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Amulya Rout
BASEL III)
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The Basel Committee issued in December 2010 the Basel III rules
text, which presents the details of global regulatory standards on
bank capital adequacy and liquidity agreed by the Governors and
Heads of Supervision, and endorsed by the G20 Leaders at their
November Seoul summit.
The Committee also published the results of its comprehensive
Quantitative Impact Study (QIS).
▪ A total of 263 banks from 23 Committee member
jurisdictions participated in the QIS exercise.
▪ These Norms to be partially implemented from March 31,
2015 in phases and would be fully implemented as on
March 31, 2018.
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▪ After the 2008 financial crisis, there was a need to
update the BASEL norms to reduce the risk in the
banking system further.
▪ Until BASEL III, the norms had only considered some of
the risks related to credit, the market, and operations.
▪ To meet these risks, banks were asked to maintain a
certain minimum level of capital and not lend all the
money they receive from deposits.
▪ This acts as a buffer during hard times.
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7 things to know about BASEL III norms
a. Why need BASEL norms?
b. BASEL III rules
c. Capital needs
d. Leverage risk
e. Liquidity
f. Implementation in India
The Reserve Bank of India (RBI) introduced the norms in India in 2003. It now
aims to get all commercial banks BASEL III-compliant by March 2019. So far,
India’s banks are compliant with the capital needs. On average, India’s banks
have around 8% capital adequacy. This is lower than the capital needs of 10.5%
(after taking into account the additional 2.5% buffer). In fact, the BASEL
committee credited the RBI for its efforts.
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Basel III strengthens 3 Capital Pillars of Basel II and introduces a new
Pillar for Liquidity
Capital Liquidity
Pillar 1 Pillar 2 Pillar 3
Risk Global liquidity
Containing standard and
Capital Risk coverage management and Market discipline
leverage supervisory monitoring
supervision
Quality and level of Securitisation Leverage ratio Supplemental Revised Pillar 3 Liquidity coverage ratio
capital Pillar 2 disclosure
Trading book requirements in requirements for Net stable funding ratio
particular for off- securitisation, off-
Capital loss absorption
Counterparty balance sheet balance sheet Principles for Sound
All banks
at the point of non- credit risk exposures, risk vehicles, Liquidity Risk
viability concentrations, components of Management and
Bank exposures compensation regulatory capital, Supervision
Capital conservation to CCPs practices, stress etc.
buffer testing Supervisory monitoring
Countercyclical buffer
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The original Basel III rule from 2010 required banks to fund
themselves with 4.5% of common equity (up from 2% in Basel II)
of RWAs.
Since 2015, a minimum Common Equity Tier 1 (CET1) ratio of
4.5% must be maintained at all times by the bank.
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Furthermore, Basel III introduced two additional capital
buffers:
▪ A mandatory "capital conservation buffer", equivalent to
2.5% of risk-weighted assets. Considering the 4.5% CET1
capital ratio required, banks have to hold a total of 7%
CET1 capital ratio, from 2019 onwards.
▪ A "discretionary counter cyclical buffer", allowing
national regulators to require up to an additional 2.5% of
capital during periods of high credit growth.
▪ The level of this buffer ranges between 0% and 2.5% of
RWA and must be met by CET1 capital.
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New quantitative requirements (within parentheses Basel II requirements)
▪ Trading book
◦ Higher risk weights, already decided in Basel II.5
▪ Counterparty credit risk
◦ More stringent requirements for measuring exposures
◦ Capital incentives for banks to use central counterparties for
derivatives
◦ Higher risk weights for exposures to other financial intermediaries
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Revised Core Principles for Effective Banking
Supervision
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2013 2014 2015 2016 2017 2018 2019
Minimum Total Capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Introduce
Net stable funding ratio minimum
standard
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▪ It was also asked to consider the different perspectives for
developed and developing countries
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Are all countries able equip supervisors with the significantly
large resources required by the complexity of Basel III?
▪ This has been a major preoccupation for the BCBS. Monitoring by
IMF has shown it to be a real problem, also for many developed
countries. Now the BCBS is studying ways to simplify the
framework ….
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Thank You
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