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8/2/2019 Basel in Banking Sector
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Definition of 'Basel I'A set of international banking regulations put forth by the Basel Committee on Bank Supervision,which set out the minimum capital requirements of financial institutions with the goal of minimizingcredit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of
capital based on a percent of risk-weighted assets. Investopedia explains 'Basel I'The first accord was the Basel I. It was issued in 1988 and focused mainly on credit risk by creating a
bank asset classification system. This classification system grouped a bank's assets into five
risk categories:
0% - cash, central bank and government debt and any OECD government debt
0%, 10%, 20% or 50% - public sector debt
20% - development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt
(under one year maturity) and non-OECD public sector debt, cash in collection
50% - residential mortgages
100% - private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and
equipment, capital instruments issued at other banks
The bank must maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted assets. For
example, if a bank has risk-weighted assets of $100 million, it is required to maintain capital of at
least $8 million.
How Basel 1 Affected Banks
From 1965 to 1981 there were about eight bank failures (or bankruptcies) in the United States. Bank
failures were particularly prominent during the '80s, a time which is usually referred to as the "savings
and loan crisis." Banks throughout the world were lending extensively, while countries' external
indebtedness was growing at an unsustainable rate. (For related reading, seeAnalyzing A Bank's
Financial Statements.)
As a result, the potential for the bankruptcy of the major international banks because grew as a result
of low security. In order to prevent this risk, theBasel Committee on Banking Supervision, comprised
of central banks and supervisory authorities of 10 countries, met in 1987 in Basel, Switzerland.
The committee drafted a first document to set up an international 'minimum' amount of capital thatbanks should hold. This minimum is a percentage of the total capital of a bank, which is also called the
minimum risk-based capital adequacy. In 1988, theBasel I Capital Accord(agreement) was created.
TheBasel II Capital Accordfollows as an extension of the former, and was implemented in 2007. In
this article, we'll take a look at Basel I and how it impacted the banking industry.
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The Purpose of Basel I
In 1988, the Basel I Capital Accord was created. The general purpose was to:
1. Strengthen the stability of international banking system.
2. Set up a fair and a consistent international banking system in order to decrease competitive
inequality among international banks.
The basic achievement of Basel I has been to define bank capital and the so-called bankcapital ratio.
In order to set up a minimum risk-based capital adequacy applying to all banks and governments in
the world, a general definition of capital was required. Indeed, before this international agreement,
there was no single definition of bank capital. The first step of the agreement was thus to define it.
Two-Tiered Capital
Basil I defines capital based on two tiers:
1. Tier 1 (Core Capital):Tier 1 capitalincludes stock issues (or share holders equity) and declared
reserves, such asloan loss reservesset aside to cushion future losses or for smoothing out income
variations.
2. Tier 2 (Supplementary Capital):Tier 2 capitalincludes all other capital such as gains on investment
assets, long-term debt with maturity greater than five years and hidden reserves (i.e. excess
allowance for losses on loans and leases). However, short-term unsecured debts (or debts without
guarantees), are not included in the definition of capital.
Credit Risk is defined as therisk weighted asset(RWA) of the bank, which are banks assets weighted
in relation to their relativecredit risklevels. According to Basel I, the total capital should represent at
least 8% of the bank's credit risk (RWA). In addition, the Basel agreement identifies three types of
credit risks:
The on-balance sheet risk (see Figure 1 for example).
The tradingoff-balance sheetrisk. These arederivatives, namely interest rates,foreign exchange,
equity derivatives andcommodities.
The non-trading off-balance sheet risk. These include general guarantees, such as forward purchase of
assets or transaction-related debt assets.
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RBCC - Breakout Gains!
Let's take a look at some calculations related to RWA and capital requirement. Figure 1 displays
predefined categories of on-balance sheet exposures, such as vulnerability to loss from an unexpected
event, weighted according to four relative risk categories.
Figure 1: Basel's Classification of risk weights of on-balance sheet assets
As shown in Figure 2, there is anunsecured loanof $1,000 to a non-bank, which requires a risk
weight of 100%. The RWA is therefore calculated as RWA=$1,000 100%=$1,000. By using Formula
2, a minimum 8% capital requirement gives 8% RWA=8% $1,000=$80. In other words, the total
capital holding of the firm must be $80 related to the unsecured loan of $1,000. Calculation under
different risk weights for different types of assets are also presented in Table 2.
