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DECLARATION I hereby declare that the project report entitled BASEL III & BANKING SECTOR is my work submitted in partial fulfillment of the requirement for Degree of MASTER O F MANAGEMENT STUDIES (MMS), UNIVERSITY OF MUMBAI from KOHINOOR BUSINESS SCHOOL, KURLA, and MUMBAI and not submitted for the award of any degree, diploma, fellow ship or any similar titles or prizes.

Date: Signature: _______________ Place: Mumbai Student Name: KAJAL LAXMAN NAIDU

CERTIFICATE This is to certify that the project entitled BASEL III & BANKING SECTOR is success fully completed by KAJAL LAXMAN NAIDU during the second year of her course, in par tial fulfillment of the Masters Degree in Management Studies, under the Universi ty of Mumbai, through KOHINOOR BUSINESS SCHOOL, Kurla, Mumbai-400070. Date: Place: Mumbai Professor Name-JATIN DAMANIA

ACKNOWLEDGEMENT I express my sincere thanks to my project guide, Mr.Jatin Damania visiting facul ty of Finance Department, for guiding me right from the inception till the succe ssful completion of the project. I sincerely acknowledge him for extending their valuable guidance, support for literature, critical reviews of project and the report and above all the moral support he/she/they had provided to me with all s tages of this project. I would also like to thank the supporting staff Department, for their help and c ooperation throughout our project. (Signature of Student) Name of the Students

CHAPTER 1 2 2.1 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 4.4 4.5 4.6 5 6 7 8 9 10

INDEX PARTICULARS PAGE NO Introduction 7 Research Methodology 8 Research Objective 9 Situation analysis & problem definition 9 Need for New Regulation 9 Literature Review 10 Sources Of Data 10 Method Of Data Collection 11 Scope Of Study 13 Hypothesis 14 Limitation 17 History Of BASEL COMMITTEE 20 BASELI 20 BASEL II 21 BASEL III 21 Why BASEL III 22 The New BASEL III Framework 25 Key Elements of BASEL III Framework 28 Scope & National Implementation 29 Challenges Bank have to Face 30 Potential challenges of BASEL III Implementation How Bank Will Respond 31 Proposed BASEL III Guideline 32 Timeline for New Minimum Capital Standards 46 Impact of BASEL III Norms on Indian Banking 50 Limitation Recommendation 52 Conclusion 53 Bibliography 66


EXECUTIVE SUMMARY As the time draws near for the implementation of the BASEL III banks in India fa ce one question: What will be our capital requirement under the new norms? This report is an Endeavour to give some number to the capital requirement by the ban ks under the New Capital Accord. Keeping in mind the onerous task, attempt has b een made to first give reader a background to the Basel norms. The Basle I Accor d has achieved its objective of getting banks to keep adequate capital commensur ate to their risk exposure. But with more sophisticated approaches being increas ingly applied by the banks themselves a need has been felt to do away with a fla t 8% charge on claims on the private sector. Basel II Accord, with its three pillar approach is a step forward to provide ban ks with an accurate measure of risk by introducing complex approaches for risk m easurement. It gives guidelines for supervisors and introduces market discipline and greater transparency on the part of banks. The definition of capital has re mained the same under the new Accord. In this project I try to highlight the New Regulation of BASEL III and Its impac t on Banking sector. At the same time it also put light on various elements of N ew Regulation and how it will start its implementation from current year.

INTRODUCTION The Rs 64 trillion (US$ 1.22 trillion) Indian banking industry has made exceptio nal progress in last few years, even during the times when the rest of the world was struggling with financial meltdown. Even today, financial institutions acro ss the world are facing the repercussions of the turmoil but the Indian ones are standing stiff under the regulator's watchful eye and hence, have emerged stron ger. Recent fiscal crises demonstrated numerous weaknesses in the global regulat ory framework and in banks risk management practices. As a result, regulatory aut horities have discussed several new measures to increase the stability of the fi nancial markets. One central focus is strengthening global capital and liquidity rules (Basel III) with the goal of improving the banking sectors ability to abso rb shocks arising from financial and economic stress [Source: Basel Committee on Banking Supervision (Dec. 2010) - Basel III: A global regulatory framework for more resilient banks and banking systems] Basel III introduces several new or en hanced rules, including the introduction of a new and stricter definition of cap ital designed to increase quality, consistency and transparency of the capital b ase and the introduction of a global liquidity standard. The new framework also contains measures addressing the reduction of the cyclical effects of Basel II, as well as the reduction of systemic risk. For instance, it introduces a capital conservation and countercyclical capital buffer, and discusses through the- cycl e provisioning [Sources: Basel Committee on Banking Supervision (Dec. 2010) - Bas el III: A global regulatory framework for more resilient banks and banking syste ms and Basel Committee on Banking Supervision (Dec. 2010) - Basel III: Internati onal framework for liquidity risk measurement, standards and monitoring]. Basel IIIs approach to systematically important financial institutions (SIFIs) has not yet been finalized, but may include a combination of capital surcharges, conting ent capital and bail-in debt.1Another Basel III element under discussion is the so-called single rule book, i.e. the creation of a level playing field and the rem oval of discretionary rule-making at the national level. The new regulations wil l increase capital requirements and drive up capital as well as liquidity costs and thus increase pressure on banks profitability.

RESEARCH METHODOLOGY As the title of the project suggests the purpose to study the access relevance o f BASEL III Regulation in the banking sector. Research comprise defining and redefining problems, formulating hypothesis or su ggested solutions; collecting, organizing and evaluating data; making deductions and reaching conclusions; and at last carefully testing the conclusions to dete rmine whether they fit the formulating Hypothesis.

In short, the search for Knowledge through Objective and Systematic method of fi nding solutions to a problem is Research. RESEARCH OBJECTIVE The research objective mainly involves identifying research problem. The researc h objectives at the beginning of the research are not very clearly defined but l ater it gets cleared after the literature review has been critically assessed an d the research is complete. Research objectives include: 1. To Analyze the introduction of Base III and its features 2. To Investigate the impact of Basel III on the Indian banking System 3. To analyze the Capital Adequacy Ratio of Indian Banks against the RBI no rm for Capital Adequacy Ratio. Of these different issues, the prime focus is on the impact of Basel III in Indi a. This is done so as to examine the problems that the Indian banks faced in adopting it like what changes they have to make in their system and what s trategies are they had adopted in implementing it. SITUATION ANALYSIS & PROBLEM DEFINITION Why is Basel III fundamentally different from Basel I and Basel II? First, it is more comprehensive in its scope and, second, it combines micro- and macro-prude ntial reforms to address both institution and system level risks. On the micro prudential side, these reforms mean: 1. A significant increase in risk coverage, with a focus on areas that were most pr oblematic during the crisis, that is trading book exposures, counterparty credit risk, and securitization activities; A fundamental tightening of the definition of capital, with a strong focus on co mmon equity. At the same time, this represents a move away from complex hybrid i nstruments, which did not prove to be loss absorbing in periods of stress. We al so introduced requirements that all capital instruments must absorb losses at th e point of non-viability, which was not the case in the crisis; The introduction of a leverage ratio to serve as a backstop to the risk-based fr amework; The introduction of global liquidity standards to address short-term and long-te rm liquidity mismatches; and Enhancements to Pillar 2s supervisory review process and Pillar 3s market discipline, particularly for trading and securitization act ivities. In addition, a unique feature of Basel III is the introduction of macro prudential elements into the capital framework. This includes: 1. Standards that promote the build-up of capital buffers in good times that can be drawn down in periods of stress, as well as clear capital conservation requirem ents to prevent the inappropriate distribution of capital; The leverage ratio al so has system-wide benefits by preventing the excessive build-up of debt across the banking system during boom times. To minimize the transition costs, the Base l III requirements will be phased in gradually as of 1 January 2013. I would now like to say a few words in particular about two of the newer elemen ts of the regulatory framework, namely the liquidity standards and the leverage ratio. As mentioned, excess leverage and weak liquidity profiles of banks were a t the core of the crisis, and they therefore represent a critical part of the Ba sel III framework going forward. NEED FOR NEW REGULATION

Despite having a low exposure to the toxic assets involved in the sub-prime cris is and a gradualist approach towards liberalization of the financial sector, cer tain parts of the Indian financial sector were significantly affected by the glo bal financial crisis. Though Indian policymakers reacted in a proactive manner a nd introduced a host of measures to counter the adverse effects of the financial crisis, the recovery has not been uniform; several markets and sectors are stil l reeling from the crisis' aftershocks. The proposed Basel III norms are going t o have a significant impact on the Indian financial sector. The effects of the recent global financial crisis have dented India's growth pr ospects much more than had been originally anticipated. In 2007, even as the sub -prime crisis unfolded in the United States (US), the decoupling theory (Akin an d Chose 2007; The Economist 2008), argued that business cycles in a number of em erging markets got decoupled from those in advance economies thanks to the rapid expansion of intra-regional trade over the past few decades, high savings ratio s, and a burgeoning stockpile of international reserves,. India was also expecte d to remain insulated from the developments in the US for two main reasons. Firs tly, the Indian banking sector had no direct exposure to the toxic sub-prime mor tgage assets or the failed institutions. Secondly, much of India's recent growth can be attributed to a rise in domestic demand especially capital formation. Ex ternal demand in the form of exports of goods and services accounted for only 20 % of the country's gross domestic product (GDP). Despite these factors, India was greatly affected by the global crisis and the c ountry's growth rate dropped from a peak of 10.6% in Q3 2006 to 5.8% in Q4 2008. A key reason for this dip in growth rate was India's increased integration with the rest of the world. Despite a low export-to-GDP ratio, India's level of glob al integration as measured by the sum of financial and trade flows, increased fr om 47% in 199798 to 117% in 200708.1 Consequently, the crisis impacted India by re ducing the Indian corporate sector's access to global capital markets, bringing down domestic liquidity, and causing stock prices to fall. The financial crisis also affected certain sectors that were heavily dependent on finance like real e state, exports, and small and medium-sized enterprises (SMEs). Given that some o f these sectors are labor-intensive, the global meltdown has strongly impacted e mployment. The global crisis' impact on India's financial sector was mitigated due to the g radualist and calibrated approach taken by Indian policymakers towards liberaliz ation of this sector. Indian policymakers also introduced several countercyclica l measures during periods of credit upturn prior to the crisis. Furthermore, a s eries of measures were undertaken in the post sub-prime crisis period to enhance the resilience of the sector to future crisis. However, a worrying feature is the deterioration of asset quality in the afterma th of the global financial crisis. In 2009-10, the stock of NPAs grew at a rapid rate of 20.6%, which was higher than the 16.7% rate of growth of gross advances . This led to deterioration in the gross and net ratio of NPAs to gross and net advances in 2009-10. The increase in NPAs was mitigated by the onetime special d ispensation in restructuring norms permitted by the RBI for entities that were t emporarily affected by the global crisis. The profitability of the Indian banking sector also suffered a setback with a de cline in the rate of growth of profit. The decline was brought about by subdued credit off-take and preference for risk-free but low yielding investments during the crisis. Increased requirements for provisions also adversely affected banks profitability. Finally, the RBI has set up a Financial Stability Unit to look into issues relat ing to financial stability. The unit is entrusted with conducting macro-prudenti al surveillance and stress tests, to gauge the strength of the financial sector. LITERATURE REVIEW

1.According to StefernWalter,SecretaryGenaral of BASEL COMMITTEE of Banking Supe rvision BASEL III Basel III goes a long way to closing the gaps in exposure to s hadow banking. It does this in several ways like by addressing the capital treat ment for liquidity lines to SIVs and other types of off-balance sheet conduits; by addressing counterparty credit risk; by including off-balance sheet exposures in the Basel III leverage ratio; and by incorporating a range of contractual and reputational risks arising from the shadow banking sector into the liquidity regulatory and supervisory standards. T hus, stronger, consolidated banking regulation and supervision will go a signifi cant way towards containing the risks of the shadow banking sector. 2.According to Pierre Georg, Basel III increases the quality and quantity of ban king capital, introduces two liquidity and one leverage ratio. The aim is to red uce the probability of bank failures by improving banks loss absorption possibili ties. Besides extensions in capital requirements, an additional non-risk based l everage ratio and two liquidity ratios will be established in Basel III. Capital is about to increase both quantitatively and qualitatively. Under Basel III, ba nks will have to meet two liquidity ratios. Whereas the liquidity coverage ratio (LCR) follows a short-term approach, the net stable funding ratio (NSFR) addres ses longer-term problems arising from illiquidity. Under the LCR banks will be r equired to hold a sufficient amount of liquid assets with a high quality to obvi ate short-term disruptions. The NSFR will include the entire balance sheet to pr event structural longer-term problems arising from liquidity mismatch. 3.According to Dwight M. Jaffee is the Willis Booth Professor of Banking, Financ e and Real Estate at the Haas School of Business, University of California at Be rkeley, All the proposed regulations allow substantial transition periods. Our e valuation focuses on the full adjustments that will be required for banks. Basel III (including the July 2010 amendments) takes steps that will decrease systemi c risk, and the costs to society of explicit and implicit government insurance o f deposits and debt instruments. We believe that the costs of these steps will b e quite marginal for the economy. 4. According to AfroditiKero Universitat Pompeu Fabra, BASEL III is the most eff icient regulation should lead to the best capital allocation in the economy and in the same time should be able to smooth the business cycles. 5.According to Ojo, Marianne, Center for European Law and Politics, University o f Bremen, Oxford Brookes University Basel III and responding to the recent Finan cial Crisis: progress made by the Basel Committee in relation to the need for in creased bank capital and increased quality of loss absorbing capital it looks as though the "Dynamic Provisioning" (DP) approach or technique to the computation of Bank Capital in the context of Banking Supervision is gaining the ascendancy solution to ensuring banks hold sufficient reserves such that a credit crisis never occurs again. 6.According to RBI, So far as implementation of Basel III in India is concerned, availability of adequate amount of capital, both in terms of quality and quanti ty provides significant comfort to begin implementation of the new framework as per the time schedule fixed by the BCBS. Basel III is a global regulatory framework for more resilient banks and banking s ystems and Basel III: International framework for liquidity risk measurement, stan dards and monitoring which inter alia aim at promoting a more resilient banking s ector and strengthening liquidity regulations. Collectively, the revised Basel I I capital framework and the new global standards have been commonly referred to as Basel III.

