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OVERVIEW
Meaning of Basel III
Why
Basel III
Aims
Objectives
Major
Changes
Implementation
of the Changes
A. Inability to strengthen financial stability. B. Insufficient capital reserve. C. Inadequate comprehensive risk management approach. D. Lack of uniformed definition of capital .
To minimize the probability of recurrence of crises to greater extent. To improve the banking sector's ability to absorb shocks arising from financial and economic stress. To improve risk management and governance. To strengthen banks' transparency and disclosures .
TARGETS:
Bank-level or micro prudential which will help raise the resilience of individual banking institutions in periods of stress. Macro prudential system wide risks that build up across the banking sector as well as the pro-cyclical amplification of these risk over time.
Increasing the quality and quantity capital Enhancing risk coverage of capital Introducing Leverage ratio Improving liquidity rules Establishing additional buffers Managing counter party risks
STRUCTURE OF BASEL II
REQUIREMENTS(CONT.)
Credit risk The standardised approach Foundation internal ratings based (IRB) approach Advanced IRB approach Operational risk Basic indicator approach Standardized approach Advanced measurement approach Market risk standardized approach internal models approach
Pillar 3 is designed to increase the transparency of lenders' risk profile by requiring them to give details of their risk management and risk distributions.
WEAKNESSES OF BASEL II
Liquidity risk.
Systemic banks.
A. CAPITAL REFORM
regulatory capital will consist of the sum of the following elements: 1. Tier 1 Capital (going-concern capital) a. Common Equity Tier 1 b. Additional Tier 1 2. Tier 2 Capital (gone-concern capital)
For
each of the three categories above (1a, 1b and 2) there is a single set of criteria that instruments are required to meet before inclusion in the relevant category.
The capital conservation buffer is designed to ensure that banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred. A capital conservation buffer of 2.5%, comprised of Common Equity Tier 1, is established above the regulatory minimum capital requirement. Outside of periods of stress, banks should hold buffers of capital above the regulatory minimum.
The countercyclical buffer aims to ensure that banking sector capital requirements take account of the macrofinancial environment in which banks operate. It will be deployed by national jurisdictions when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses.
B. LIQUIDITY STANDARDS:
1.
2.
1.SHORT-TERM:LCR
The LCR is a response from Basel committee to the recent financial crisis. The LCR proposal requires banks to hold high quality liquid assets in order to survive in emergent stress scenario.
SHORT-TERM:LCR
Banks are still expected to conduct their own stress tests to assess the level of liquidity they should hold beyond this minimum, and construct scenarios that could cause difficulties for their specific business activities.
2. LONG-TERM:NSFR
Objectives: To promote more medium and long-term funding activities of banking organizations. Ensure that the investment activities are funded by stable liabilities. To limit the over-reliance on wholesale short-term funding(money market)
LONG-TERM:NSFR
Available stable funding (ASF) is defined as the total amount of an institutions:
capital. preferred stock with maturity of equal to or greater than one year.
The
required amount of stable funding is calculated as the sum of the value of the assets held and funded by the institution, multiplied by a RSF factor, added to the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor.
100% of loans longer than one year. 85% of loans to retail clients with a remaining life shorter than one year. 50% of loans to corporate clients with a remaining life shorter than one year.
and 20% of government and corporate bonds. off-balance sheet categories are also weighted.
(COUNTERPARTY RISK)
CONCLUSION
Basel III introduces a paradigm shift in capital and liquidity standards. It was constructed and agreed in relatively record time which leaves many elements unfinished.
HOWEVER,
Market
pressure and competitor pressure already driving considerable change at a range of firms.
Firms
therefore should ensure to engage with Basel III as soon as possible to be competitively advantaged in the new postcrisis financial risk and regulatory landscape.
REFERENCES:
Basel II: a guide to capital adequacy standards for Lenders. [Available at: http://www.cml.org.uk/cml/policy/issues/748] Basel III regulations: a practical overview. [Available at: www.moodysanalytics.com] [Accessed on 30/11/12]. Basel III: Issues and implications. [Available at: www.kpmg.com] [Accessed on 30/11/12]. Federal Reserve Proposes Revised Bank Captial Rules. [Available at: http://blogs.law.harvard.edu/corpgov/2012/06/12/federal-reserveproposes-revised-ba...] [Accessed on 30/11/12]. Introduction to Basel II: [Available at: http://www.rcg.ch/papers/basel2.pdf] Introduction to Basel II. [Available at: http://www.horwathmak.com/Literature/Introduction_to_basel_ii.pdf]
REFERENCES: (CONT.)
http://mpra.ub.uni-muenchen.de/35908/ [Accessed on 11/12/2012] The New Basel III Framework: Implications for Banking Organisations. [Available at: www.shearman.com][Accessed on 30/11/12].