Figure 2: Calculation of RWA and capital requirement on-balance sheet assets
Market riskincludes general market risk and specific risk. The general market risk refers to changes in
the market values due to large market movements. Specific risk refers to changes in the value of an
individual asset due to factors related to the issuer of the security. There are four types of economic
variables that generate market risk. These are interest rates, foreign exchanges, equities and
commodities. The market risk can be calculated in two different manners: either with the
standardized Basel model or with internalvalue at risk(VaR) models of the banks. These internal
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models can only be used by the largest banks that satisfy qualitative and quantitative standards
imposed by the Basel agreement. Moreover, the 1996 revision also adds the possibility of a third tier
for the total capital, which includes short-term unsecured debts. This is at the discretion of thecentral
banks. (For related reading, seeGet To Know The Central BanksandWhat Are Central Banks?)
Pitfalls of Basel I
Basel I Capital Accord has been criticized on several grounds. The main criticisms include the
following:
Limited differentiation of credit risk
There are four broad risk weightings (0%, 20%, 50% and 100%), as shown in Figure1, based on an
8% minimum capital ratio.
Static measure of default risk
The assumption that a minimum 8% capital ratio is sufficient to protect banks from failure does not
take into account the changing nature ofdefault risk.
No recognition of term-structure of credit risk
The capital charges are set at the same level regardless of the maturity of a credit exposure.
Simplified calculation of potential future counterparty risk
The current capital requirements ignore the different level of risks associated with different currencies
andmacroeconomicrisk. In other words, it assumes a common market to all actors, which is not true
in reality.
Lack of recognition of portfolio diversification effects
In reality, the sum of individual risk exposures is not the same as the risk reduction through
portfoliodiversification. Therefore, summing all risks might provide incorrect judgment of risk. A
remedy would be to create an internal credit risk model - for example, one similar to the model as
developed by the bank to calculate market risk. This remark is also valid for all other weaknesses.
Advertisment - Article continues below.
These listed criticisms have led to the creation of a new Basel Capital Accord, known as Basel II, which
added operational risk and also defined new calculations of credit risk. Operational risk is the risk of
loss arising from human error or management failure. Basel II Capital Accord was implemented in
2007.
Conclusion
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The Basel I Capital Accord aimed to assess capital in relation to credit risk, or the risk that a loss will
occur if a party does not fulfill its obligations. It launched the trend toward increasing risk modeling
research; however, its over-simplified calculations, and classifications have simultaneously called for
its disappearance, paving the way for the Basel II Capital Accord and further agreements as the
symbol of the continuous refinement of risk and capital. Nevertheless, Basel I, as the first
international instrument assessing the importance of risk in relation to capital, will remain a milestone
in the finance and banking history.
BASEL III is a global regulatory standard on bankcapital adequacy,stress testingandmarket
liquidityriskagreed upon by the members of theBasel Committee on Banking Supervisionin 2010-11.[1]
This, the third of theBasel Accords(seeBasel I,Basel II) was developed in response to the deficiencies
in financial regulation revealed by thelate-2000s financial crisis. Basel III strengthens bankcapital
requirementsand introduces new regulatory requirements onbank liquidityandbank leverage. For
instance, the change in the calculation of loan risk in Basel II which some consider a causal factor in the
credit bubble prior to the 2007-8 collapse: in Basel II one of the principal factors of financial risk
management was out-sourced to companies that were not subject to supervision: credit rating agencies.
Ratings of creditworthiness and of bonds, financial bundles and various other financial instruments were
conducted without supervision by official agencies, leading to AAA ratings onmortage-backed
securities,credit default swapsand other instruments that proved in practice to be extremely bad credit
risks. In Basel III a more formalscenario analysisis applied (three official scenarios from regulators, with
ratings agencies and firms urged to apply more extreme ones).
TheOECDestimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to
0.15 percentage point.[2][3]
. Outside the banking industry itself, criticism was muted. Bank directors would
be required to knowmarket liquidityconditions for major asset holdings, to strengthen accountability for
any major losses.
