Free Essay

Basel Iii

In: Business and Management

Submitted By abc12345a
Words 996
Pages 4
Overview[edit]
Unlike Basel I and Basel II, which focus primarily on the level of bank loss reserves that banks are required to hold, Basel III focuses primarily on the risk of a run on the bank by requiring differing levels of reserves for different forms of bank deposits and other borrowings. Therefore Basel III rules do not, for the most part, supersede the guidelines known as Basel I and Basel II; rather, it will work alongside them.

Key principles[edit]
Capital requirements[edit]
The original Basel III rule from 2010 was supposed to require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (including common equity and up from 4% in Basel II) of "risk-weighted assets" (RWAs).[3] Basel III introduced two additional "capital buffers"—a "mandatory capital conservation buffer" of 2.5% and a "discretionary counter-cyclical buffer" to allow national regulators to require up to an additional 2.5% of capital during periods of high credit growth.

Leverage ratio[edit]
Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated by dividing Tier 1 capital by the bank's average total consolidated assets (not risk weighted);[4][5] The banks were expected to maintain a leverage ratio in excess of 3% under Basel III. In July 2013, the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured bank holding companies.[6]

Liquidity requirements[edit]
Basel III introduced two required liquidity ratios.[7] The "Liquidity Coverage Ratio" was supposed to require a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the Net Stable Funding Ratio was to require the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.[8]

U.S. version of the Basel Liquidity Coverage Ratio requirements[edit]
On 24 October 2013, the Federal Reserve Board of Governors approved an interagency proposal for the U.S. version of the Basel Committee on Banking Supervision (BCBS)'s Liquidity Coverage Ratio (LCR). The ratio would apply to certain U.S. banking organizations and other systematically important financial institutions.[9] The comment period for the proposal is scheduled to close by 31 January 2014.

The United States' LCR proposal came out significantly tougher than BCBS’s version, especially for larger bank holding companies.[10] The proposal requires financial institutions and FSOC designated nonbank financial companies[11] to have an adequate stock of high-quality liquid assets (HQLA) that can be quickly liquidated to meet liquidity needs over a short period of time.

The LCR consists of two parts: the numerator is the value of HQLA, and the denominator consists of the total net cash outflows over a specified stress period (total expected cash outflows minus total expected cash inflows).[12]

The Liquidity Coverage Ratio applies to U.S. banking operations with assets of more than $10 billion. The proposal would require:

Large Bank Holding Companies (BHC) – those with over $250 billion in consolidated assets, or more in on-balance sheet foreign exposure, and to systemically important, non-bank financial institutions;[11] to hold enough HQLA to cover 30 days of net cash outflow. That amount would be determined based on the peak cumulative amount within the 30-day period.[9]
Regional firms (those with between $50 and $250 billion in assets) would be subject to a “modified” LCR at the (BHC) level only. The modified LCR requires the regional firms to hold enough HQLA to cover 21 days of net cash outflow. The net cash outflow parameters are 70% of those applicable to the larger institutions and do not include the requirement to calculate the peak cumulative outflows[12]
Smaller BHCs, those under $50 billion, would remain subject to the prevailing qualitative supervisory framework.[13]
The U.S. proposal divides qualifying HQLAs into three specific categories (Level 1, Level 2A, and Level 2B). Across the categories the combination of Level 2A and 2B assets cannot exceed 40% HQLA with 2B assets limited to a maximum of 15% of HQLA.[12]