SOURCES OF DATA Data is collected from secondary sources. For secondary data annual report, jour nals, internet and past records of the bank articles were used.

METHOD OF DATA COLLECTION SECONDARY DATA: Secondary data was collected through finance magazines, data ava ilable with bank website ,newspaper articles, rating agencies articles, finance website.

SCOPE OF THE STUDY 1.The proposed Basel III regulation will raise capital requirements for banks, thu s strengthening the stability of the global financial system. 2.In the medium term, as banks increase their capital ratios by reducing lending , access to credit is likely to become more difficult and borrowing costs are liable to increase 3. However, the long implementation timeline and the fact that many major banks c apital ratios are above the Basel III standards will probably soften the impact of the new regulat ion on lending, particularly for major companies; moreover, as the new rules leave out non-bank financial institutions, bigger companies might consider other ways of financing, such as by raising equi ty or issuing debt (i.e. selling debt bonds on the open market to finance their operations). 4. Small and medium-sized firms are likely to experience more difficult credit c onditions, as the new rules affect mostly small financial institutions; moreover, raising equity or is suing debt will continue to be a much more expensive option for small and medium-sized businesses than fo r major companies. 5. Countries such as the US and the UK could adopt tighter regulations than reco mmended by Basel III, which will impact on the availability of financing in these economies

HYPOTHESIS A hypothesis is a tool of quantitative studies. It is a tentative and formal pr ediction about the relationship between two or more variables in the population being studied, and the hypothesis translates the research question into a predic tion of expected outcomes. hypothesis is a statement about the relationship betw een two or more variables that we set out to prove or disprove in our research s tudy. To be complete the hypothesis must include three components: 1. The variables. 2. The population. 3. The relationship between the variables. This theory is based on Null Hypothesis because these hypothesis are used when t he researcher believes there is no relationship between two variables or when th ere is inadequate theoretical or empirical information to state a research hypot hesis .As success of BASEL III is dependent on its future implementation and its consequences on Banking Sector. Hence there is still inadequate information ava

ilable for research. LIMITATION OF STUDY As this research is depend upon implication of BASEL III on Banking Sector. But due to timeline for the BASEL III is too long so its prediction is quite diffic ult. So we are just making the assumption and predict it will beneficial for eco nomy as whole. Hence there is still inadequate information for the prediction.

HISTORY OF THE BASEL COMMITTEE The Basel Committee, established by the central-bank Governors of the Group of T en countries at the end of 1974, meets regularly four times a year. It has four main working groups which also meet regularly. The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, L uxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Afric a, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. Countries are represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where t his is not the central bank. The present chairman of the Committee is Mr Stefan Ingves, Governor of Sveriges Riksbank, who succeeded Mr NoutWellink on 1 July 20 11. The Committee does not possess any formal supranational supervisory authority, a nd its conclusions do not, and were never intended to, have legal force. Rather, it formulates broad supervisory standards and guidelines and recommends stateme nts of best practice in the expectation that individual authorities will take st eps to implement them through detailed arrangements - statutory or otherwise - w hich are best suited to their own national systems. In this way, the Committee e ncourages convergence towards common approaches and common standards without att empting detailed harmonisation of member countries' supervisory techniques. The Committee reports to the central bank Governors and Heads of Supervision of its member countries. It seeks their endorsement for its major initiatives. Thes e decisions cover a very wide range of financial issues. One important objective of the Committee's work has been to close gaps in international supervisory cov erage in pursuit of two basic principles: that no foreign banking establishment should escape supervision; and that supervision should be adequate. To achieve t his, the Committee has issued a long series of documents since 1975. In 1988, the Committee decided to introduce a capital measurement system commonl y referred to as the Basel Capital Accord. This system provided for the implemen tation of a credit risk measurement framework with a minimum capital standard of 8% by end-1992. Since 1988, this framework has been progressively introduced no t only in member countries but also in virtually all other countries with intern ationally active banks. In June 1999, the Committee issued a proposal for a revi sed Capital Adequacy Framework. The proposed capital framework consists of three pillars: minimum capital requirements, which seek to refine the standardised ru les set forth in the 1988 Accord; supervisory review of an institution's interna l assessment process and capital adequacy; and effective use of disclosure to st rengthen market discipline as a complement to supervisory efforts. Following ext ensive interaction with banks, industry groups and supervisory authorities that are not members of the Committee, the revised framework was issued on 26 June 20 04. This text serves as a basis for national rule-making and for banks to comple te their preparations for the new framework's implementation. Over the past few years, the Committee has moved more aggressively to promote so und supervisory standards worldwide. In close collaboration with many jurisdicti ons which are not members of the Committee, in 1997 it developed a set of "Core

Principles for Effective Banking Supervision", which provides a comprehensive bl ueprint for an effective supervisory system. To facilitate implementation and as sessment, the Committee in October 1999 developed the "Core Principles Methodolo gy". The Core Principles and the Methodology were revised recently and released in October 2006. In response to the financial crisis of 2008, the Committee and its oversight bod y, the Group of Governors and Heads of Supervision, have developed a reform prog ramme to address the lessons of the crisis, which delivers on the mandates for b anking sector reforms established by the G20 at their 2009 Pittsburgh summit. Co llectively, the new global standards to address both firm-specific and broader, systemic risks have been referred to as "Basel III". In order to enable a wider group of countries to be associated with the work bei ng pursued in Basel, the Committee has always encouraged contacts and cooperatio n between its members and other banking supervisory authorities. It circulates t o supervisors throughout the world published and unpublished papers. In many cas es, supervisory authorities in non-member countries have seen fit publicly to as sociate themselves with the Committee's initiatives. Contacts have been further strengthened by International Conferences of Banking Supervisors (ICBS) which ta ke place every two years. The last ICBS was held in Singapore in the autumn of 2 010. The Committee's Secretariat is provided by the Bank for International Settlement s in Basel. The 17 person Secretariat is mainly staffed by professional supervis ors on temporary secondment from member institutions. In addition to undertaking the secretarial work for the Committee and its many expert sub-committees, it s tands ready to give advice to supervisory authorities in all countries.

BASEL COMMITTEE ON BANKING SUPERVISION Functions The Committee provides a forum for regular cooperation on banking supervisory ma tters. Over recent years, it has developed increasingly into a standard-setting body on all aspects of banking supervision. Membership Senior officials responsible for banking supervision or financial stability iss ues in central banks and authorities with formal responsibility for the prudenti al supervision of banking business where this is not the central bank. Basel Committee Member Countries Argentina Luxembourg Australia Mexico Belgium Netherlands Brazil Russia Canada Saudi Arabia China Singapore France South Africa Germany Spain Hong Kong SAR Sweden India Switzerland Indonesia Turkey Italy United Kingdom Japan United States Korea Chairman Stefan Ingves, Governor of Sveriges Riksbank

Secretariat Secretary General: Wayne Byres, supported by a staff of 17. Frequency of meetings The Basel Committee usually meets four times per year. Reporting arrangements The Basel Committee on Banking Supervision reports to a joint committee of centr al bank Governors and (non-central bank) heads of supervision from its member co untries (as listed above). Observers Observers on the Basel Committee are: the European Banking Authority, the Europe an Central Bank, the European Commission, the Financial Stability Institute and the International Monetary Fund. Outreach The Committee maintains links with supervisors not directly participating in the committee with a view to strengthening prudential supervisory standards in all the major markets. These efforts take a number of different forms, including: 1. the development and dissemination throughout the world of policy papers on a wide range of supervisory matters; 2. the pursuit of supervisory cooperation through support for regional supe rvisory committees and sponsorship of an international conference every two year s; 3. cooperation with the FSI in providing supervisory training both in Basel and at regional or local level. Main subgroups 1. The Standards Implementation Group 2. The Policy Development Group 3. The Accounting Task Force 4. The Basel Consultative Group

BASELI It aimed to standardized the computation of risk based capital across banks and across countries. The 1988 Basel Accord focused primarily on credit risk. Bank assets were classif ied into five risk buckets i.e. grouped under five categories according to credi t risk carrying risk weights of zero, ten, twenty, fifty and one hundred per cen t. Assets were to be classified into one of these risk buckets based on the para meters of counter-party (sovereign, banks, public sector enterprises or others), collateral (e.g. mortgages of residential property) and maturity. Generally, go vernment debt was categorized at zero per cent, bank debt at twenty per cent, an d other debt at one hundred per cent. 100%. Banks were required to hold capital equal to 8% of the risk weighted value of as sets. Since 1988, this framework has been progressively introduced not only in m ember countries but also in almost all other countries having active internation al banks. The 1988 accord can be summarized in the following equation: Total Capital = 0.08 x Risk Weighted Assets (RWA) Amendment: In 1996, BCBS published an amendment to the 1988 Basel Accord to provide an expl icit capital cushion for the price risks to which banks are exposed, particularl y those arising from their trading activities. This amendment was brought into e

ffect in 1998. The Terminology Capital to Risk Weighted Assets Ratio (CRAR) is also known as Capital Adequacy R atio which indicates a bank's risk-taking ability. The RBI uses CRAR to track wh ether a bank is meeting its statutory capital requirements and is capable of abs orbing a reasonable amount of loss. CRAR = (Tier I capital + Tier II capital) / Risk-Weighted Assets Capital funds are broadly classified as Tier 1 and Tier 2 capital. Two types of capital are measured: Tier one capital, which absorbs losses without a bank bein g required to cease trading, and Tier two capital, which absorbs losses in the e vent of winding-up and so provides a lesser degree of protection to depositors. Tier I capital (core capital) is the most reliable form of capital. The major co mponents of Tier I capital are paid up equity share capital and disclosed reserv es viz. statutory reserves, general reserves, capital reserves (other than reval uation reserves) and any other type of instrument notified by the RBI as and whe n for inclusion in Tier I capital. Examples of Tier 1 capital are common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings. Tier II capital (supplementary capital) is a measure of a bank's financial stren gth with regard to the second most reliable forms of financial capital. It consi sts mainly of undisclosed reserves, revaluation reserves, general provisions, su bordinated debt, and hybrid instruments. This capital is less permanent in natur e. The reason for holding capital is that it should provide protection against u nexpected losses. This is different from expected losses for which provisions ar e made. BASLE I: LIMITATIONS 1. The rapid build up of external short-term debt increased the vulnerabili ty of exchange rate and the channelling of funds, including external borrowings into speculative activities by an under supervised financial system. This led to the East Asian crisis, which emanated primarily from a combination of structura l and proximate factors. 2. There was no account of the difference between the banks actual risk and the regulatory risk. The specified risk weights had the potential for driving th e banks to shift their portfolio compositions towards lower quality claims withi n the same risk bucket, as returns from it would be higher while capital to be m aintained would be similar. 3. There was provisioning for only credit risk. Operational risk was comple tely ignored while market risk came to be recognized only after 1996. 4. Loan mispricing was possible as there was no correlation between banks r egulatory capital and economic capital while both strong and weak banks were bei ng kept on the same pedestal. 5. With only four risk categories (0%, 20%, 50% and 100%), present to class ify all the assets there was inadequate differentiation of credit risk. 6. Even when market risk was captured, it gave a fixed quantum of 2.5% to a ll investments. 7. Capital structure was same irrespective of the maturity structure of cre dit exposures and the accord ignored the fact that there is greater risk of defa ult in a long term exposure as opposed to a short term exposure. 8. The accord did not recognize the effect of portfolio diversification on credit risk. 9. The availability of some credit risk mitigation techniques such as cash margin, collateral security, etc. was not recognized. BASELII The New Basel Capital Accord, often referred to as the Basel II Accord or simply Basel II, was approved by the Basel Committee on Banking supervision of Bank fo

r International Settlements in June 2004 and suggests that banks and supervisors implement it by beginning 2007, providing a transition time of 30 months. It is estimated that the Accord would be implemented in over 100 countries, including India. Basel II takes a three-pillar approach to regulatory capital measurement and capital standards - Pillar 1 (minimum capital requirements); Pillar 2 (supe rvisory oversight); and Pillar 3 (market discipline and disclosures). Objective: The overall objective of Basel II is to increase the safety and soundness of the (international) financial system by : making capital requirements for banks more risk sensitive while maintaining the same level of overall average regulatory capital in the banking system.

