basel iii and its implications
TRANSCRIPT
Dr.Nabil Zaki
Basel III And Its Implications
Agenda
• Welcome
• Housekeeping notes
• Session starts
• Q&A
• End of webinar
House Keeping• Slides will be available on our SlideShare page, link will be
emailed to you
• Recording of the webinar will be available to download, link will be emailed
• Take the time to complete post-webinar survey that will pop up at the end
• You can type your questions throughout the session
• Time will be allocated in the end for the speaker to address your questions
About Your SpeakerDr. Nabil Zaki.
Dr. Nabil W. Zaki has been in the investment and banking industry for more than 30 years. During that period, he assumed senior positions in both corporate finance and treasury with major Wall Street firms and international financial institutions in New York, Canada and the Middle East. He has held high profile management positions with Chase Manhattan Bank, Merrill Lynch, Prudential Securities and Tradition. Currently, Nabil Zaki is an adjunct Professor of Corporate Finance and Derivatives at New York University. He taught at New York Institute of Finance (currently known as FT Knowledge) from 1995 until 2004. He lectures extensively on portfolio management, risk management, derivatives, and international capital markets for major Wall Street firms and financial institutions. Nabil worked as senior vice presidents at both Chase Manhattan bank as well as Merrill Lynch in a variety of senior posts in credit and treasury.
6
Sheila Blair of FDIC to put 829 of the nation’s 7,800 banks on its “problemList” at the end of June 2010; up from 775 at the end of 1Q10.
Already 118 banks failed until Sept 1st, 2010; well ahead of the pace set in2009, when 140 were seized by regulators.
Lending by US banks is still stunted; loan balances across all major loan Categories fell; leading to a decline of total assets for the industry by 1% to$13.2 trillion during 1Q10, and a massive liquidity squeeze.
US banks’ 2Q10 profits totaled $21.6 billion, reversing a combined loss of $4.4 billion in 2Q09. Banks set aside more than $40.3 billion for
future loan losses.
7
From 2007 until September 2011A total of 396 bank failures in USA
With total assets of
US$674.7 billion&
Cost to U.S. government of
US$80.7 billion
8
BIS is recognizing that a key characteristic of the 2007
onwards financial crisis is the inaccurate and
ineffective management of liquidity risk
9
Basel IIIA new set of rules on banking supervision, published in
response to the recent financial crisis.
The Basel Committee is an international organization, set up by the governors of the G10 central banks at the end of 1974, operating under the patronage of BIS.
After the crisis broke out in 2007, the Committee was extendedto G20 countries (including China, India & Brazil). The Committee coordinates the allocation of supervisory dutiesamong the national authorities for the supervision of banking
activities worldwide.
10
Basel III
Basel III Capital
Proposals
Basel IIILiquidity Proposals
11
Introduction of a Leverage Ratio
Increased Capital Requirements on Certain counterparty Credit Risks
Improving Quality & Consistency of Regulatory Capital
Components of Basel III Capital Proposals
Addressing Procyclicality
12
Increased Capital Requirements “Tighter definitions” of Common Equity
Banks must hold 4.5% by Jan. 2015,then a further 2.5%, totaling 7%
Measures to limit Counterparty Credit Risk Introduction of a Leverage Ratio A framework for counter-cyclical capital buffers Short & Medium-term quantitative
Liquidity Ratios
The Basel III Regulations
13
New Elements of Basel III(1) Increasing & improving the quality of bank capital by:
(a) Increasing the minimum regulatory ratios
(b) Introducing capital buffers to be added to the minima
(c) Reviewing the treatment of certain regulatory capital components (particularly deferred tax assets, minority interest capital and significant equity investments in banks, finance and insurance companies, and hybrid equity instruments) to improve their quality.
(2) The introduction of anti-cyclical capital buffers to avoid excessive increases in bank’s risk position in the expansive phases of the cycle; therefore, avoiding the negative consequences that emerge in recession phases.
(3) The introduction of additional capital requirements for counterparty risk, in relation to banks’ off-balance sheet activities (derivatives, guarantees & commitments).
(4) The introduction of a leverage ratio (the ratio between capital and non-risk weighted total assets).
(5) The introduction of liquidity risk measurement/monitoring provisions in the short-term (liquidity coverage ratio) and in the mid-term (net stable funding ratio- NSFR)
14
Basel III
Capital Requirements
CapitalRatios
CapitalBuffers
DefinitionOf Capital
15
Basel IIIRisk-based
Capital Ratios
Core Tier 1Total Tier 1Total
Capital
Basel 3 requires banks to hold4.5% of common equity, up
from 2%. 6% of capital must be Tier 1. Tier 2 no more than 2%.