Level 1 represents assets that are highly liquid (generally those risk-weighted at 0% under the Basel III standardized approach for capital) and receive no haircut. Notably, the Fed chose not to include GSE-issued securities in Level 1, despite industry lobbying, on the basis that they are not guaranteed by the "full faith and credit" of the U.S. government.
Level 2A assets generally include assets that would be subject to a 20% risk-weighting under Basel III and includes assets such as GSE-issued and -guaranteed securities. These assets would be subject to a 15% haircut which is similar to the treatment of such securities under the BCBS version.
Level 2B assets include corporate debt and equity securities and are subject to a 50% haircut. The BCBS and U.S. version treats equities in a similar manner, but corporate debt under the BCBS version is split between 2A and 2B based on public credit ratings, unlike the U.S. proposal. This treatment of corporate debt securities is the direct impact of the Dodd–Frank Act's Section 939, which removed references to credit ratings, and further evidences the conservative bias of U.S. regulators’ approach to the LCR.
The proposal requires that the LCR be at least equal to or greater than 1.0 and includes a multiyear transition period that would require: 80% compliance starting 1 January 2015, 90% compliance starting 1 January 2016, and 100% compliance starting 1 January 2017.[14]

Lastly, the proposal requires both sets of firms (large bank holding companies and regional firms) subject to the LCR requirements to submit remediation plans to U.S. regulators to address what actions would be taken if the LCR falls below 100% for three or more consecutive days.

Similar Documents

Free Essay

Basel Iii

...Basel Committee on Banking Supervision reforms - Basel III Strengthens microprudential regulation and supervision, and adds a macroprudential overlay that includes capital buffers. Capital Pillar 1 Capital Quality and level of capital Greater focus on common equity. The minimum will be raised to 4.5% of riskweighted assets, after deductions. Capital loss absorption at the point of non-viability Contractual terms of capital instruments will include a clause that allows – at the discretion of the relevant authority – write-off or conversion to common shares if the bank is judged to be non-viable. This principle increases the contribution of the private sector to resolving future banking crises and thereby reduces moral hazard. Capital conservation buffer Comprising common equity of 2.5% of risk-weighted assets, bringing the total common equity standard to 7%. Constraint on a bank’s discretionary distributions will be imposed when banks fall into the buffer range. Countercyclical buffer Imposed within a range of 0-2.5% comprising common equity, when authorities judge credit growth is resulting in an unacceptable build up of systematic risk. Liquidity Pillar 2 Containing leverage Leverage ratio A non-risk-based leverage ratio that includes off-balance sheet exposures will serve as a backstop to the risk-based capital requirement. Also helps contain system wide build up of leverage. Pillar 3 Market discipline Revised Pillar 3 disclosures requirements The requirements introduced...

Words: 792 - Pages: 4

Free Essay

Liquidity Requirements for Basel Iii

...Liquidity Requirements For Basel III The Basel Committee was birthed to aid the banking sector’s ability to deal with the impact of the changing financial environment. The committee hopes to improve risk management through times of financial and economic stress. These goals are executed through creating criteria for each bank to follow to regulate and improve management. The Basel Committee has outlined the regulations through a set of reform measures. The first version was released in 2009 and labeled Basel I, the second publication was labeled Basel II and released in 2010. Currently the efforts of the Basel Committee are outlined in Basel III, which aims to strengthen banks’ transparency through requirements of proper leverage ratios and capital requirements. The Basel Accords are built upon one another to better improve requirements. It directs banks that hold riskier assets to have more cushion to absorb the risk known as capital on hand so the portfolio is safer should a financial change occur. This is regulated by the publication made in the notes of the balance sheet. Banks must also maintain higher common equity including capital cushioning of 2.5% of assets. Liquidity requirements of Basel III are outlined in the Liquidity Coverage Ratio (LCR). It promotes short-term resilience of the bank’s liquidity risk profile. The bank must hold stock of high quality liquid assets (HQLA) that can easily be converted to cash in private markets to meet liquidity...