Pillar 1 includes 3 risks now, operational risk + credit risk + market risk. Kee ping in view RBI's goal to have consistency and harmony with international stand ards, it has been decided that all commercial banks in India shall adopt Standar dized Approach (SA) for credit risk and Basic Indicator Approach (BIA) for opera tional risk. Banks shall continue to apply the Standardized Duration Approach (S DA) for computing capital requirement for market risks. Under the Standardized A pproach, the rating assigned by the eligible external credit rating agencies wil l largely support the measure of credit risk. RBI has identified external credit rating agencies that meet the eligibility criteria specified under the revised Framework. Banks may rely upon the ratings assigned by the external credit ratin g agencies chosen by the RBI for assigning risk weights for capital adequacy pur poses. The RBI decided that banks may use the ratings of the following domestic credit rating agencies for the purposes of risk weighting their claims for capit al adequacy purposes: a) Credit Analysis and Research Ltd. b) CRISIL Ltd. c) FIT CH Ltd. and d) ICRA Ltd. Banks may use the ratings of the following internationa l credit rating agencies for the purposes of risk weighting their claims for cap ital adequacy purposes a) Fitch; b) Moody's; and c) Standard &Poors. Banks should use the chosen credit rating agencies and their ratings consistently for each t ype of claim, for both risk weighting and risk management purposes. Banks will n ot be allowed to "cherry pick" the assessments provided by different credit rati ng agencies. Banks must disclose the names of the credit rating agencies that th ey use for the risk weighting of their assets, the risk weights associated with the particular rating grades as determined by RBI for each eligible credit ratin g agency as well as the aggregated risk weighted assets. For instance recently, Induslnd bank entered into MOU with CRISIL and Allahabad bank entered into MOU w ith CARE for rating facility as required under Basel II. Pillar 2 requirements give supervisors, i.e., the RBI, the discretion to increa se regulatory capital requirements. The RBI can administer and enforce minimum c apital requirements from bank even higher than the level specified in Basel II, based on risk management skills of the bank. RBI will consider prescribing a hig her level of minimum capital ratio for each bank under the Pillar 2 framework on the basis of their respective risk profiles and their risk management systems. Further, in terms of the Pillar 2 requirements of the New Capital Adequacy Frame work, banks are expected to operate at a level well above the minimum requiremen t. Pillar 3 demands comprehensive disclosure requirements from banks. For such com prehensive disclosure, IT structure must be in place for supporting data collect ion and generating MIS which is compatible with Pillar 3 requirements. Computation of Total CRAR and Tier I capital under Basel II

Basel II Tier I CRAR = Tier I capital / (Credit Risk RWA + Operational Risk RWA + Market Risk RWA) Basel II Total CRAR = Total capital / (Credit Risk RWA + Operational Risk RWA + Market Risk RWA) RWA - risk weighted assets LIMITATION OF BASEL II 1. Major banking risks not reflected in Pillar One: interest rate risk in the ba nking book, concentration risk, strategic business risk, reputation risk; struct ural interest rate risk not covered by capital requirements, but included in Pil lar II. 2. Differences in view of relative riskiness of certain business lines: high-ris k corporate, mortgage banking, consumer lending 3. Pro-cyclicality the Basel II framework may give rise to pro-cyclical effects due to the fact that the three main components of the IRB system are themselves influenced by cyclical movements. In particular, the higher risk sensitivity of banks ratings systems may lead to increases in regulatory capital requirements in an economic downturn. However, such concerns have been addressed and procyclica lity has been significantly reduced in the latest proposals for the Basel II fra mework. 4. Basel II is overly complex and still contains some fundamental flaws 5. Total capital ratio remains at 8%, although no rationale has been provided fo r why the ratio is set at this level, and there are no changes to the definition of capital (although this is planned for review in both Basel and EU forums bet ween now and 2009). 6. High implementation costs 7. Newly calculated capital ratios under Basel II will be difficult to compare a mong banks, unless extensive disclosure is provided by banks. However, even if disclosure were extensive, the investor community may not have the expertise and resources to analyse such complex data. 8. Insufficient history for calculation of IRB variables may lead to wrong assum ptions for LGD and other variables in a recessionary scenario. Difference Between BASELI & BASEL II

INTERNATIONAL REGULATORY FRAMEWORK FOR BANKS (BASEL III) Basel III" is a comprehensive set of reform measures, developed by the Basel Com mittee on Banking Supervision, to strengthen the regulation, supervision and ris k management of the banking sector. These measures aim to: 1. improve the banking sector's ability to absorb shocks arising from finan cial and economic stress, whatever the source 2. improve risk management and governance 3. strengthen banks' transparency and disclosures. The reforms target: 1. bank-level, or micro prudential, regulation, which will help raise the r esilience of individual banking institutions to periods of stress. 2. macro prudential, system wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time. These two approaches to supervision are complementary as greater resilience at t he individual bank level reduces the risk of system wide shocks. The Basel III framework is summarized in a table which provides an overview of t he various measures taken by the Committee.

PROGRESS REPORT TABLE ON THE BASEL III ADOPTION Status of Basel III adoption (as of end September 2011) Country Basel III Next steps - Implementation plans Argentina 1 On-going work to draft preliminary documents. Australia 1 Discussion paper (not draft regulation) issued which describes the key p olicy elements that will be included in the draft Prudential Standards - Consult ation until 02/12/2011 - Draft Prudential Standards to be issued 02/2012. Belgium 2 (Follow EU process - EU proposal published on 20 July 2011) Brazil 1 Draft regulation expected in Q4 2011 - Road map for Basel III implantati on published in February 2011. Canada 1 Draft regulation expected in May 2012 and final guidance before the end of 2012 for implementation in Q1 2013. OSFI has issued a number of public commun ications concerning the implementation of Basel III. China 2 Regulation expected in November 2011 - Application expected at the start of 2012. France (2) (Follow EU process - EU proposal published on 20 July 2011) Germany (2) (Follow EU process - EU proposal published on 20 July 2011) Hong Kong 1 Formal consultation on a draft Banking (Amendment) Bill planned in Q4 20 11 (legislative process). In parallel, industry consultation planned in Q4 2011 on HKMA policy proposals on implementation of the various requirements under Bas el III. India 1 Draft regulation to be released for consultation within next few months. Indonesia 1 Draft regulation to be released for consultation with industry in Q1 201 2. Italy (2) (Follow EU process - EU proposal published on 20 July 2011) Japan 1 Public consultation planned in early 2012 - Publication of final rules t ext by the end of March 2012 - Implementation of final rules (end of March 2013 - In Japan, the fiscal year for banks starts in April and ends in March). Korea 1 Draft regulation to be published in the first half of 2012. Luxembourg (2) (Follow EU process - EU proposal published on 20 July 2011) Mexico 1 Consultation to end in the fourth quarter this year. Final rule expected at the end of 2011 for an application during 2012. The Netherlands (2) (Follow EU process - EU proposal published on 20 July 2011) Russia 1 Draft regulations under development. Saudi Arabia 3 Final regulation issued to banks.

Singapore 1 Announcement made on 28 Jun 2011 on Basel III minimum capital requiremen ts, capital conservation buffer and transition arrangements - Draft rules to be published for consultation in Q4 2011. South Africa 1 Draft amendments to legislation expected at the end of Q1 2012 for consu ltation. Spain (2) (Follow EU process - EU proposal published on 20 July 2011) Sweden (2) (Follow EU process - EU proposal published on 20 July 2011) Switzerland 1 Draft regulation on Basel III to be published for public consultation on 17 October 2011 - Final SIFI regulation (level: Banking Act) adopted by parliam ent on 30 September 2011 - Draft SIFI regulation (level: accompanying ordinances ) to be published in Q4 2011. Turkey 1 Draft regulation expected to be published in mid-2012. United Kingdom (2) (Follow EU process - EU proposal published on 20 July 2011) United States 1 Draft regulation for consultation planned during 2011. Basel 2.5 and Bas el III rulemakings in the United States must be coordinated with applicable work on implementation of the Dodd-Frank regulatory reform legislation. European Union 2 Proposal (directive and regulation) published by the European Commission on 20 July 2011. Number code: 1 = draft regulation not published; 2 = draft regulation published; 3 = final ru le published; 4 = final rule in force. WHY BASEL III? The sub-prime crisis raised serious questions about the regulatory architecture within which banks and other financial institutions operate. Accordingly, the Ba sel Committee on Banking Supervision, made up of central bankers and regulators from 27 countries, had initiated discussions last year to "strengthen global cap ital and liquidity regulations with the goal of promoting a more resilient banki ng sector. It has sought to put in place a counter-cyclical macro-prudential reg ulatory structure for banks that would try to reduce the chances of banking cris es and minimize systemic risks if individual banks failed. It is hoped that the Basel II norms on international capital and liquidity requirements and some othe r related areas of banking supervision would be ready for implementation from 20 12. Any meaningful banking regulation has to work at two dimensions - bank-level (or micro-prudential) and system-wide (or macro-prudential) - and should be counter -cyclical. This is because the nature of modern financial markets, with their co mplex and opaque financial instruments and massive financial institutions, makes it impossible today to ex-ante assess with reasonable accuracy the extent of da mage possible when individual banks run into problems. Present regulatory archit ecture suffers many pro-cyclical distortions, where banks tend to accumulate ris ks when the going is good, only to bear the consequences when crisis strikes sud denly. The discussions to arrive at a new set of Basel III norms have focused on higher capital ratios, use of a leverage ratio as a safety net, tougher risk we ightings for trading assets, elimination of softer forms of capital and exclusio n of some balance sheet items from capital, higher capital requirements for coun ter-party credit risks, new liquidity requirements, contingent capital, countercyclical capital requirements etc. Fundamentally, effective banking regulation s hould be designed keeping the following in mind.

1. Banks should have adequate and liquid enough capital buffer, accumulated when the times were good, that could come into use in case of financial market shock s and minimize the public costs of a bailout. Capital reserve requirements (capi tal as a percentage of risk-weighted assets) are therefore central to any bankin g regulatory reforms. It adds the important counter-cyclical dimension to the ba nking system. 2. There should be clarity on what types of assets constitute capital, so that i ts liquidity value is preserved. Currently, there are enough dubious assets - de ferred tax assets (the money a bank will save on taxes when it earns profits in the future), non-traded stock in a related financial company, mortgage servicing rights (the value of a banks rights to collect and pass on mortgage payments) et c. that are hard to monetize in a crisis. The presence of these assets camouflag es the real quality of bank balance sheets and makes them appear far more liquid and solvent than they actually are. 3. One of the biggest criticism of the Basel II was the freedom it gave banks to assess trading risks. It permitted the banks to use their own internal risk rat ing models to determine the risk weightings for their own particular assets, wit h an idea to align regulatory risk calculations with the considerably more sophi sticated risk models that were being used by major banks in their own decision-m aking. 4. One of the major contributors to amplifying the magnitude of the sub-prime cr isis was the massive quantities of leverage banks had accumulated, both on- and off-balance sheets. This excessive leverage not only devastated individual bank balance sheets when the asset markets plunged, they also triggered off a systemwide ripple of risks when these banks started de-leveraging in response to the c risis. This contributory role of leverage highlights attention on the need to co ntain excessive leveraging during the good times. 5. The deeply inter-connected nature of financial market markets, due to both th e nature of instruments and the size of institutions, means that any meaningful assessment of the risks posed by a bank has to take into account both the banks' individual risks and its systemic contribution. 6. Even with the strictest micro-prudential and macro-prudential regulations tha t address the problems faced by too-big-to-fail and too-interconnected-to-fail b anks, the complexity of modern financial markets mean that it may not be possibl e to effectively limit the effects of fire sales (as banks dump assets to reduce their balance sheets once the crisis erupts) and the resultant credit crunch.