Total Tier 1 increased from 4% to 6%. Other types of Tier 1 canaccount for 1.5%. Combined with buffers,
Total Tier 1 = 8.5% RWAs
Total minimum capital requirement remains at 8%, subject to new capitalBuffers. Combined with buffers,
Total Risk-based capital =10.5% of RWAs
16
Basel IIICapital Buffers
Conservation BufferTo be used by banks
in times of stress(2.5% of core Tier 1;
to be met with Common equity only)
Countercyclical BufferA range of up to 2.5%
of common equity.Left to the discretion
of national regulators
17
Capital Buffers• In addition to the rise in Tier 1 capital ratios, a new
series of capital buffers will be introduced to further increase the minimum requirements
(1) Capital Conservation Buffer: which will require banks to hold (above the minimum 8% total capital) a further 2.5% of core Tier 1 capital over and above the new 4.5% level; which brings the total common equity requirement to the level of 7% of RWAs. This buffer must consist solely of common equity, after deductions.
(2) Capital Countercyclical Buffer: Banks may at certain times be required to hold another buffer; ranging from 0% to 2.5% of capital in the form of common equity or other fully loss-absorbing capital; to be implemented according to national circumstances. This buffer will only be in effect where there is an excess credit growth that results in a “system wide build up of risk” in any given country & will operate as an extension of the capital conservation buffer.
18
Timing of Capital Buffers• Both the capital conservation &
countercyclical buffers will be phased in from January 1st, 2016 to January 1st, 2019 at yearly increments of 0.625% of RWAs.
• The capital conservation buffer will be phased in at 0.625% on Jan 1st, 2016 & increasing each subsequent year by an additional 0.625%; to reach 2.5% on Jan 1st, 2019.
19
Regulators’ Response to LR• The Basel Committee on Banking Supervision
(BCBS) and some national regulatory authorities are going to introduce the following:
Limiting the amount of
leverage
RegulatoryCapitalBuffer
20
Phase-in Arrangements (all dates as of Jan)
l
20120111
20122012 20120133
20142014 20120155
20162016 20172017 20182018 20120199
Min. C. Equity Min. C. Equity Capital RatioCapital Ratio
3.5%3.5% 4%4% 4.54.5%%
4.5%4.5% 4.5%4.5% 4.5%4.5% 4.5%4.5%
Capital Conserv. Capital Conserv. RatioRatio
0.6250.625%%
1.251.25%%
1.8751.875%%
2.5%2.5%
Min C. Equity +Min C. Equity +
Conservation Conservation RatioRatio
3.5%3.5% 4%4% 4.54.5%%
5.1255.125%%
5.755.75%%
6.3756.375%%
7%7%
Phase-in Phase-in deductionsdeductions
20%20% 40%40% 60%60% 80%80% 100%100% 100100%%
Min Tier 1 Min Tier 1 CapitalCapital
4.5%4.5% 5.5%5.5% 6%6% 6%6% 6%6% 6%6% 6%6%
Min. Total Min. Total CapitalCapital
8%8% 8%8% 8%8% 8%8% 8%8% 8%8% 8%8%
Min Total Capital Min Total Capital + Cons. Buffer+ Cons. Buffer
8%8% 8%8% 8%8% 8.6258.625%%
9.1259.125%%
9.8759.875%%
10.510.5%%
Capital Capital Instruments (no Instruments (no longer qualify as longer qualify as non-core Tier1 non-core Tier1 &2)&2)
Phased-out over 10 year horizon beginning 2013
Leverage Ratio SupervisoryMonitoring
Parallel Run Jan 2013-2015Disclosure starts 2015
MigrationTo Pillar 1
21
Basel IIIGlobal Liquidity
Standards
Liquidity Coverage Ratio
Net Stable Funding Ratio
Short-term liquidity metric Structural funding metric
It requires banks to maintain high-quality,unencumbered assets in excess of their stressed cash outflows over 30-day time.
To promote more medium & long-termfunding of the assets & activities of the bank over a 1-year horizon
2015 2018
22
Objectives of Basel III Liquidity Standards• Basel III set out 2 liquidity ratios; (A)short-term ratio as well as (B)A longer-term funding ratio by reference
to the amount of “longer-term-stable sources of funding” relative to the “liquidity profiles” of the assets funded and the off-balance sheet exposures.
• The aim is to ensure banks maintain 30 days’ liquidity coverage for extreme stress conditions
23
Liquidity Coverage Ratio (LCR)• Various changes to the detailed
calculation of “liquid assets” and other elements of the ratio are made
• These changes include treating commitments of sovereigns and central banks in a manner similar to non-financial corporates and requiring that all assets in the liquidity pool for the definition of liquid assets be managed as part of the pool and be subject to operational requirement and introducing a “level 2” of liquid assets which can comprise up to 40% of the pool.