Words: 301 - Pages: 2

Free Essay

Basel (I Ii Iii)

...THE BASEL CAPITAL ACCORDS BY JOE LARSON APRIL 2011 I. Introduction Banks are a vital part of a nation’s economy. In their traditional role as financial intermediaries, banks serve to meet the demand of those who need funding. As such, banks make it possible for people to buy homes and for businesses to expand. Banks therefore facilitate spending and investment, which fuel growth in the economy. However, despite their important role in the economy, banks are nevertheless susceptible to failure. Banks, like any other business, can go bankrupt. However, unlike most other businesses, the failure of banks, especially very large ones, can have far-reaching implications. As we saw during the Great Depression and, most recently, during the global financial crisis and the ensuing recession, the health of the bank system (or lack thereof) can trigger economic calamities affecting millions of people. Consequently, it is imperative that banks operate in a safe and sound manner to avoid failure. One way to ensure this is for governments to provide diligent regulation of banks. Yet, with the advent of globalization, banking activities are no longer confined to the borders of any individual country. With cross-border banking activities rapidly increasing, the need for international cooperation in bank regulation has likewise increased. Ready to meet this need is the Basel Committee on Bank Supervision (BCBS). In its role as the international advisory authority on bank regulation, the BCBS...

Words: 9857 - Pages: 40

Premium Essay

Is Basel Iii a Better Support to Islamic Banks Than Basel Ii?

...Is Basel III a better support to Islamic banks than Basel II? International Interdisciplinary Conference On Changes, Challenges and Consequences In Commerce, Engineering, Technology and Social Science. Institute of Business Management and Research, Chakan & Choice Institute of Management Studies and Research, pune, 15th March, 2014. Dr. Atmaram palnitkar Research Guide& Principal of Dayanand College OF Commerce, Latur. palnitkarav@rediffmail.com&9423347478 Abdul-Jabbar Qasem Ali Al-badaani Research Scholar of Com and Magt Sci, SRTM University, Nanded. Amaf3600@gmail.com&7709670130 ------------------------------------------------- ------------------------------------------------- ABSTRACT Banking activities involve many risks calculated and otherwise. Banks have to take appropriate measures and require management of their capital and credit and implementation procedures in keeping with the best international practices, to mitigate potential losses and avoid projected pitfalls. In view of the recent financial crisis, due to wrong management or improper implementation as well as the collapse of large economies has had a cascading effect all round the world in the form of collapses of famous institutions and banks, and thus arose a decision to have a better financial control in the form of Basel I to be later followed by Basel II and Basel III. Thus a new culture in financial controls and risk management has arisen to safeguard the banking...

Words: 3374 - Pages: 14

Free Essay

Basel Iii

...Basel Committee on Banking Supervision Basel III: A global regulatory framework for more resilient banks and banking systems December 2010 (rev June 2011) Copies of publications are available from: Bank for International Settlements Communications CH-4002 Basel, Switzerland E-mail: publications@bis.org Fax: +41 61 280 9100 and +41 61 280 8100 © Bank for International Settlements 2010. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN print: 92-9131-859-0 ISBN web: 92-9197-859-0 Contents Contents ...................................................................................................................................3 Introduction ...............................................................................................................................1 A. Strengthening the global capital framework ....................................................................2 1. 2. 3. 4. Raising the quality, consistency and transparency of the capital base ..................2 Enhancing risk coverage........................................................................................3 Supplementing the risk-based capital requirement with a leverage ratio ...............4 Reducing procyclicality and promoting countercyclical buffers ..............................5 Cyclicality of the minimum requirement .................................................................5 Forward looking provisioning ....

Words: 21950 - Pages: 88

Free Essay

Basel Iii

...Des facteurs globaux et spécifiques En route vers Bâle III Facteurs macroéconomiques 1 Abondance de liquidité Faiblesse des taux d’intérêt Mauvaise gestion du risque 2 Complexité des produits financiers structurés Sous-estimation des chocs extrêmes (stress tests) Difficulté à localiser les risques de crédits (disséminés ou non) Prise en compte limitée du risque hors bilan Croissance explosive des marchés des produits dérivés du crédit Modalités d’octroi du crédit Rôle des agences de notation 3 Réduction de la perception du risque Défaillance dans la méthodologie de notation Conflits d’intérêts Manque de gouvernance 4 Lacunes dans la gouvernance d’entreprises (manque de connaissance des directions bancaires sur de nouveaux produits) Systèmes de rémunérations incitant les prises de risque excessifs Peu d’attention portée à la liquidité des marchés Autorités de réglementation trop focalisées sur la surveillance microprudentielle et pas assez sur les risques macrosystémiques Crise financière Conditions de marché 5 Procyclicité Intensification des problèmes de liquidité Manque de transparence sur le marché Crise de confiance Constats Sous-estimation de certains risques et surestimation de la capacité à les gérer Illusion du soulagement de la diffusion du risque par la titrisation Modélisation trop basée sur des historiques de données récents et des bonnes conditions de marché incapacité à réagir face à des chocs extrêmes Préconisations ...

