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BASEL Ⅲ

Chinwe Boston Mengchun Zhang Qiuli Guo Di Xiao Nathan Tsormetsri

OVERVIEW
Meaning of Basel III
Why

Basel III

Aims

Objectives
Major

Changes

Implementation

of the Changes

WHAT IS "BASEL III":

" A global regulatory standard on:

bank capital adequacy  stress testing and  market liquidity risk

ALSO A SET OF REFORM MEASURES TO IMPROVE: Regulation  Supervision  Risk management  .

B. Lack of uniformed definition of capital . C. Inability to strengthen financial stability. Insufficient capital reserve.REASONS FOR BASEL III FORMULATION:  Failures of Basel II being: A. Inadequate comprehensive risk management approach. . D.

AIMS & OBJECTIVES OF BASEL III  To minimize the probability of recurrence of crises to greater extent.     . To improve risk management and governance. To improve the banking sector's ability to absorb shocks arising from financial and economic stress. To strengthen banks' transparency and disclosures .

Macro prudential system wide risks that build up across the banking sector as well as the pro-cyclical amplification of these risk over time. .TARGETS: Bank-level or micro prudential which will help raise the resilience of individual banking institutions in periods of stress.

KEY ELEMENTS OF REFORMS… 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 .

PILLAR 1:MINIMUM CAPITAL REQUIREMENTS • Pillar 1 aligns the minimum capital requirements more closely to actual risks of bank's economic loss. • revised risks: √ Credit risk √ Operational risk √ Market risk .

PILLAR 1:MINIMUM CAPITAL 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 2:SUPERVISORY REVIEW PROCESS • Pillar 2 requires banks to think about the whole spectrum of risks they might face including those not captured at all in Pillar 1 such as interest rate risk. • Coverage in Pillar 2: √ risks that are not fully covered by Pillar 1 √ Credit concentration risk √ Counterparty credit risk √ Risks that are not covered by Pillar 1 √ Interest rate risk in the banking book √ Liquidity risk √ Business risk √ Stress testing .

.PILLAR 3:MARKET DISCIPLINE  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.

Systemic banks.   Liquidity risk.WEAKNESSES OF BASEL II  The quality of capital. Pro-cyclicality.  .

. C. B.BASEL III: STRENGTHENING THE GLOBAL CAPITAL FRAMEWORK A. Systemic risk and interconnectedness. Capital reform. Liquidity standards.

Countercyclical capital buffer.A. CAPITAL REFORM  A new definition of capital. . Capital conservation buffer.    Minimum capital standards.

Tier 1 Capital (going-concern capital) a. Common Equity Tier 1 b. Additional Tier 1 2. .A NEW DEFINITION OF CAPITAL  Total regulatory capital will consist of the sum of the following elements: 1. 1b and 2) there is a single set of criteria that instruments are required to meet before inclusion in the relevant category. Tier 2 Capital (gone-concern capital)  For each of the three categories above (1a.

  . Outside of periods of stress.CAPITAL CONSERVATION BUFFER  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. comprised of Common Equity Tier 1.5%. is established above the regulatory minimum capital requirement. banks should hold buffers of capital above the regulatory minimum.

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.COUNTERCYCLICAL CAPITAL BUFFER  The countercyclical buffer aims to ensure that banking sector capital requirements take account of the macrofinancial environment in which banks operate.  .

MINIMUM CAPITAL STANDARDS .

LIQUIDITY STANDARDS: 1. . Short-term: Liquidity Coverage Ratio(LCR) Long-term: Net Stable Funding Ratio(NSFR) 2.B.

1. The LCR proposal requires banks to hold high quality liquid assets in order to survive in emergent stress scenario.SHORT-TERM:LCR  The LCR is a response from Basel committee to the recent financial crisis. .

be central bank eligible.    Banks are still expected to conduct their own stress tests to assess the level of liquidity they should hold beyond this minimum. high quality liquid: liquid in markets during a time of stress and. . and construct scenarios that could cause difficulties for their specific business activities. ideally.SHORT-TERM:LCR  Must be no lower than 1. The higher the better.

2.  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 Objectives:  To promote more medium and long-term funding activities of banking organizations.

  liabilities with effective maturities of one year or greater. deposits and/or term deposits with maturities of less than one year that would be expected to stay with the institution for an extended period a stress event.LONG-TERM:NSFR Available stable funding (ASF) is defined as the total amount of an institution’s:   capital. . preferred stock with maturity of equal to or greater than one year.

added to the amount of OBS activity (or potential liquidity exposure) multiplied by its associated RSF factor. multiplied by a RSF factor. .REQUIRED STABLE FUNDING:  The required amount of stable funding is calculated as the sum of the value of the assets held and funded by the institution.

 and 20% of government and corporate bonds.   100% of loans longer than one year. 50% of loans to corporate clients with a remaining life shorter than one year.  off-balance sheet categories are also weighted. 85% of loans to retail clients with a remaining life shorter than one year.REQUIRED STABLE FUNDING These components of required stable funding are not equally weighted.  .

Capital surcharge for systemic banks.    .  Higher capital for systemic derivatives. Contingent capital.C. Higher capital for inter-financial exposures. SYSTEMIC RISK AND INTERCONNECTEDNESS (COUNTERPARTY RISK)  Capital incentives for using CCPs for OTC.

.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.   The final implementation date a long way off.

HOWEVER.  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.  Market pressure and competitor pressure already driving considerable change at a range of firms. .

org. Basel III: Issues and implications. [Available at: www.com/Literature/Introduction_to_basel_ii.pdf] .law. [Available at: http://www..ch/papers/basel2.kpmg. [Available at: http://www.cml.edu/corpgov/2012/06/12/federal-reserveproposes-revised-ba.moodysanalytics.com] [Accessed on 30/11/12].uk/cml/policy/issues/748] Basel III regulations: a practical overview. Federal Reserve Proposes Revised Bank Captial Rules.com] [Accessed on 30/11/12].harvard.pdf] Introduction to Basel II.horwathmak. [Available at: www. Introduction to Basel II: [Available at: http://www.REFERENCES:       Basel II: a guide to capital adequacy standards for Lenders.rcg..] [Accessed on 30/11/12]. [Available at: http://blogs.

de/35908/ [Accessed on 11/12/2012]  The New Basel III Framework: Implications for Banking Organisations.ub.uni-muenchen.  .shearman.) http://mpra.com][Accessed on 30/11/12].REFERENCES: (CONT. [Available at: www.