THE NEW BASEL III FRAMEWORK: IMPLICATIONS FOR BANKING ORGANIZATIONS The Basel Committee on Banking Supervision (the Basel Committee) released a near f inal version of its new bank capital and liquidity standards, referred to as Base l III, in December 2010. Subsequent guidance was issued in January 2011 regarding

minimum requirements for regulatory capital instruments. The United States and the European Union have publicly endorsed the Basel III standards and are consid ering how to implement them into law in their respective jurisdictions. Legal an d compliance personnel at impacted financial institutions will need to work alon gside risk management staff to ensure their institution is able to comply with t he new standards. Basel III is a series of amendments to the existing Basel II framework. The core aspects of Basel III are scheduled to be implemented into national law by Janua ry 1, 2013; certain aspects of the new standards are slated to become effective upon implementation while others will be phased in over several years. Well befo re 2013, however, it will become essential for legal and compliance professional s at many institutions to have a working understanding of the new Basel III stan dards in order to be able to assist in the development of a bank capital plan th at meets supervisory expectations. In the U.S., for example, large banking group s are required to demonstrate their ability to comply with Basel III standards b oth as a formal part of their capital plans and as a condition for regulatory ap proval of actions that could diminish their capital bases, such as paying divide nds. 1. While the broad outline of Basel III was introduced more than a year ago, the Basel Committee continued to refine the new capital and liquidity standards dur ing 2010. 2. As described in further detail below, the Committee continues to work on cert ain aspects of the framework which may lead to additional changes in Basel III. .

KEY ELEMENTS OF THE BASEL III FRAMEWORK Regulatory Capital Raising quality, consistency and transparency of the capital base RedominantformofTier1Capitalmustbecommonsharesandretainedearnings DeductionshavebeenharmonizedandgenerallyappliedatthelevelofCET1 Tier2Capitalinstrumentswillbeharmonized Tier3Capitalinstrumentswillbeeliminated Risk Coverage Raisingcapitalrequirementsforthetradingbookandcomplexsecuritizations Capital requirement for counter party creditrisk(CCR) based on stressedinputs Capitalchargeforpotentialmark-to-marketlosses(creditvaluationadjustment,[CVA]) Raisingcounterpartycreditriskmanagement standards (e.g.wrongwayrisk) Strengtheningstandards forcollateralmanagement andinitialmargining Establishingstrongstandards forcentralcounterparties(CCP) Leverage Ratio Introducingleverageratioasasupplementarymeasuretotherisk-basedBaselII framework Procyclicality Dampening cyclicality of the minimum requirements (e.g. through-the-cycle Parame ters)* Promoting stronger forward looking provisioning (expected loss approach)*

Introducing capital conservation buffer Introducing countercyclical buffer Addressing systemic risk and interconnectedness ( surcharge for Sufis )* Liquidity Standard Introducing liquidity coverage ratio(LCR) Introducing net stable funding ratio (NSFR) Introducing common set of monitoring tools

A. Capital Ratios Core solvency ratio retained at 8% of risk weighted assets (RWA s). Minimum common equity component will be 4.5% when fully phased in by 2015, incr eased from the current 2% minimum. Overall Tier 1 element of the capital base (i ncluding common equity) will be 6% when fully phased in by 2015, increased from the current 4% minimum. In addition, there will be a capital conservation buffer m ade up of common equity and amounting to 2.5% of RWAs when fully phased in by 20 19; an institution with capital falling within the buffer range (i.e., with comm on equity of between 4.5% and 7%) will be subject to restrictions on dividend pa y-outs, share buybacks and bonuses. In effect, most banks will be required, or o therwise seek, to maintain a ratio of 7% of RWAs in common equity (4.5% minimum plus a 2.5% capital conservation buffer). A further countercyclical capital buffe r (see further below) may be imposed. Where required, it would be made up of comm on equity of up to an additional 2.5% of RWAs. This buffer is expected to be imp osed at a national level only during times of excessive credit growth, and will be allowed to be released during times of credit contraction.

B. Constituents of Capital the common equity component of Tier 1 will be compris ed of ordinary share capital and retained profits. Non-common equity Tier 1 (Addi tional Tier 1) will be principally made up of perpetual non-cumulative preference shares and other qualifying instruments. Mandatory write-down or conversion int o common equity will apply to all Additional Tier 1 instruments in the event of the institution becoming non-viable without a bail- out. Tier 2 capitals will no longer be divided into lower Tier 2 (principally, dated term preference shares and subordinated debt) and upper Tier 2 (including certain perpetual preferred i nstruments and subordinated debt). Instead, a single set of criteria will apply to Tier 2 capital. All Tier 2 instruments will be required to be either converti ble into common equity or written down in the event of the institution becoming non-viable without a bail-out. Tier 3 capital will be abolished. Generally speak ing, Tier 3 capital was unsecured subordinated debt that is fully paid up, canno t be repaid before maturity without prior regulatory approval and with an origin al maturity of at least two years. Deductions from capital (or regulatory adjust ments) will be applied to the common equity Tier 1 component and not to overall capital. C. Leverage Ratio A backstop 3% ratio of Tier 1 capital as against all of a banks assets and certain off-balance sheet exposures will be introduced. The assets w ill be treated on a non-risk adjusted basis with limited or no recognition of co llateralization or credit risk mitigation associated with assets. Effectively, t his would amount to a leverage ratio of 33:1. Basel II Basel III D. Liquidity Ratios Short term liquidity Liquidity Coverage Ratio (LCR) banks will be required from 2015 to maintain a liquid assets buffer calibrated by referenc e to net cash outflow over a 30 day stressed period. Longer Term liquidity Net S table Funding Ratio (NSFR) banks will be required to have stable funding in place to address funding needs over a stressed one year period. Implementation is sche duled for 2018. E. Other Elements of the Basel III Framework systemically important financial in

stitutions (SIFIs) are likely to be subject to additional capital requirement and liquidity surcharges, to be determined in 2011. Provisions on Pillar 2 (supervis ory evaluation) and Pillar 3 (disclosure, market discipline) will be set out in further detail in 2011, building on the existing enhancements to the Basel II fr amework. More stringent standards for the treatment of securitizations and CDOs were issued in the July 2009 release. The treatment of trading positions will be subject to a more comprehensive review in 2011. Banks applying Value-at-risk (VaR) models to trading positions are required to calculate a stressed-VaR charge base d on a historical period of recent stressed market conditions. Further, credit c onversion factors have been adjusted under Basel III to reflect the 2007-2008 ex perience that some off-balance sheet items are more likely than previously thoug ht to be brought on-balance sheet.

SCOPE AND NATIONAL IMPLEMENTATION OF BASEL III Legal status of the Basel III standards: Like Basel I and Basel II, Basel III is not a legally binding framework in any jurisdiction. The U.S.s selective impleme ntation of Basel II exemplifies how a Basel Committee member country may impleme nt only certain aspects of Basel III and/or impose the requirements on only cert ain institutions. Accordingly, the U.S. and/or the E.U. may choose to modify cer tain of the Basel III provisions when they finalize and adopt rules.. Financial institutions subject to the Basel III reforms: Basel III (like Basel II) is inte nded to apply to: Holding companies for corporate groups that engage primarily i n banking activities (Basel III would be applied on a consolidated basis); Inter nationally active banks and their subsidiaries (Basel III would be applied on a consolidated basis); and Internationally active banks on an individual basis. Th e requirements are designed to apply to all of a groups banking and other financi al activities (e.g., financial leasing, issuing credit cards, portfolio manageme nt, investment advisory and custodial and safekeeping services). The U.S. could take a number of different approaches to implementation of the core components o f Basel III, including drawing a distinction between (i) community banks, (ii) b anks with $50 billion assets and above (which, under U.S. law, must be subject t o capital requirements above those that generally apply to other banks),11 and ( iii) the largest and most complex banks. In this regard, it is almost certain th at virtually all of the key reforms will be imposed on large and internationally active U.S. banking groups.12 Moreover, it is generally expected that these ins titutions (and, possibly, any institution with greater than $50 billion in asset s) will be required to comply with capital requirements quantitatively above the minima established by Basel III. On the other hand, it is less certain whether smaller institutions will be compelled to adopt reforms such as maintaining capi tal buffers and employing the stricter definition of capital. The proposed rule generally applies to U.S. banks with aggregate trading assets and liabilities eq ual to 10% or more of quarter-end total assets, or aggregate trading assets and liabilities equal to $1 billion or more. The proposed rule offers a number of te chnical changes. For example, it (i) establishes more explicit eligibility crite ria for trading positions subject to market risk capital treatment, (ii) sets re quirements for prudent valuation, robust stress testing and the control, oversig ht and validation mechanisms for models, (iii) introduces a Stressed VaR require ment, which better captures market risk during periods of stress, and (iv) chang es risk-weighting and modelling requirements (and introduces new diligence requi rements) for securitizations and re-securitizations. Capital Ratios By January 1, 2019, banking institutions subject to Basel III will be required t o maintain: A minimum ratio of Tier 1 common equity to RWAs of 4.5% (increased f rom the existing requirement of 2%); A minimum ratio of Tier 1 capital to RWAs o f 6% (increased from the existing requirement of 4%); and A minimum ratio of tot

al capital to RWAs of 8% (unchanged from the existing requirements). These ratio s will be phased in from January 1, 2013 onwards (see the Annex). Minimum Capital to RWAs Ratio Capital Base Minimum Capi tal to RWAs Ratio BASEL III BASEL II Tier 1 common equity 4.5% 2% Non-core 1.5% 2% In novative Tier 1 maximum 15% of overall Tier 1 Tier 2 2% 4% (of both upper and lower Tier 2 instruments) TOTAL 8% 8 % Capital Conservation Buffer 2.5% -Countercyclical Capital Buffer 0 2.5% -SIFI Requirement To follow -As shown above, the overall required Tier 1 and common equity (or core) Tier 1 rat ios will be much higher under Basel III. Moreover, the full extent of the change is not reflected in the numerical increase given both (i) tighter minimum requi rements for inclusion in the capital base (which may decrease the numerator of a banks capital ratio), and (ii) greater risk weightings of assets (which may incr ease the denominator of a banks capital ratio). Capital conservation buffer: Basel III introduces an extra buffer of 2.5% of com mon equity above the minimum requirement for Tier 1 common equity for the top-ti er holding company of the banking group. It is intended to ensure that financial institutions have a cushion during times of financial and economic stress. Wher e a financial institutions common equity in excess of the regulatory minimum amou nt falls within the buffer range, the institution will be restricted in the dist ributions (such as dividends, share buy-backs and staff bonuses) that it can mak e, although its operations will not be restricted (meaning that extensions of ne w credit, etc. will continue to be permitted). The constraints on distributions will increase as the capital conservation buffer decreases further below the req uired amount. The capital conservation buffer requirement will apply as of January 1, 2016 at 0.625%, moving to 1.25% as of January 1, 2017, then 1.875% as of January 1, 2018 and will rise to the full 2.5% level by January 1, 2019 (at which point the tot al Tier 1 common equity target would effectively be 7%, i.e., a 4.5% minimum and a 2.5% conservation buffer). Under Basel III, institutions that meet the minimu m ratio requirement but remain below 7% Tier 1 common equity target (i.e., the m inimum plus a conservation buffer) would be expected to maintain prudent earning s retention policies with a view to meeting the conservation buffer as soon as r easonably possible. The Basel Committee has suggested that a quicker implementat ion may be appropriate in countries that are experiencing excessive credit growt h. Countercyclical capital buffer: A second buffer, comprising between 0% to 2.5% o f Tier 1 common equity to RWAs, may be imposed by a national authority in times of excessive credit growth. The buffer is countercyclical in the sense that its in troduction is intended to raise the cost of credit during periods of rapid credi t growth and its release is intended to reduce its cost during a downturn.18 The c ountercyclical capital regime will be phased in together with the capital conser vation buffer requirement on January 1, 2016, becoming fully effective on Januar y 1, 2019.19 A national regulator may institute and permit the release of a buff er of any size and at any time to the extent deemed warranted to achieve the buf fers objective. The Basel Committee suggests that the use of a buffer is particul arly appropriate when the stock of national credit is excessive relative to hist