Words: 571 - Pages: 3

Free Essay

Basel Iii Norms

...FORE School of Management A DISSERTATION REPORT ON Impact of Basel III norms on select Indian & European banks Submitted By: DEEPANSHU CHANDRA, 053009 FORE SCHOOL OF MANAGEMENT, DELHI A Report submitted in partial fulfilment of the requirement of Post Graduate Diploma Program in Management SUBMITTED TO: Faculty Guide: Prof. Sanghamitra Buddhapriya FORE School of Management 1 FORE School of Management CERTIFICATE This is to certify that Mr. Deepanshu Chandra has completed his Dissertation under my guidance and has submitted this project report entitled Impact of Basel III norms on select Indian and European banks towards partial fulfilment of the requirements for the award of the Post Graduate Diploma Program in Management (FORE, Delhi) 2011-2013. This Report is the result of his own work and to the best of our knowledge. This project was carried out under my overall supervision. Date: Place: ---------------------------------- Prof. Sanghamitra Buddhapriya (Faculty Guide) FORE School of Management 2 FORE School of Management ACKNOWLEDGEMENT I would like to take this opportunity to thank all those who helped me in the successful completion of my Dissertation. To start with, I would like to thank the organization FORE School of Management for providing me the chance to undertake this Dissertation. I wish to place on records, my deep sense of gratitude and sincere appreciation to my Mentor, Prof. Sanghamitra Buddhapriya, Faculty...

Words: 12440 - Pages: 50

Free Essay

Basel Iii Case Note

...capital base of banks and the 2007-1010 financial crisis and great recession. Previous financial crisis have demonstrated that past efforts to prevent systematic crashes are insufficient, and are still working to implement The Basel III framework. The Basel Committee on Banking Supervision tried to concentrate on solving some of the major systematic problems known during the financial crisis, however Basel III might fail to reduce the risks, some major countries could choose to reject the proposals or delay the implementation of this framework. One of the main problems is that Basel III is focusing mostly in Europe and the United States, ignoring the practices in emerging economies. This new regulation will only shift systematic risk from one place to another without really reducing the risk of global financial crises placing greater regulation on banks and allowing non bank institutions to operate without supervision, meaning that this will increase rather than decrease systematic risk. 2: What measures should limit counterparty credit risk? Counterparty credit risk is the risk that the opposing party in a financial transaction will fail to honor an agreement. Since Basel II did not required banks to hold enough money in order to honor the agreement, Basel II is imposing additional measures to calculate the amount of risk. Some of the measures to limit counterparty credit risk are to include a period of economic and market stress when making assumptions, this way banks will be...

Words: 612 - Pages: 3

Free Essay

Basel Iii: an Evaluation of New Banking Regulations

...Case#1 Page 1 Basel III: An Evaluation of New Banking Regulations Q#1 – Discuss the relationship between the capital base of banks and the 2007-2010 financial crisis and Great Depression (120 words)  Most Economists would agree that the 2007-2010 crisis, was the worst global financial crisis since the great depression. During both of these times, the capital base of banks was severely compromised. Therefore, bank regulations are needed to improve the quality of banks’ capital base to become more resilient during economical crisis. During the Great Depression, major banks failures resulted after the stock market crash. These failures began as debtors defaulted on loans and depositors withdrew their deposits en masse. Outstanding debt increased as prices and income fell. Bank failures increased as desperate banks called loans yet, borrowers did not have the time or money to pay. In addition, capital investment slowed and banks struggled to build up their capital reserves by making fewer loans. Many would say that the Federal Reserve allowed the money supply to shrink to 1/3 and transformed what was a normal recession to the Great Depression by restricting emergency lending to failing banks. However, the Federal Reserve could not react in part because the Federal Reserve Act, which required 40% gold backing of Federal Reserve notes issued. During this time, the Federal Reserve hit this allowable credit limit. Reduced capital reserves resulted in many...

