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Stefan Ingves, 10 November 2011
Basel III – regulations for
safer banking
Swedish Bankers’ Association
The banks are important to the economy
A motorway junction for the economy
Important, but risk of serious external effects
Financial crises have significant economic costs
…and, in a financial crisis, the bill for the taxpayers is considerable
Crises have permanent negative effects on growth…
Sources: The Riksbank, Independent Committee on Banking
Public sector net debt in the United Kingdom, 2001-2013
GDP
Time
Crisis
Trend
Post-crisis trend
GDP level
Conceptual sketch
Banks need a substantial amount of equity
Capital adequacy requirements in Basel III and Basel II
Basel II
4.5%
2.5%
1.5%
2%
Minimum requirement
Conservationbuffer
Contracyclical buffer0-2.5%
Additional Tier 1
Tier 2
9.5%
7%
CET 1
Basel III
2%
2%
4%
Additional Tier 1
CET 1 Tier 2
2%
4%
8%
Basel III sets up clear measures for liquidity
Liquidity in the short term Liquidity in the long term
Liquidity Coverage RatioLiquidity Coverage Ratio
High quality liquid assets
Net cash outflow over the coming 30 calender days
Net Stable Funding RatioNet Stable Funding Ratio
Available stable funding
Need for stable funding > 100% > 100%
Systemically-important banks need special regulation Almost 30 global
systemically-important banks (G-SIB)
Package for special resilience Framework for crisis
management Extra buffer of Common Equity
Tier 1 equal to 1-2.5 per cent of RWA
More intensive supervision
On the way – D-SIB
Indicators of Indicators of systemic importancesystemic importance
• Cross-jurisdictional activity
• Size
• Interconnectedness
• Substitutability
• Complexity
Features of the Swedish banking market Concentration
Size and international operations
Implicit state guarantees
Market funding and funding in foreign currencies
Liquidity
Risk weighting
The Swedish banking system is concentrated
Sources: OECD and World Bank
Swedish banks are large and internationally dependent
Bank assets in relation to GDP, June 2010
Sources: The ECB, the Swiss National Bank and the Riksbank
Implicit state guarantees
Source: Bloomberg
Five-year CDS for Danske Bank and Nordea 2010-2011, basis points
Large share of market funding in foreign currency
0
500
1 000
1 500
2 000
2 500
3 000
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Foreign currency SEK
The major Swedish banks’ market funding via Swedish parent companies and subsidiaries, 1998-2011 (quarter 1), SEK billions
Sources: Statistics Sweden and the Riksbank
Weaker liquidity position than others in Europe
Stable funding as share of illiquid assets, December 2010
Sources: Liquidatum and the Riksbank
Survival period in the Riksbank’s stressed scenario, months, December 2010
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SEB Handels-banken
Nordea Swedbank Mean,Europeanbanks
0,0
0,5
1,0
1,5
2,0
2,5
Swedbank Nordea Handels-banken
SEB Mean,European
banks
Swedish banks have low risk weightings
Risk weighting on mortgages according to Basel II, per cent
Sources: National central banks and the Riksbank, FSR 2011:1
0
10
20
30
40
50
60
Swed
en
Bel
giu
m
Finla
nd
Den
mar
k
Norw
ay
Gre
ece
Net
her
lands
Ger
man
y
Ital
y
Esto
nia
Lith
uan
ia
Spai
n
Hungar
y
Latv
ia
Slova
kia
Sweden has had bad experiences of low capital adequacy
Source: The Riksbank
Resilience is needed in uncertain times
Loan losses and provisions Loan losses and provisions 2007-20102007-2010
Example: Example: Similarly large loan losses Similarly large loan losses
in the next few years in the next few years
Common Equity Tier 1 Common Equity Tier 1 20102010
SEK 350 billion
45 per cent of Common Equity Tier 1
SEK 780 billion
Example: Rough estimate of loss aversion in 35 major European banks
350
780
Source: The Riksbank
Other countries with large banking industries have more stringent regulations than Basel III
Commission of Experts
•Progressive capital requirements•10 per cent equity •9 per cent contingent convertibles
Independent Commission on Banking
•Structural separation of retail and investment banking•Extra capital buffer for retail banks•Capital and bail-in bonds to total 17-20 per cent
Bank assets in relation to GDP, June 2010
The Riksbank sees a need for regulation in several areas
Capital adequacy Capital adequacy requirementsrequirements
Short-term liquidity Short-term liquidity and reserve and reserve
requirementsrequirements
Need to go beyond requirements of Basel III•Leverage ratio measure
Need for a floor
Need to be met on per-currency basis•ESRB recommendations
Risk weightingsRisk weightings
The Riksbank will clarify its recommendations soon
The Financial Stability Report 2011:2 will be
published on29 November