orical trends.20 Individual countries are free to consider other factors in maki ng buffer decisions and may well exercise their discretion in very different way s. As a consequence, precisely when, how and the extent to which the buffer will be used in practice will remain uncertain for some time.21 Where a banking grou p has operations in more than one country, it is required to calculate its own c ountercyclical buffer based on a weighted average of all of the countercyclical capital buffers in force in each Basel III country to which the group has any cr edit exposure.22 This unique aspect of the countercyclical capital buffer which the Basel Committee refers to as jurisdictional reciprocity is intended to create a level playing field for all institutions (whether incorporated in the jurisdic tion or not) providing credit in a given jurisdiction. In practice it would seem to (i) create an economic incentive for banks to increase their exposures to co untries with no (or a relatively smaller) capital buffer requirement in place an d to reduce their exposures to countries that have imposed a relatively larger b uffer, and (ii) add to the complexity (and compliance burden) associated with th e calculation of the buffer. Constituents of Capital -Basel III further restricts the types of instruments th at qualify as bank regulatory capital through the introduction of new requiremen ts. The classes or tiers of regulatory capital under Basel III are summarized belo w. Tier 1 common equity: Includes common shares (including share premium resulting fr om the issue of such instruments), retained earnings, certain accumulated other comprehensive income (including interim profit and loss) and disclosed 1reserves , and a limited amount of common shares issued by consolidated bank subsidiaries and held by third parties. Certain assets are deducted from Tier 1 common equity . Additional Tier 1 instruments: In addition to common equity, Tier 1 capital inc ludes certain non-common subordinated instruments with fully discretionary non-c umulative dividends or coupons. So-called Additional Tier 1 instruments must be perpetual, i.e., without a maturity date and precluding any incentives to redeem . In January, the Basel Committee pronounced that Additional Tier 1 instruments, if issued by internationally active banks, must be convertible to common equity or be written off at the point that an institution would become non-viable with out state support.23 In addition, any Tier 1 instruments that are classified as liabilities for accounting purposes must include a similar conversion or write-o ff feature. Tier 2 capital: Basel III abolishes the existing categories of upper and lower T ier 2 capital. Under Basel III, there will be one unified category of Tier 2 cap ital, consisting of instruments capable of absorbing losses in the event a bank is insolvent (gone concern capital). Tier 2 capital mainly consists of subordinate d debt with a minimum original maturity of at least five years. Like Additional Tier 1 instruments, Tier 2 instruments must incorporate a mandatory write-down o r conversion feature if issued by an internationally active bank and satisfy sev eral other specific criteria. Tier 3 capital abolished: Under Basel II, there is a category of Tier 3 capital that includes some short-term subordinated debt and net interim trading book pro fits. Under the existing framework, Tier 3 capital can satisfy a part of the cap ital requirement for market risk. The concept of Tier 3 capital has been abolish ed, and so these instruments will no longer be included in calculations of the t otal risk-based capital ratio. Capital instruments representing interests in the se organizations will satisfy the common equity component if they are deemed ful ly equivalent to common shares in terms of their capital quality as regards loss absorption and do not possess features which could cause the condition of the b ank to be weakened as a going concern during periods of market stress. Phase-out of ineligible capital instruments: Capital instruments that no longer qualify a s Additional Tier 1 capital or Tier 2 capital will be phased out over a 10 year period, with 90% recognition of such instruments commencing January 1, 2013, 80% recognition commencing January 1, 2014, 70% recognition commencing January 1, 2 015, and so on. Only instruments issued prior to September 12, 2010 will qualify for these transitional arrangements. Capital instruments that no longer qualify as common equity will be excluded from Tier 1 common equity capital as of Janua

ry 1, 2013 (subject to certain narrow exceptions for some capital instruments th at will be phased-out over a ten-year period). Deductions from Capital: Certain assets will be deducted from the calculation of common equity Tier 1 capital (rather than such adjustments being applied to the overall regulatory capital of a bank). The deductions from a banks common equity include goodwill and other intangible assets (excluding mortgage servicing righ ts), reciprocal cross-holdings in other financial institutions, any shortfall in provisions by reference to expected losses calculated under its own internal mo dels, defined benefit pension fund assets, investment in the banks own shares (un less already derecognized under relevant accounting standards), and some deferre d tax assets which must be entirely deducted from common equity. Items that are required to be derecognized in relation to common equity include unrealized gain s and losses recognized on a banks balance sheet because of a change in such banks credit risk (e.g., gains and losses with respect to debt instruments, equities, loans and receivables), cash flow hedge reserves, and gains, on sales related t o securitization transactions. Certain assets are subject to partial deduction f rom Tier 1 common equity. These assets include significant investments (being mo re than 10% of the issued share capital) in the common shares of unconsolidated financial institutions, mortgage servicing rights and certain deferred tax asset s. Such assets can be included as Tier 1 common equity so long as (i) each of th ese items is capped at 10% of a banks common equity, and (ii) in the aggregate, a ll three of these items do not exceed 15% of a banks common equity. These adjustm ents to capital will be fully deducted by January 1, 2018. Risk-Weighting of Assets Existing approaches to assessing credit risk associated with a banks assets, namely (i) the standardized approach, (ii) the foundation i nternal ratings based approach, and (iii) the advanced internal ratings based ap proach remain intact under Basel III.24 The standardized approach focuses on a c ounterpartys credit rating to determine the credit risk of that counterparty. The second and third approaches determine the mechanism for calculating the three v ariables which are used in computing the credit risk component of capital requir ement for institutions, namely: probability of default (PD), loss given default (LG D) and exposure at default (EAD). Under the standardized approach, PD and LGD are i ncorporated into the weightings prescribed by Basel II, whereas prescribed credi t conversion factors are used to calculate the EAD. The foundation internal rati ngs based approach permits the bank to use internal rating models to calculate P D, whereas LGD and EAD inputs are provided by the banks regulator. The advanced i nternal ratings based approach allows a bank to calculate all three variables us ing internal models, although the formulae used in the model must be agreed with the regulator. The Basel Committee found that mark-to-market losses occasioned by the deteriora tion of creditworthiness, short of default, of a counterparty were not accuratel y reflected. Accordingly, Basel III now requires (i) the use of stressed inputs in assessing credit risk, (ii) more capital to be held to reflect mark-to-market losses (i.e. the credit valuation adjustment risk) associated with deterioratio n in a counterpartys credit quality in relation to OTC derivatives, (iii) strengt hened standards for collateral management and margining for OTC derivatives and securities financing transactions, (iv) applying a multiplier of 1.25 to the ass et value correlation of exposures to regulated financial firms (with assets of a t least $100 billion) and to all exposures to unregulated financial firms regard less of size; and (v) applying a proposed risk weighting of 2% to exposures to a central counterparty (where currently such exposures are treated as risk-free). In addition, banks will be required to identify instances of wrong-way risk where the future exposure to a counterparty is highly correlated to the counterpartys probability of default. For example, a company writing put options on its own st ock creates wrong way exposures for the option buyer. Risk-weightings for tradin g book activities: Banks that are permitted to use their own internal value-at-ri sk (VaR) models for assessing market risk associated with their trading positions will now be required to incorporate stressed inputs in their VaR modelling. Thi s is to address the inherent procyclicality of normal VaR modelling where capita l requirements were greater in downswings but reduced in upswings, which was a p

articular problem where the trading book included illiquid positions and VaR mod eling used stressed inputs calibrated only by reference to a historical 12 month period. A stressed VaR measurement will now take into account a 12 month period of significant financial stress and losses and this 12 month period would be eq uated with the losses suffered in the 2007/8 period of the financial crisis. In addition, there will also be a new incremental risk charge applied to trading posi tions where losses occasioned by, typically, a ratings downgrade of an issuer wo uld be captured. This replaces the current incremental default risk charge which c aptured default risk of the underlying obligor. Risk-weighting for exposures to counterparties who are financial institutions will be higher than risk- weightin g for other types of corporations. Under Basel III, risk-weightings need only be applied to the loan equivalent amount of a banks derivative exposure to a counterp arty, which is determined by netting out the parties derivatives exposure to each other. This incentivizes increased netting by banks, which encourages them to e nsure their bilateral OTC derivatives are centrally cleared. Risk-weightings for securitizations: Concern about arbitrage between the banking book and the tradi ng book, particularly in relation to securitization exposures, was the basis for the realignment of capital charges for such exposures whether held in the banki ng book or the trading book. Increased capital charges will be required for re-s ecuritizations (or CDOs). New Leverage Ratio Requirement The leverage ratio is a simple, transparent, non-risk based measure intended to reduce the amount of risk in the financial system and to backstop the risk-based capital requirements. Ba sel III provides for a trial period a minimum leverage ratio requiring 3% of Tie r 1 capital measured against gross exposures without risk adjustments. The lever age ratio will be required to be calculated as an average over each month. Like the leverage requirement currently in effect in the United States for banks and bank holding companies, the numerator of the ratio of the Basel III requirement is Tier 1 capital . The denominator of the ratio, the total exposure, is based on non-risk weighted assets and off-balance sheet exposures. The denominator is to be calculated in accordance with financial accounting principles that apply to t he bank but with a consistent application of regulatory netting principles to gr oss assets. Implementation: The transition to the leverage ratio will be marked by the follo A supervisory monitoring period from January 1, 2011 through Dece wing milestones: mber 31, 2012 will focus on developing templates to consistently track the compo nents of the ratio and the resulting ratio. A parallel run period from January 1 , 2013 through December 31, 2016 during which the leverage ratio and its compone nts will be tracked, including the ratios relation to the risk-based requirements . Bank disclosure of the leverage ratio will start on January 1, 2015. Based upo n the results of the parallel run period, any final adjustments will be made in the first half of 2017, with a view to full applicability from January 1, 2018. Notwithstanding that full compliance is not required until January 1, 2018, mark et pressure could effectively require compliance at an earlier date (especially once banks are required to start disclosing their leverage ratios from January 2 015). New Liquidity Requirements Basel III introduces two new liquidity standards as f ollows: The Liquidity Coverage Ratio (LCR): The LCR is intended to measure a banks ability to access funding for a 30 day period of acute market stress. Banks will be requ ired to have a segregated stock of highly liquid and unencumbered assets that ar e at least equal to its estimated net cash outflows for a thirty day period during a time of acute liquidity stress. The 30 day stressed period assumes certain in stitution-specific and system wide liquidity shocks including a credit rating do wngrade of the bank of three notches, partial loss of unsecured wholesale fundin g, withdrawal of some retail deposits, some committed but unfunded credit and li quidity lines provided by the bank being drawn down and general market volatilit y. High quality liquid assets: Qualifying high quality liquid assets (i.e., the numerator of the LCR) are generally unencumbered, easily and immediately convert ible to cash with little or no loss of value even during times of stress, and ce ntral bank eligible. Qualifying assets fall into one of two categories: Level 1

and Level 2. Only cash, central bank reserves and certain securities issued by g overnments, central banks and some international finance agencies constitute Lev el 1 assets. Other qualifying liquid assets will be treated as Level 2 assets. A 15% haircut is applied to all Level 2 assets and, after applying this haircut, Level 2 assets cannot make up more than 40% of the total liquid assets used to c alculate the LCR. Net cash outflows: Basel III sets out complex formulae for det ermining net cash outflows (i.e. the denominator of the LCR), which involve the we ighting of cash inflows and outflows to determine net cash outflows. While the t erm net cash outflow suggests otherwise, a bank cannot completely net cash inflows and outflows for the purpose of calculating the denominator of the LCR. The for mula is designed to ensure that there will be enough high quality liquid assets to service at least 25% of un-netted cash outflows, in addition to having liquid assets sufficient to service 100% of net cash outflows. The Basel Committee als o adopts a conservative approach to the treatment of credit facilities. Banks wi ll not be able to include as a cash inflow their ability to draw down on any cre dit or liquidity facility lines granted by another bank, yet banks are required to assume a 100% drawdown of committed credit and liquidity facilities granted t o other banks for the purpose of calculating cash outflows. 14 The Net Stable Funding Ratio (NSFR): The purpose The Net Stable Funding Ratio (NSFR) : The purpose of the NSFR is to limit short-term liquidity mismatches and encour age the use of longer term funding. A bank is required to have stable funding so urces in excess of the amount of stable funding it would likely need over a oneyear period of extended market stress. This is a longer term structural ratio th at covers a banks entire balance sheet as well as certain off-balance sheet commi tments. Essentially a sufficient amount of stable funding is required to finance those assets which are regarded as not being capable of being monetized through sale or use as collateral in secured borrowings during a liquidity event lastin g one year. Available stable funding: These are the available reliable sources o f funds over a one-year period under conditions of extended stress. Stable fundi ng sources include Tier 1 and Tier 2 capital, preferred stock (that does not oth erwise qualify as Tier 2 capital) with maturity greater than one year, liabiliti es with maturities greater than one year, and deposits and funding with maturiti es less than one year which would be expected to stay with the bank even during stress events. Basel III gives various stable funding sources different weightin gs, to be used in calculating the available amount of stable funding. For exampl e, encumbered (e.g., pledged) assets have a weighting of 100% unless the encumbr ance expires within a year. Interestingly, loans to corporate would be assigned a higher weighting than equivalent borrowings by such corporate through bond iss ues. Implementation of the LCR and NSFR: The observation period for both the LCR and the NSFR begins on January 1, 2012. The minimum standard for the LCR is int ended to be introduced on January 1, 2015, and the NSFR minimum standard is inte nded to be introduced on January 1, 2018. It should be noted that the Basel Comm ittee has already indicated that some refinements to the calculation of the LCR and the NSFR may be necessary.