Words: 526 - Pages: 3

Free Essay

Companies in Basel

...Roche, Novartis and UBS Syngenta which the Financial Times includes in its FT Global 500 Index as one of the most important companies worldwide Pharmaceuticals, Biotechnology & Life Sciences  4-Antibody  Acino  Actelion  Aerosol-Service AG  Bachem  Basilea  Beiersdorf  Bühlmann Laboratories  Carbogen AMCIS  Cimex  CIS Pharma  DSM Nutritional Products AG  Evolva  Gaba  Genedata  Inotech  Karger  Lonza  Mepha  MondoBIOTECH  Novartis  Pentapharm  Permamed  Polyphor  Proreo Pharma  RCC Ltd.  Roche  Santhera  S.L.A. Pharma  SwissCo Services  Swiss Pharma Contract  Syngenta  Synosia  Tillots Pharma AG  Triplan  Vivendy Therapeutics  Weleda  Xenometrix ------------------------------------------------- Chemicals & Nanotechnology   Acino  Bachem  Clariant  Concentris  Lonza  Nanosurf  Rohner Chem  Rolic  Solvias  Swiss Nanoscience Institute  Zeptosens ------------------------------------------------- ------------------------------------------------- Agribusiness & Food   Bell AG  Bio.inspecta AG  DSM Nutritional Products  Feldschlösschen  Jungbunzlauer  Louis Ditzler AG  Ricola  Syngenta Medical Technology * Camlog * Medartis * NaviSwiss * SIC invent AG Switzerland * Straumann * Synthes * Thommen Medical ------------------------------------------------- Commerce & Logistics  ...

Words: 406 - Pages: 2

Free Essay

Corning Inc. Case Study

...Corning Inc. To: From: Subject: Recommendations for the three proposals Corning Inc.’s strategy – to compete in four worldwide business sectors (communications, laboratory sciences, consumer housewares, and specialty materials) and to deliver long-range superior economic benefits to its employees, consumers, communities, and shareholders – has served the organization well for over three decades as evidenced by a transformed business portfolio, record earnings, and the emergence of a new spirit within the organization. However, due to diverse changes in trends that characterize the industry’s landscape, there is the need to come up with innovative proposals that originate from diverse business sectors. The CEO of Corning Inc. hopes that these proposals would aid in the company’s continual growth. These proposals deal with (a) the laboratory sciences, (b) communication (fiber optics), and (c), the television glass division. The opinions given are a result of a comprehensive deduction of the Porter’s Five Forces model so as to identify the best paths of actions to achieve a proper competitive advantage in the industry. For the first proposal, I think it is vital that Corning maintains its relationship with Ciba Geigy. Ciba Geigy has portrayed a strong commitment to the partnership’s success as evidenced by its willingness to preserve with significantly low returns over the next few years as the venture continues to grow. Furthermore, it has a good strategic fit with Corning Inc...

Words: 623 - Pages: 3

Free Essay

Efgrggg

...HISTORY OF EULER METHOD Leonhard Euler Leonhard Euler was one of the giants of 18th Century mathematics. Like the Bernoulli’s, he was born in Basel, Switzerland, and he studied for a while under Johann Bernoulli at Basel University. But, partly due to the overwhelming dominance of the Bernoulli family in Swiss mathematics, and the difficulty of finding a good position and recognition in his hometown, he spent most of his academic life in Russia and Germany, especially in the burgeoning St. Petersburg of Peter the Great and Catherine the Great. (1707 - 1783) Today, Euler is considered one of the greatest mathematicians of all time. His interests covered almost all aspects of mathematics, from geometry to calculus to trigonometry to algebra to number theory, as well as optics, astronomy, cartography, mechanics, weights and measures and even the theory of music. There are many different methods that can be used to approximate solutions to a differential equation and in fact whole classes can be taught just dealing with the various methods. We are going to look at one of the oldest and easiest to use here. This method was originally devised by Euler and is called, oddly enough, Euler’s Method. General first order IVP; Where f(t,y) is a known function and the values in the initial condition are also known numbers. From the second theorem in...

