos and securities financing activities Medium to High** * Rough assessment. CCP) leads to an increase of capital requirements for the trading book and complex securitization exposures Leverage ratio Medium Liquidity standards High Counterparty credit risk (CCR) Higher capital requirements for CCR arising from derivatives. consistency and transparency of the capital base New leverage ratio as a supplementary measure to the risk-based Basel II framework Introduction of a short-term LCR and a longer-term NSFR High Potential impact for banks* Explanation/remarks New definition of capital leads to a significant reduction of the capital ratios build up of capital (quantitative/qualitative).g. wrong way risk. asset value correlation for large financial institutions. 4 . CVA.

impact depends on bank specifics ** through the cycle Copyright © 2011 Accenture All Rights Reserved. definition of SIFIs currently in discussion ( Indicator-based measurement approach) Systemically important financial institutions High Single rule book (entire regulation) Low Regulation harmonizes divergent national supervisory approaches by removing options and discretions * Rough assessment. TTC** parameters Approach could include combinations of capital surcharges. 5 .The discussed measures for SIFIs might have a material impact on those institutions.5% is proposed (CET1 capital) Creation of consistent rules – removal of national discretions Medium Potential impact for banks* Explanation/remarks When capital levels fall into conservation range constraints on capital distribution are imposed. capital surcharge of 1-2. The definition of SIFIs is currently in discussion Accenture estimated impact of Basel III (2/2) Topic Countercyclical measures Brief description Impact Introduction of capital conservation and countercyclical capital buffer In discussion: EL-approach for provisioning. contingent capital and bail-in debt (in discussion) Capital surcharge of 1-2.5% of RWA (depending on „bucket“) is proposed (CET 1 capital). Pressure from the market to fulfill ratios before regulatory deadline Different measures currently in discussion. Countercyclical buffer extends capital conservation buffer.

implementation effoert depends on bank specifics Copyright © 2011 Accenture All Rights Reserved. 6 . technical as well as organizational implementation effort Accenture estimated implementation effort of Basel III Topic Functional Definition capital Leverage Ratio Liquidity standards Counterparty credit risk (CCR) Countercyclical measures SIFIs Single rule book High Low High High Medium Medium Low Implementation effort* Technical Medium Low High High Medium Medium Low Organizational Medium Low High Low Low High (depending on regulation evolution) Low * Rough assessment.The liquidity standards will have a high functional.

2018 Scope of application: Level of individual institution (with legal personality) Disclosure of LCR and NSFR under pillar 3 Copyright © 2011 Accenture All Rights Reserved. introduced on Jan 1. 2012 LCR: reported at least monthly. 7 . introduced on Jan 1. 2015 NSFR: calculated and reported at least quarterly. first reporting to supervisors is expected by Jan 1.Basel III introduces two liquidity ratios to promote the short-term and the longer-term resilience of the liquidity risk profile of institutions Global Liquidity Standard LCR High quality liquid assets Total net cash outflows over 30-day time period ≥ 100% NSFR Available stable funding > 100% Required stable funding Institutions are required to fund their activities with more stable sources of funding on an ongoing structural basis Institutions have to ensure that they have sufficient high quality liquid assets to survive an acute stress scenario lasting for 30 days Frequency of calculation and reporting: Banks are expected to meet the requirements of the standards continuously. with the operational capacity to increase the frequency to weekly or even daily in stressed situations.

g. no haircut „Level 2 assets“ (transferable assets that are of high liquidity and credit quality): max. 60% of liquid assets. haircut of min. 40% of liquid assets. market value. 15% Copyright © 2011 Accenture All Rights Reserved. 8 .The LCR aims to ensure that banks maintain an adequate level of high-quality liquid assets to survive a severe liquidity stress scenario lasting for 30 days LCR: High quality liquid assets Conditions high quality liquid assets (e. market value. transferable assets of extremely high liquidity and credit quality): min.g.): Appropriate diversification Assets are legally and practically readily available at any time during the next 30 days Liquid assets are controlled by a liquidity management function High quality liquid assets items: “Level 1 assets” (cash.): Not issued by the institution or parent/subsidiary Eligibility as collateral in normal times for intraday liquidity needs and overnight liquidity facilities of a CB Listed on a recognized exchange ≥ 100% Total net liquidity outflows over 30-day time period LCR High quality liquid assets Operational requirements (e.

The scenario includes firm-specific and systemic factors Calculation liquidity outflows: Multiplication of the items with the respective „run off“ factor Calculation liquidity inflows: Multiplication of the items with the specified inflow factor.Total net cash outflows are defined as the total expected cash outflows minus total expected cash inflows in the specified stress scenario LCR: Net liquidity outflows Net liquidity outflows = Liquidity outflows – Min {Liquidity inflows. 9 . inflows are capped with 75% of the outflows Copyright © 2011 Accenture All Rights Reserved. 75% of liquidity outflows) LCR High quality liquid assets ≥ 100% Total net liquidity outflows over 30-day time period Net liquidity outflows: Liquidity outflows minus liquidity inflows in the stress scenario.