CHALLENGES BANKS HAVE TO FACE Figure2: Impact of Basel III on the calculation of the Capital Ratio Basel III requires better capital endowment and simultaneously results in higher RWAs

Required capitalratio

Increasedcapitalrequirements Capital (according to newdefinition) RWA (Credit-,Market-,OperationalRisk) 0-2.5% 1.3% 1.9% 2.5%

Strictercapitaldefinition IncreasedqualityofTier1Capital(going concern) SimplificationandreductionofTier2 Capital(goneconcern) 4.0% 2.5% 3.5% 2.0% 2.0% 2.0% 2.0% 2.0%

EliminationofTier3Capital l 2.0% 2.0% 1.5% 1.0% 3.5% -2012 4.0% 2013 2014

CoreTier1Capital Non-coreTier1Capital Tier2Capital CapitalConservationBuffer CountercyclicalBuffer

bookpositions(Stressed-VaR,Incremental RiskCharge) Highercapitalrequirementsforcounterpartycreditriskexposuresarisingfromderivatives , repo-styletransactionsandsecuritiesfinancing activities(CVArisk, WrongWayrisk) BaselIIIwillundoubtedlyhitbanks hardthroughitsrangeofnewand stricterregulations, whether because ofhighercapitalrequirements,the newliquiditystandard,theincrease d risk coverage,thenewleverageratio oracombinationofthedifferent requirements.Th eaggregateeffect oftherequirements boththosethat areimminentandthosethatare still indiscussionwillvaryfrombankto bank,andamonglargebanksalmost all willhavetodealw ithitsfar- reachingimplications.Takingacloserlookatthechanges inthecapitalrequir ements,wesee anumberofnegativeeffectswhose interplaycan stressbankscapitalbase si gnificantly.Ontheonehandthe strictercapitaldefinitionlowersbanks availablecapital .Atthesametime theriskweightedassets(RWA)for securitizations,tradingbookposition s andcertaincounterpartycreditrisk exposuresaresignificantlyincreased. Both effe ctsdecreasebanks realized capitalratiosenormously.Onthe otherhandtherequiredcapit alratio isincreasedoverthenextfewyears till2019(seeFigure2).Thesetwo counterbala ncingeffectswillposeamajorproblemforsomebankstomeettherequiredcapitalratio,makin g correspondingmeasuresinevitable. Thismajorimpactcanalsobeseen inthelatestQuant itative ImpactStudy(QIS)publishedby theBaselCommitteeonBanking Supervision(BCBS) inDecember2010.Oneimportantresult isthata fullimplementationoftheBaselIII packa gewouldleadtoareduction ofCET1Capitalbymorethan40%,creatingashortfallof577billio nEurosforthe91Group1banks [Source:BaselCommitteeonBanking Supervision(Dec.2010): Resultsofthecomprehensivequantitative impactstudy]i.e.,thoseparticipants ofthestu dythathaveTier1Capital inexcessof3billionEuros;arewell diversified;andareinternationally active.Theexpe cteddeclineinCET1Capitalisattributableprimarilytoreductionsinthegoodwillthatbank s cancarryontheirbalancesheetand thedeductionofdeferredtaxassets [Source:BaselCo mmitteeonBanking Supervision(Dec.2010):Resultsof thecomprehensivequantitativeimp act study].AtthesametimetheGroup1 banksoverallRWAwould increaseby 23%,mainlydueto increased capitalchargesforcounterpartycredit risk(CCR)andtradingbookexposures [ Source:BaselCommitteeonBanking Supervision(Dec.2010):Resultsof thecomprehensiveq uantitativeimpact study]. Thisimpactwillvaryfrominstitution toinstitution,depend inguponthe linesofbusinessinwhichthebankis activeandthegeographicregionin whichi tdoesbusiness.Nevertheless itisforeseeablethat,inparticular, bankswithanincrease dexposure intradingpositions,asignificant securitizationportfolioandlarger activ itiesinderivatives,repo-style transactionsandsecuritiesfinancing activitieswills uffermorethanothers. Duetonewlimitsandincreasedasset valuecorrelationswithinthen ew CCRframework,theoverallinterbank businesswillbepenalizedaswell. Furthermore,therewillbe higher regulatorycosts forbanksdue toon goingchangesinre gulatory requirements,whichcan bequite meaningfuldependinguponthesize ofthebanka ndthecomplexityofits business.TheBaselIIIlandscapeis changingrapidly,withnewregu lations and requirementspublishedbythe correspondingnational authorities almoste veryweek;merelykeepingup posesastrainonbankresources.Bankswillexperience increas edpressureontheirReturnon Equity(RoE)duetoincreasedcapital andliquiditycosts,whi chalongwith increasedRWAswillputpressureonmarginsacrossallsegments.In ordertobec omecompliantwiththe differentnewBaselIIIrequirements and,atthesametime,torestore the profitabilityoftheirbusinesses,banks haveavarietyofpotentialmeasures theycan take. POTENTIALCHALLENGESOFBASELIIIIMPLEMENTATION Figure5: Functional, technical and organizational challenges of BaselIII impleme ntation Functional specification of new regulatory requirements (e.g. stress testing, li mit system, risk Quantification)

Functional integration of new regulatory requirements in to existing capital and risk management

Implementation challenges of Brasilia Technical implementation of new regulatory requirements Data availability and quality Technical integration into existing risk management systems (e.g. interfaces)

Coordination of different units as well as within the group Responsibilities within implementation and beyond Availability of resources BaselIII, with its comprehensive requirements, forces banks to take a number of actions to meet the various new regulatory ratios and to restore, at least parti ally, their profitability. Before undertaking Such actions, banks must be able to calculate and report the new ratios, requiri ng a huge implementation effort. Since BaselIII covers a large number of areas, thorough review of respective data and IT architecture, risk methodologies, gove rnance structure, reporting systems, as well as the corresponding processes is n eeded to accomplish a successful implementation. Banks should be fully aware of these challenges as early as possible before starting their BaselIII implementat ion. To get a better picture of the potential pitfalls we have categorized the i ssues as functional, technical and organizational implementation challenges (see Figure5).The functional challenges include developing specifications for the new regulatory requirements, such as the mapping of positions (assets and liabiliti es) to the new liquidity and funding categories in the LCR and NSFR calculation as well as to the stricter defined capital categories. Within the LCR the stress testing methodologies need to be specified taking into account the characterist ics of the bank. Further functional challenges refer to the specification of the new requirements for trading book positions and within the CCR framework (e.g. CVA) as well as adjustments of the limit systems with regard to the new capital and liquidity ratios. Crucial is the integration of new regulatory requirements into existing capital and risk management as some measures to improve new ratios (e.g. liquidity ratios) might have a negative effect on existing figures. The t echnical challenges of Basel III implementation include data availability, data completeness, and data quality and data consistency to calculate the new ratios. Our experienceindicatesthatinsomecaseshighlightingdataavailabilityas the key cr iteria for calculating liquidity ratios and analyzing the completeness of the da ta in the different enterprise systems and data pools can be beneficial. Further technical challenges result from the adjustments of the financial reporting sys tem with regard to the new ratios and the creation of effective interfaces with the existing risk management systems. Compared to BaselII with its major focus o n credit and operational risks, the BaselIII requirements cover wider range of t opic are as including the banks capital, liquidity and risk management. Thekeytoa successfulBaselIIIimplementationistoset-upaBaselIIIprojectteamthatwillconsiderth edependenciesbetween the different topic areas and that will coordinate the diff

erent functional, technical and operating units and departments such as risk and finance as well as IT and business departments. Close cooperation will be in ev itable to keep implementation costs down while providing necessary resources for compliance and for subsequent effort store build profitability. HOW BANKS WILL RESPOND Operational response 1.Process 2.Method 3.Data zation Eg.RWA nit, Optimization, ture Stricter credit Approval Processes Tactical response Strategic response 1.Pricing 1.Business Model 2.Funding 2.Equity 3.Asset 3.Group organi restructuring Eg. Risk sensitive pricing, reduction of securitization exposures Eg. Sale of Business u change of holding struc

Operational response-BaselIII creates incentives for banks to improve their oper ating processes not only to meet requirements but to increase efficiency and low er costs. Banks have already begun to examine areas such as: RWA optimization, including gmodel refinement, process improvement, enhancement of data quality, and framework alignment Reducing credit exposure and potential credit losses through stricter credit app roval processes and, potentially, through lower limits, especially in regard to bank exposures Improving liquidity risk management processes including stress testing and devel opment of contingency funding plans Fostering closer integration of risk and finance functions Integrating all subsidiaries through consistent, group-wideriskand capital manag ement standards Reducing credit exposure and potential credit losses through stricter credit app roval processes and, potentially, through lower limits, especially in regard to bank exposures Improvingliquidityriskmanagementprocessesincludingstresstesting anddevelopmentof contingency fundingplans Fosteringcloserintegrationofriskandfinancefunctions Integratingallsubsidiariesthroughconsistent,group-wideriskand capitalmanagementst andards Tactical response-Besidestherathershort-term operationalresponsesbankshavea numb erofmorefar-reachingtacticalactionstheycantaketorespond, especiallytoprofitabili tyconcerns.We seethefocusoftacticalresponseson theareasofpricing,fundingandasset restructuring.Whiletacticalresponses bydefinitiondonotaddresslong-termstrategic issues,theymaybe extremely helpful in reliving pressure of profitability. Among tactical responses available to banks are: Adjustinglendingrates,dependingoncompetitionwithinthespecific segmentsandeachsegm ents strategicimportanceforthebank Reflectinghighercapital andliquiditycoststhroughmorerisk- sensitivepricingand per formance measurement Shiftingtohigher-valueclientswithregardtoprofitability.Shi ftingtolessriskysegmentsintheportfolio,withfewersecuritizations, lowertradingboo kexposuresand reducedactivitiesinareas suchas derivatives,reposandsecurities fin ancing Increasingthelevelofhigh-qualityliquidassets

Strategic Response- Inreviewingtheir strategicresponses toBaselIIIandtothedanger sof reducedprofitability,bankshavethe opportunitytoeffectmajorchangesthroughouta ll areasoftheinstitution. Theseincludefairlystraightforward initiativessuchas ret ainingearnings toincreaseTier1Capitalbutalso encompassabroadrangeoffar- reachingp ossibilitiesincluding: Issuingnewcapital inlightoftheneweligibilitycriteriaandphase-in arrangements Changingliquidityriskandfundingstrategy Takingamoreactiveapproachtobalancesheetmanagement Engaginginmoreactiveclientmanagement, forinstanceby adjustingclientsegmentation a nddevotingmoreorfewerresources toclientsatspecificlevelsofsizeor profitability Undertakingstrategiccostreductions,includingrationalization ofbranchstructures,pr oduct rationalizationorimplementationof asharedservicesmodel Changingthebusinessmodel,whichmayentailsellinghigh- riskbusinessunits,enteringnew productsegmentsorbusinesses,or outsourcingoroff-shoringnon-core functions Changingthegroupstructure,forexamplebysellingoffminority interestsinfinancialins titutions