Words: 477 - Pages: 2

Free Essay

Basel

...Basel II to Basel III: Changes and Requirements Hesham Hamdy Chief Risk Officer, Arab International Bank Nairobi, 7-8 March 2012 Basel; what is it? • A New Standard for the Measurement of Risks in Banks, and for the Allocation of Capital to cover those risks, published by the Basel Committee of G10 Central Banks. • What Does Basel Committee Do? - Acts as Think-Tank for banking regulators - Issues guidance on best practice for banks - Standards accepted worldwide - Generally incorporated in national banking regulations Basel I • Basel I was the round of deliberations by central banks from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This was known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992 . • Basel I primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Basel I (continued) • Banks with international presence were required to hold capital equal to 8 % of the risk-weighted assets. • Basel I was then widely viewed as outmoded because the world has changed as financial corporations, financial innovation and risk management have developed. Therefore, a more comprehensive set of...

Words: 3834 - Pages: 16

Free Essay

Basel

...BASEL III NORMS AND INDIAN BANKING: ASSESSMENT AND EMERGING CHALLENGES C.S.Balasubramaniam Professor, Babasaheb Gawde Institute of Management Studies, Mumbai Email: balacs2001@yahoo.co.in ABSTRACT Banking operations worldwide have undergone phenomenal changes in the last two decades since 1990s. Financial liberalization and technological innovations have created new and complex financial instruments/products have increased their role and turnover in financial markets and have rendered banking operations vulnerable to a variety of risks. The financial crisis episodes surfaced since 2006 have highlighted this paradox to a number of central banks operating in different countries and RBI and Indian banking sector is no exception to this phenomenon. Basel framework has been drawn by Bank for International Settlements (BIS) in consultation with supervisory authorities of banking sector in fifteen emerging market countries with the basic objective of advocating codes of bank supervision and promoting financial stability amidst economic crises. This research paper is divided in three parts .The opening part attempts to briefly describe the changes in the banking scenario since 1991 reforms and the necessity of introducing Basel III to the Indian Banking sector. Part II presents the Basel standards framework and explains why the transition from Basel II to Basel III norms has become necessary to bring in measures and safety standards which would equip the banks to become more resilient...

Words: 5175 - Pages: 21

Free Essay

Capital Adequacy

...Analysing the strengths, weaknesses and effects of Capital adequacy, moral hazard and banking operations using current financial regulations in the UK. Basel 3 After the recent global financial crisis, the Basel Committee on Banking Supervision (BCBS) decided to revise its previous Basel Accords and reform it; resulting in the implementation of Basel III. Basel I was considered extremely simple in its application and relatively easy to reduce capital with very little risk, through off-balance sheet activities therefore reducing the value of capital the bank required. There was poor management of the risk taken by banks and the guidelines were subject to “regulatory arbitrage, this is where banks keep on their books assets that have the same risk-based capital requirements but are quite risky i.e loans to companies with high credit ratings.” /\ /\ /\ BOOK Basel II although was more risk sensitive through its use of three pillars; which were minimum capital requirements, supervisory review and market discipline, it wasn’t adequate enough to prevent the global financial crisis. The first pillar sets capital requirements against the risks; credit risk, market risk, and operational risk. The second pillar allows supervisors to review the banks performance and activities and thus decide whether they require holding more capital than what was calculated within pillar one. The third pillar motivates banks to manage their risks sensibly through increasing the banks transparency...

Words: 678 - Pages: 3