24
Net Stable Funding Ratio (NSFR)• It effectively assesses the behavioral
maturity of each side of the balance sheet over a one-year horizon.
• More particularly, haircuts are applied to each category of assets and liabilities according to their expected stability through a stress scenario, and the available stable funding must exceed the required stable funding.
25
NSFR ….in a nutshell• NSFR, as a metric, highlights the level of
long-term funding compared with short-term liabilities.
• At this stage, no limit for the NSFR has been set, and such a limit is unlikely.
• However, regulators are expected to compare each bank’s figure against its peer group average and range.
• By end of 2011, the exact calculation of the metric has not been specified
The main objective of NSFR is to encourage more medium-term funding
26
Objectives of NSFRThe main objective of
NSFR is to encourage more medium-term funding
Control the level of maturity transformation that an institution undertakes
27
Quantitatives of NSFR British Bankers Association (BBA) suggested either of
the following definitions for calculating NSFR:(1) Capital + term funding with residual maturity of 1-year
+ non-wholesale funding divided by assets not marketable within 1 year
Capital + Term funding ( > 1 year) + Retail funding
Assets > 1 year
(2) Given that the problem during the 2008 crisis was one of over-reliance on ST wholesale funding, an alternative calculation of the metric could be by the following formula:
Unsecured wholesale funding > 1 year Total deposits + Debt securities in issue + Capital
28
Timing of Basel III Liquidity Standards
TestedTested(Observation (Observation
Period)Period)
MandatoryMandatory
Liquidity Coverage Liquidity Coverage RatioRatio
(LCR)(LCR)
20112011 Jan 1Jan 1stst, , 20152015
Net Stable Funding Net Stable Funding RatioRatio
(NSFR)(NSFR)
20122012 Jan 1Jan 1stst, , 20182018
29
Basel III
Capital Standards
125% increase of Tier 1 Capital from 2% to 4.5% of RWAs.
50% increase in Total Tier 1 Capital from 4% to 6% of RWAs.
Redefining Common Equity and its Structure & Content
Simplifying Tier 2 & Abolishing Tier 3Capital Ratios
Capital Buffers
2.5% Conservation
Buffer
0%-2.5% Countercyclical
Buffer
New 3% Leverage Ratio of Tier 1 Capital; as part of Pillar 2.
Total Tier 1 Capital+
Capital Buffer= 7% of RWAs
up from 2%Increase of 250%
30
Key dates: Capital Requirements
DatDatee
Milestone: Capital RequirementsMilestone: Capital Requirements
20120133
Minimum capital requirementMinimum capital requirement: : Start of the Start of the gradual phasing-in of the higher minimum gradual phasing-in of the higher minimum capital requirementscapital requirements
20120155
Minimum capital requirementMinimum capital requirement: Higher minimum : Higher minimum capital requirements are fully implementedcapital requirements are fully implemented
20120166
Conversion Buffer:Conversion Buffer: Start of the gradual phasing-in Start of the gradual phasing-in of the conversion bufferof the conversion buffer
20120199
Conversion BufferConversion Buffer: The conversion buffer is fully : The conversion buffer is fully implementedimplemented
31
Key dates: Leverage RatioDatDatee
Milestone: Leverage RatioMilestone: Leverage Ratio
20112011 Supervisory monitoringSupervisory monitoring: : Developing templates Developing templates to track the leverage ratio and the underlying to track the leverage ratio and the underlying componentscomponents
20132013 Parallel run I:Parallel run I: The leverage ratio and its components The leverage ratio and its components will be tracked by supervisors, but not disclosed and not will be tracked by supervisors, but not disclosed and not mandatorymandatory
20152015 Parallel run II:Parallel run II: The leverage ratio and its components The leverage ratio and its components will be tracked and disclosed, but mandatorywill be tracked and disclosed, but mandatory
20172017 Final adjustmentsFinal adjustments: : Based on the results of the parallel Based on the results of the parallel run period, any final adjustments to the leverage ratiorun period, any final adjustments to the leverage ratio
20182018 Mandatory requirementsMandatory requirements: : The leverage ratio will The leverage ratio will become a mandatory part of Basel III requirementsbecome a mandatory part of Basel III requirements
32
Key dates: Liquidity Requirements
DatDatee
Milestone: Liquidity RequirementsMilestone: Liquidity Requirements
20120111
Observation PeriodObservation Period: Developing templates & : Developing templates & supervisory monitoring of the liquidity ratios supervisory monitoring of the liquidity ratios
20120133
Introduction of the LCRIntroduction of the LCR: Introducing Leverage : Introducing Leverage Coverage RatioCoverage Ratio
20120188
Introduction of NSFRIntroduction of NSFR: Introducing Net Stable : Introducing Net Stable Funding RatioFunding Ratio
Any Questions?
Thank you for your time.