PROPOSED BASEL III GUIDELINES: A CREDIT POSITIVE FOR INDIAN BANKS The proposed Basel III guidelines seek to improve the ability of banks to withst and periods of economic and financial stress by prescribing more stringent capit al and liquidity requirements for them. ICRA views the suggested capital require ment as a positive for banks as it raises the minimum core capital stipulation, introduces counter-cyclical measures and enhan ces banks ability to conserve core capital in the event of stress through a conse rvation capital buffer. The prescribed liquidity requirements, on the other hand , are aimed at bringing in uniformity in the liquidity standards followed by banks globally. This requirement, in ICRAs op inion, would help banks better manage pressures on liquidity in a stress scenari o. The capital requirement as suggested by the proposed Basel III guidelines wou ld necessitate Indian banks1 raising Rs. 600000 crore in external capital over next nine years, besides lowering their leveraging capacity. It is the public s ector banks that would require most of this capital, given that they dominate th e Indian banking sector. Further, a higher level of core capital could dilute th e return on equity for banks. Nevertheless, Indian banks may still find it easie r to make the transition to a stricter capital requirement regime than some of t heir international counterparts since the regulatory norms on capital adequacy i n India are already more stringent, and also because most Indian banks have hist orically maintained their core and overall capital well in excess of the regulatory minimum. As for the liquidity requirement, the liquidity coverage rat io as suggested under the proposed Basel III guidelines does not allow for any mismatches while also introducing a uniform liquidity definition. Comparable current regulatory n orms prescribed by the Reserve Bank of India (RBI), on the other hand, permit so me mismatches, within the outer limit of 28 days. CAPITAL REQUIREMENT: THE NEW ELEMENTS AND THEIR IMPACT ON INDIAN BANKS

The proposed Basel III guidelines seek to enhance the minimum core capital (afte r stringent deductions), introduce a capital conservation buffer (with defined t riggers), and prescribe a countercyclical buffer (to be built up in times of exc essive credit growth at the national level). Changes in standard deductions The proposed Basel III guidelines suggest changes in the deductions made for the computation of the capital adequacy percentages. The key changes for Indian banks include the following: Table 1: Deductions from CapitalProposed vs. Existing RBI Norms Proposed Basel III Guideline Exis ting RBI Norm Impact a)Limit on deductions Deductions to be made All dedu ctibles to be deducted Positive only if deductibles exceed 15% of core capital at an aggregate level, or 10% at the individual item level

b)Deductions2 from Tier I or Tier II All deductions from core capital 50% of the deductions from Tier I and 50% from Tier II (except DTA and intangible assets wherein 100% deduction is done from Tier I capital ) C)Treatment of significant investments in common shares of unconsolidated financial institutions Any investment exceeding 10% of issued share capital to be counted as significant and therefore deducted For investments up to: (i) 30%: 125% risk weight or risk weight as warranted by external rating (ii)30-50%: 50% deduction from Tier I and 50% from Tier II Negative Negative

While the proposal to make deductions only if such deductibles exceed 15% of core capital would provide some relief to Indian banks (since all such deductibles ar e currently reduced from the core capital), the stricter definition of significan t interest and the suggested 100% deduction from the core capital (instead of 50%

from Tier I and 50% from Tier II) could have a negative impact on the core capi tal of some banks. 1.Capital conservation buffer The Basel committee suggests that a new buffer of 2.5% of risk weighted assets ( over the minimum core capital requirement of 4.5%) be created by banks. Although the committee does not view the capital conservation buffer as a new minimum st andard, considering the restrictions imposed on banks and also because of reputa tion issues, 7% is likely to become the new minimum capital requirement. The main purpose of the proposed capital buffer is two-fold: 1. It can be dipped into in times of stress to meet the minimum regulatory requi rement on core capital. 2. Once accessed, certain triggers would get activated, conserving the internall y generated capital. This would happen as in this scenario, the bank would be re strained in using its earnings to make discretionary payouts (dividends, share b uyback, and discretionary bonus, for instance). However, the Basel committee may allow some distribution of earnings by the bank s, which are in breach of the proposed capital conservation buffer. If a bank wa nts to make payments in excess of the amount that the norm on capital conservati on allows, it would have the option of raising capital for such excess amount. T his issue would be discussed with the banks supervisor as part of the capital p lanning process. Table 2: Illustration on distributable Earnings in Various Scenarios Actual conservation capital as percentage of required conservation capital Maximum Permissib le earnings that can be distributed in the subsequent financial year < 25% 25% - 50% 50% - 75% 75% - 100% >100%

0% 20% 40% 60% 100%

2.Countercyclical buffer The Basel committee has suggested that the countercyclical buffer, constituting of equity or fully loss absorbing capital, could be fixed by the national author ities concerned once a year and that the buffer could range from 0% to 2.5% of r isk weighted assets, depending on changes in the credit-to-GDP ratio. The primar y objective of having a countercyclical buffer is to protect the banking sector from system-wide risks arising out of excessive aggregate credit growth. This co uld be achieved through a pro-cyclical build up of the buffer in good times. Typ ically, excessive credit growth would lead to the requirement for building up hi gher countercyclical buffer; however, the requirement could reduce during period s of stress, thereby releasing capital for the absorption of losses or for prote ction of banks against the impact of potential problems. The key features of the buffer include the following: 1. Credit-GDP gap could be used as a reference point 2. Buffer to be set at the national level every year 3. Buffer to be calculated at the same frequency as the normal capital requ irement 4. Banks could be given one year to comply with the additional capital requ irement 5. Reduction in buffer could take effect immediately 6. Banks not meeting the norm could be restrained from distributing the ear

nings (in the same manner as in the case of the capital conservation buffer) 3.Enhancement in loss absorption capacity of capital of internationally active b anks The Basel committee issued a consultative document in August 2010 to introduce a write off clause in all non-common Tier I and Tier II instruments issued by inter nationally active banks. The main features include the following: Capital instruments to be written off on the occurrence of trigger event In the event of write off, instrument holders could be compensated immediately i n the form of common stock. The trigger event is the earlier of: o The decision to make a public injection of fund or support, without which the bank would become non-viable ( as determined by National authority) o A decision that write-off is necessary to prevent the bank from becoming non-v iable (as determined by the National Authority) The main purpose of the proposed contingent capital clause is to: Ensure that holders of capital bear the loss in a stress scenario before public money is infused and are not its (public funds) beneficiaries; and Reduce the possibility of publi c support for a bank under stress, as the banks core capital base would get stren gthened at the expense of non-core capital (Tier I and Tier II) holders. Capital instruments with this clause are likely to increase the downside risk fo r potential investors; therefore the risk premium could go up. However, price di scovery may not be easy as it could be difficult to assess the probability of co nversion to equity or a principal write-down and the extent of loss after the ev ent. Further considering the riskier nature of these instruments, there may be a wider notching in the credit rating of such instruments as compared to existing capital instruments. Additionally in case this loss absorption clause is adopted, a large number of ins truments would get disqualified for inclusion under Tier I and Tier II capital. Therefore, Indian banks would need to mobilize capital for replacing this as wel l; the quantum of capital to be replaced could be large as total non common Tier 1 and Tier 2 capital of Indian bank is close to Rs. 200000 crore as on March 31, 2010 and large part of it is issued by internat ionally active banks. However, transition may be not be abrupt as these instrume nts would be phased out over 10 years starting 2013; their recognition would be capped at 90% in the first year and the percentage would drop by 10% each subsequent year. Comparison on Capital Requirement Overall, with the Basel III being implemented, the regulatory capital requiremen t for Indian banks could go up substantially in the long run (refer Table 3). Ad ditionally within in capital, the proportion of the more expensive core capital could also increase. Moreover, capital requirements could undergo a change in va rious scenarios, thereby putting restriction on banks ability to distribute earn ings. Please refer to Annexure 2 for an Illustration on the same. Table 3: Regulatory Capital Adequacy LevelsProposed vs. Existing RBI Norm Proposed Basel III Norms Existing RBI Norms Common equity (after deductions) 4.5% 3.6% (9.2%) Conservation buffer 2.5% Nil Countercyclical buffer 0-2.5 % Nil Common equity + Conservation buffer + Countercyclical buffer 7-9.5% 3.6 % (9.2%) Tier I(including the buffer) 8.5 -11% 6% (10%)

Total capital (including the buffers) 9% (14.5%)


(Source: Basel committee documents, RBI, Basel II disclosure of various banks; F igures in parenthesis pertain to aggregated capital adequacy of banks covering over 95% of the total banking a ssets as on March 31, 2010. Please refer Annexure 1 for details.) Indian banks are subjected to more stringent capital adequacy requirements than their international counterparts. For instance, the common equity requirement fo r Indian banks is 3.6% , as against the 2% mentioned in the Basel document. At t he same time, the total capital adequacy requirement for Indian banks is 9%, as against the 8% recommended under Basel II. Moreover, on an aggregate basis, the capital adequacy position of Indian banks is comfortable, and being so, they may not need substantial capital to meet the new norms. However, differences do exi st among various banks. While most of the private sector banks and foreign banks have core capital in excess of 9%, that is not the case with some of the public sector banks, as Chart 13brings out.

Once Basel III comes into force, some public sector banks are likely to fall sho rt of the revised core capital adequacy requirement and would therefore depend o n Government support to augment their core capital. In recent times, Government of India (GOI) support has come via non-core Tier I, but this form of support ma y change in favour of equity capital, especially for banks falling short on core capital. The expected growth in the risk weighted assets along with the requirement of mo re stringent capital adequacy norms would also require banks to mobilise additio nal capital. In a scenario of 20% annualised growth in risk weighted assets and in internal capital generation, the volume of additional capital that would be r equired by the banking sector (excluding foreign banks) as a whole over the next nine years ending March 31, 2019 works out to be Rs. 600000 crore (over interna l capital generation). Of this, the public sector banks would require 75-80% and private banks 20-25%. However, any variation in the assumed growth rate may lea d to a change in the volume of capital required. Further, in case some non-common Tier I and Tier II capital instruments get disqualified for inclusion under regulatory capital, the requirement would go up. It could be a challenge to find the investors, wit h higher risk appetite, to subscribe to the capital requirement of Indian banks. 4. Impact On Return On Equity Chart 3: Return on Core Tier 1 at various levels of Core Tier 1 Return on core tier-1 Core Tier 1 Capital As discussed, the minimum core Tier I capital requirement may increase to 7-9.5% (9.5% including countercyclical buffer at the maximum level) and the overall Ti er I capital to 8.5-11% (depending on the countercyclical capital buffer level). This would impact the leveraging capital of banks and therefore their return on equity (ROE). For instance, a bank generating 18% ROE on a core capital of 6% w ould generate around15% ROE (3 percentage points lower) in case it were to raise its core capital to 8%. As most private sector banks and foreign banks in India are very well capitalised, transition to Basel III may not impact their earning s much, but the upside potential associated with higher leveraging would decline . As for public sector banks, those with Core Tier I less than 7% would be negat ively impacted. Further, as the countercyclical buffer has to be set annually by the RBI, this could introduce an element of variation in lending rates and/or t

he ROE of banks. 5.Liquidity Table 4: Liquidity RatioProposed vs. Existing RBI Norm Proposed Basel III Existing RBI Norm Liquidity Ratios Liquidity Coverage Ratio = f days 1 2-7 8-14 15-28 Stock of high quality liquid Maximum 5% 10% 15% 20% assets/Net cash outflows permissible over a 30-day time period >= gap(% of out flow) 100% Net Stable Funding Ratio No such Norm (NSFR) = Available amount of stable funding/Required amount of stable funding > =100% The net stable funding ratio (NSFR) is likely to be implemented from 2019. But i mplementation of the liquidity coverage ratio (LCR) from 2015 may necessitate ba nks to maintain additional liquidity since the LCR requirement is more stringent ; also some assumptions on the rollover rates and the required liquidity for com mitted lines may be more stringent. However, considering the period of one month and the fact that most Indian banks have upgraded their technology platforms, t he transition to LCR may not be a very difficult one. Annexure 2: An illustration on movement of capital requirement and triggers unde r various scenarios Regulatory Capital = Core Capital + Capital Conservation Buffer + Countercyclica l buffer (if any)