15% LCR ≥ 100% Liquidity outflows Retail deposits (5-10%) Other liabilites coming due during next 30 days (0-100%) Collateral other than “level 1” assets (15-20%) Credit and liquidity facilities (5100%) - Liquidity inflows Monies due from non financial customer (50%) Secured lending and capital market driven transactions (0%-100%) Undrawn credit and liquidity facilities (0%) Specified payables and receivables expected over the 30 day horizon (100%) Liquid assets (0%) New issuance of obligations (0%) Copyright © 2011 Accenture All Rights Reserved. 60% of liquid assets) “Level 2” assets: transferable assets that are of high liquidity and credit quality): max. market value. haircut of min.The definition of high quality liquid assets and the treatment of interbank funding are key discussion points Liquidity Coverage Ratio High quality liquid assets “Level 1” assets: cash. 40% of liquid assets. transferable assets of extremely high liquidity and credit quality (min. 10 .

central banks. Neither at this point in time it is stated whether the NSFR should be “>” or “≥” 100%. ** The proposed EU Regulation does not include any ASF. Copyright © 2011 Accenture All Rights Reserved. provided by non-financial corporates. non-maturity deposits and/or term deposits with a residual maturity < 1 year. multilateral development banks and PSEs All other liabilities and equity categories not included in the above categories 90% 80% 50% 0% * “Stable funding” is defined as the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon under conditions of extended stress. 11 .or RSF factor.The NSFR should ensure that long term assets are funded with at least a minimum amount of stable liabilities in relation to their liquidity risk profiles NSFR: Available stable funding Available stable funding* Items Tier 1 & 2 capital Preferred stock not included in Tier 2 capital with maturity ≥ 1 year Secured and unsecured borrowings and liabilities with effective remaining maturities ≥ 1 year ASF factor** 100% NSFR Available stable funding > 100% Required stable funding "Stable" non-maturity (demand) deposits and/or term deposits with residual maturity < 1 year "Less stable" non-maturity (demand) deposits and/or term deposits with residual maturities < 1 year Unsecured wholesale funding. sovereigns.

central banks. CB. and PSEs with a risk-weighting of 20%. sovereigns. noncentral government. EC. BIS. CB. maturity ≥ 1 yr Gold Loans to non-financial corporate clients. MDB with a 0% STA risk weight Unencumbered non-financial senior unsecured corporate bonds and covered bonds rated at least AA-. Other loans to retail clients and small businesses having a maturity < 1 yr All other assets 85% 100% 12 Copyright © 2011 Accenture All Rights Reserved.or RSF factor. IMF. Neither at this point in time it is stated whether the NSFR should be “>” or “≥” 100%.Funding provided by financial institutions and loans to such firms are assigned with a low ASF and a high RSF respectively NSFR: Required stable funding Required stable funding Items RSF factor* NSFR Available stable funding > 100% Required stable funding Cash Short-term unsecured actively-traded instruments (< 1 yr) Securities with exactly offsetting reverse repo Securities with remaining maturity < 1 yr Non-renewable loans to FI with remaining maturity < 1 yr Debt issued or guaranteed by sovereigns. excluding loans to financial institutions with a remaining maturity of one year or greater that would qualify for the 35% or lower risk weight under Basel II standardised approach for credit risk 0% 5% 20% 50% 65% * The proposed EU Regulation does not include any ASF. and debt that is issued by sovereigns. . maturity ≥ 1 yr Unencumbered listed equity securities or non-financial senior unsecured corporate bonds (or covered bonds) rated from A+ to A-. and PSEs with a maturity < 1 yr Unencumbered residential mortgages of any maturity and other unencumbered loans.

Basel III introduces a common set of monitoring tools that should allow competent authorities to obtain a comprehensive view of the liquidity profile of institutions Monitoring Tools Contractual maturity mismatch Contractual cash and security inflows and outflows from all on. mapped to defined time bands based on their respective maturities Different ratios/figures which should help to identify those sources of wholesale funding that are of such significance that withdrawal of this funding could trigger liquidity problems Available unencumbered assets that are marketable as collateral in secondary markets and/or eligible for central banks’ standing facilities Foreign Currency LCR = Stock of high-quality liquid assets in each significant currency / Total net cash outflows over a 30-day time period in each significant currency Early warning indicators based on high frequency market data with little or no time lag (market wide information. information on the financial sector.and off-balance sheet items. 13 . Rather EBA shall develop draft implementing technical standards regarding liquidity monitoring metrics that allow competent authorities to obtain a comprehensive view of the liquidity profile of institutions. Copyright © 2011 Accenture All Rights Reserved. bank-specific information) Concentration of funding Available unencumbered assets LCR by significant currency Market-related monitoring tools The proposed EU Regulation does not include any concrete monitoring tools.

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