No. o


2011 2012 2013 2014 2015 201 62017 2018 2019 Tier 1 Common Equity 2.0% 2.0% 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% Capital Conservation Buffer0.625% 1 .25% 1.875% 2.50% Tier 1 Common Equity plus Capital Conservation Buffer 2.0% 2.0% 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7% Tier 1 Capital 4.0% 4.0% 4.5% 5.5% 6.0% 6.0% 6.0% 6 .0% 6.0% Total Capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8 .0% 8.0% Total Capital plus Capital Conservation Buffer 8.0% 8.0% 8.0% 5.0% 8.0% 8.625% 9.25% 9.875% 10.5% PHASE-IN ARRANGEMENTS FOR LEVERAGE RATIO Leverage Ratio Supervisory Monitoring Parallel Run (3%) Pillar 1 Migration (disclosure begins January 1, 2015) PHASE-OUT ARRANGEMENTS FOR CAPITAL INSTRUMENTS NO LONGER QUALIFYING AS NON-COMMO N EQUITY TIER 1 OR TIER 1 (ALL DATES AS OF JANUARY 1) 2013 2014 2015 2016 2017 201 8 2019 2020 2021 2022 90% 80% 70% 60% 50% 4 0% 30% 20% 10% 0% PHASE-IN ARRANGEMENTS FOR DEDUCTIONS OF REGULATORY ADJUSTMENTS TO COMMON EQUITY 0% 20% 40% 60% 80% 100%

IMPACT OF BASEL III NORMS ON INDIAN BANKING SECTOR The introduction of Basel III norms by the Bank for International Settlements (B IS) has brought about a paradigm shift in banking regulation. Unlike Basel II, w hich solely focused on capital requirements, Basel III takes a more holistic app roach to bank regulation. The financial crisis of 2007-09 saw banks suffer liqui dity and leverage induced stresses which their weak capital buffers couldnt susta in. Several new requirements introduced under Basel III aim to prevent the recur rence of such mistakes. The major changes in Basel III vis--vis the currently fol lowed Basel II norms are; _1. Emphasis on core equity capital (minimum of 7% of RWAs v/s 2% currently) _2. Introduction of liquidity requirement in the form of Liquidity Coverage Rati o & Net Stable Funding Ratio (NSFR). _3. Constraints on leverage in form of Leverage ratio _4. Introduction of Counter cyclical capital buffers The Indian economy is heavily reliant on banking due to the low level of disinte rmediation. Consequently, any change in banking regulation has consequences not only for the Indian banking sector but the Indian economy as a whole. Let us examine the imp act of Basel III norms on Indian banking sector. Capital requirements: Comparison between Capital requirements under Basel III, RBIs Basel II Guidelines & BIS Basel II norms The current Tier I capital requirements mandated by RBI are the same as those un der Basel III. However, Tier 1 + Tier II ratio in the case of India is even higher compared to that under Basel III. The major difference between the two norms arises on the total common equity req uirement front. To bridge the 3.4% gap in total common equity requirements between the Basel III

norms and existing RBI guidelines, Indian banks (excluding foreign banks) would have to raise nearly Rs.6,00,000 crore over next nine years assuming 20% a nnualized growth in risk weighted assets (RWAs)& internal capital generation. Of this new capital, the public sector banks would require 75 - 80% and private ba nks 20-25% (Source: ICRA Report). Government shareholding in many PSU banks has reached close to the 51% statutory floor due to previous rounds of capital raisi ng by the banks. Consequently, as PSU banks seek additional capital, the governm ent would have to either infuse fresh capital into the banks to maintain its sta ke or relax the minimum shareholding law. Further, the entry of new banks due to the issue of new bank licenses is also expected to add to the demand for capita l. Also the hike in the total common equity ratio would reduce leverage and cons equently returns reducing the attractiveness of bank security issues to investor s. Minimum Requirements BASEL II BIS (as a % of RWAs) MIN Tier 1 + Tier 2 8.0% -Tier 1 0% of which Core Tier 2.0% Conservation Buffer NA Countercyclical buffer Total Capital Ratio (CRAR ) 8.0% Total Common Equity 2.0% 0.0% NA 10.5% 7.0% 2.5% 13.0% 9.5% 9.0% 3.6% 0.0% 2.5% 2.5% 0.0% 6.0% 4.0% 1 4.5% 4.5% 6.0% 3.6% 6. 8.0% 8.0% 9.0%



Liquidity requirements: The current RBI regulation requires Indian banks to maintain a minimum of 80% Li quidity Coverage Ratio (LCR) for 15-28 day period vis--vis 100% mandated under Ba sel III. Consequently, though Indian banks would have to hold additional liquid assets, the shortfall to be covered is not substantial. However, the additional liquidity will dampen profitability due to the low yields on such assets. The in troduction of Net Stable Funding Ratio (NSFR) would require Indian banks to have stable sources of funding that match the liquidity profile of their assets port folio. Banks with high dependence on short term funding would have to build up s table deposit bases or switch to long term funding to meet NSFR criteria. The fo rmer would require banks to expand branch network & attract deposits which would reduce funding costs; the latter would provide stability but increase cost of f unds. Building a deposit base will be particularly challenging for newly license d banks. However, as the NSFR will become a standard only in 2018, banks will ha ve plenty of time to change their funding mixes. Leverage Ratio: The RBI has to specify the maximum leverage ratio for banks. Indian banks are cu rrently having healthy Tier- 1 ratios which indicate low leverage. However, the impact of this norm would be felt only after the current excess capital in the system is consum ed and banks need to raise more capital. Countercyclical buffer: The introduction of countercyclical buffer helps regulators build up excess capi tal buffers during boo times to manage system wide build up of risks due to exce ss credit growth. The RBI can mandate banks to maintain common equity capital up

to 2.5% of RWAs as part of counter-cyclical buffer. The countercyclical buffer would contribute to the stability of the Indian financial system but would lead to higher cost of funds and lower GDP growth. Monitoring and detecting systemic credit risks and setting appropriate buffer levels annually would be the key cha llenge for the RBI. Any build up in the Credit-GDP ratio would be a good pointer for the same. Also, the RBI would have to co-ordinate with other regulators to counter any regulatory arbitrage that may arise due to different buffer requirem ents in banking systems of other countries.

LIMITATION 1. The implementation timeline for these regulations is relatively loose, in ord er to avoid any negative impact on credit conditions and the hesitant economic recovery. Most re gulations will be implemented gradually between 2013 and 2019, leaving plenty of time for national regulators and most financial institutions to prepare for the higher capital requirements without affecting lending significantly. However (a nd as many sect oral studies have warned), we are wary of the risk that the impl ementation of Basel III might force certain overleveraged and smaller banks to r estrict access to credit, at least temporarily; in particular, this is likely to create tighter credit conditions for small and medium-sized firms, and for star t-up businesses. 2. The impact of Basel III on economic growth in the medium to long term is less clear. The Basel Committee and the Institute of International Finance (IIF) hav e published two conflicting studies on this; although neither denies the positiv e effects of higher capital requirements on long-term growth by reducing the lik elihood of financial crises, views on the cost of implementation differ signific antly. According to the Basel Committees scenario a 2.0-percentage point (pp) increase i n capital requirements would negatively affect real GDP growth by subtracting ju st 0.04pp on an annual basis over a period of four years. In contrast with this optimistic view, the IIF argues that the same increase in capital requirements w ould entail an annual reduction in real GDP growth of 0.6pp over the same period . Although the risk of a significant impact on growth prospects cannot be discou nted, we consider the Basel Committees scenario more probable. 3. Basel III leaves unanswered questions about non-bank financial institutions, as they fall beyond the scope of the new regulations. Shadow banking (such as in surance firms, hedge and pension funds, and investment banks) played a central r ole in the latest financial crisis and has become a major provider of credit. Ho wever, the Basel Committees proposals do not concern this increasingly important sector of the financial system; this means that Basel III affords shadow banking a competitive advantage and is likely to incentivise risk taking in this sector . Moreover, in the event of an insolvency crisis in the non-bank financial secto r, the banking system will be unlikely to remain immune to the risk of contagion . 4. Regulatory Arbitrage will remain a problem, as some governments (such as the US and the UK) are likely to approve tougher terms or shorter timetables for the i

mplementation of the new regulations. As a result, although Basel III promotes a set of common standards to avoid the possibility that banks might take advantage of regulatory differenc es between countries, this risk remains concrete.

RECOMMENDATION Before going ahead with BASEL III, RBI should plan a strategy in stages so that they can analyse the impact of BASEL III on the banking sector as whole. These s tages are as follows: Stage1:Gapanalysis &derivationoptionsofactionRBI should identifiesgapsbetweenthebankssituationandthere requirements. As per t hat they should implements the regulation. Stage2:Prioritizationoptions ofaction&implementation planning Createanimplementationplanthat respectsthebanksprioritiesandfocus. TheEffortEstim atordeliversaresilientestimationoftheimplementationeffort. Based on thatRBI shou ld prioritizethemeasuresinadetailedimplementationplan. Stage 3:Implementation of measures. DeliveryMethod supportstheplannedimplementationintermsoftime,budgetandqualityparameter s.Projectmanagementtools,Riskand IssueManagement,ProgressTracking andStatusRepor tingillustratedeviationsfromtheprojectplanandtargetachievementandinitiatecounter activemeasures.Long time project management experience in the Basel field in fun ctional, technical and process related areas Thedemandsandchallengesofthe BaselIIIimplementationareboth numerousandcomplex,an dcallfor anefficientand structuredapproach tomitigatetheimpactofBaselIII.In work ingwithbanksontheirresponsetotheBaselIIIrequirements acrosstheglobe,RBIuses atar get-orientedthree- stageapproach. This approachis modular,flexibleandscalableand takes intoaccountthespecific contextof eachbank.Itallowsnotonlyforan efficientBa selIII implementationbut alsoinitiates appropriatemeasurestomitigatethenegativee ffectsofBaselIII onthebank. Thefirststageisdevotedtoananalysisofthebankscurrentsituation andtohelpidentifythe scaleandfocusoftheproject.RBI candevelopedaproprietaryBaselIII DiagnosticToolwit hamodularset-up tohelpidentifyactionsnecessaryto meettherequirementsthebankhas d efinedforsatisfyingtheregulations,withthetoolprovidinganefficientand effectivega panalysis. Inthesecondstage,withdeviations fromBaselIIIidentified,the bankestablishespr ioritiesfor immediateaction whileplanning forimplementation.Theplanning processt akesthebanksspecific characteristics,aswellasitsown strategicpriorities,intoconsi deration. This stagealsoinvolvesestimatingthe totalBaselIIIimplementationeffort andusesbusinesscasestoverify themeasuresneededinadetailed implementationplan. Duringthethirdstage,theplan is implemented,withprojectplanningtoolsusedtoidentif yandcorrect deviationsfromtheprojectplan.Dependingupontheresultsof thegapanalysi s,theoverallBasel IIIimplementationcouldtake approximatelytwo years(subjecttothe sizeandcomplexityofthe bank,itscurrentsituationandIT architecture), fromcommence mentofthepreliminaryreviewthrough projectset-upanddesign,developmentoffunctional concepts, andits implementationofnecessary componentsforBaselIII. It can support banks in their efforts to address the changes required by BASEL III as well as to undertake measures to mitigate the adverse effect of BASEL III.

CONCLUSION The impact of the new Basel III requirements though partly buffered by the drawn out implementation period, is bound to impact banks around the world. In the Indian context, the shock will be significantly softened by the already stringent RBI n orms. However, the norms will introduce structural changes in bank balance sheet s which will change the way Indian banking sector has functioned. Bank profitabi lity would be constrained by higher cost of capital, greater liquidity requireme nts as well as leverage restrictions. Consequently, banks would have to find mor e efficient means of going about their business to maximize profitability. Since a large proportion of new capital issues would be from the financial sector, ge nerating & maintaining investor interest would be critical. The new liquidity re quirements would encourage banks to increase holdings of short term liquid asset s as well as tap long term sources of funding. The countercyclical buffer will b e a new weapon in the RBIs arsenal. However, it would have to wield it carefully to maintain banking systems health while minimizing regulatory arbitrage. Lastly, the measures will promote a safer banking system.

BIBLIOGRAPHY Website Reference 1. 2. 4. 5. 6. 7. 8. 9. Journals Caruana; Jaime Basel II: The road ahead Journal of Financial Regulation and Compli ance (1358 1988electronic:1740-0279) 2003. Vol.11,Iss.4;p.297 Bruggink; Bert - Buck; Eugen. Practical aspects of implementing a Basel II-compli ant economic capital framework Journal of Financial Regulation and Complian ce (1358-1988electronic:1740-0279) 2002. Vol.10,Iss.3;p.219 Adrian Blundell; Wignall; Paul Atkinson. Thinking beyond Basel III:Necessary Solutions for Capital and LiquidityOECD Journa l: Financial Market Trends 22 Sep 2010. p.933 Preston; Alex Basel III is not just window-dressing New Statesman (1364-7431) 2010

. Vol.139,Iss.5020;p.20.0 Patrick Slovik; Boris CourndeMacroeconomic Impact of Basel IIIOECD Economics Depart ment Working Papers 14 Feb 2011. p.16