Contents
[hide]
1 Overview
2 Summary of proposed changes
o 2.1 US implementation
3 Macroeconomic Impact of Basel III
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4 Key dates
o 4.1 Capital Requirements
o 4.2 Leverage Ratio
o
4.3 Liquidity Requirements5 Studies on Basel III
6 See also
7 References
8 External links
[edit]Overview
Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I
capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital
buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer,
which allows national regulators to require up to another 2.5% of capital during periods of high credit
growth. In addition, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios.
The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total
net cash outflows over 30 days; the Net Stable Funding Ratio requires the available amount of stable
funding to exceed the required amount of stable funding over a one-year period of extended stress.[4]
[edit]Summary of proposed changes
First, the quality, consistency, and transparency of the capital base will be raised.
Tier 1 capital: the predominant form of Tier 1 capital must be common shares and retained
earnings
Tier 2 capitalinstruments will be harmonised
Tier 3 capital will be eliminated.[5]
Second, the risk coverage of the capital framework will be strengthened.
Promote more integrated management of market and counterparty credit risk
Add the CVA (credit valuation adjustment)-risk due to deterioration in counterparty's credit rating
Strengthen the capital requirements for counterpartycredit exposures arising from banks
derivatives, repo andsecurities financingtransactions
Raise the capital buffers backing these exposures
Reduceprocyclicalityand
Provide additional incentives to moveOTC derivative contractsto central counterparties
(probablyclearing houses)
http://en.wikipedia.org/wiki/Basel_III#Macroeconomic_Impact_of_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Key_dateshttp://en.wikipedia.org/wiki/Basel_III#Key_dateshttp://en.wikipedia.org/wiki/Basel_III#Capital_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Capital_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Leverage_Ratiohttp://en.wikipedia.org/wiki/Basel_III#Leverage_Ratiohttp://en.wikipedia.org/wiki/Basel_III#Liquidity_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Liquidity_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Studies_on_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Studies_on_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#See_alsohttp://en.wikipedia.org/wiki/Basel_III#See_alsohttp://en.wikipedia.org/wiki/Basel_III#Referenceshttp://en.wikipedia.org/wiki/Basel_III#Referenceshttp://en.wikipedia.org/wiki/Basel_III#External_linkshttp://en.wikipedia.org/wiki/Basel_III#External_linkshttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=1http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=1http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=1http://en.wikipedia.org/wiki/Basel_III#cite_note-3http://en.wikipedia.org/wiki/Basel_III#cite_note-3http://en.wikipedia.org/wiki/Basel_III#cite_note-3http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=2http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=2http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=2http://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/wiki/Tier_2_capitalhttp://en.wikipedia.org/wiki/Tier_2_capitalhttp://en.wikipedia.org/wiki/Basel_III#cite_note-4http://en.wikipedia.org/wiki/Basel_III#cite_note-4http://en.wikipedia.org/wiki/Basel_III#cite_note-4http://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Security_(finance)#Collateralhttp://en.wikipedia.org/wiki/Security_(finance)#Collateralhttp://en.wikipedia.org/wiki/Security_(finance)#Collateralhttp://en.wikipedia.org/wiki/Procyclicality#Meaning_in_policy_makinghttp://en.wikipedia.org/wiki/Procyclicality#Meaning_in_policy_makinghttp://en.wikipedia.org/wiki/Procyclicality#Meaning_in_policy_makinghttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Procyclicality#Meaning_in_policy_makinghttp://en.wikipedia.org/wiki/Security_(finance)#Collateralhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Basel_III#cite_note-4http://en.wikipedia.org/wiki/Tier_2_capitalhttp://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=2http://en.wikipedia.org/wiki/Basel_III#cite_note-3http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=1http://en.wikipedia.org/wiki/Basel_III#External_linkshttp://en.wikipedia.org/wiki/Basel_III#Referenceshttp://en.wikipedia.org/wiki/Basel_III#See_alsohttp://en.wikipedia.org/wiki/Basel_III#Studies_on_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Liquidity_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Leverage_Ratiohttp://en.wikipedia.org/wiki/Basel_III#Capital_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Key_dates8/2/2019 Basel in Banking Sector
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Provide incentives to strengthen therisk managementof counterparty credit exposures
Raise counterparty credit risk management standards by including wrong-way risk
Third, the Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-
based framework.
The Committee therefore is introducing a leverage ratio requirement that is intended to achieve
the following objectives:
Put a floor under the build-up ofleveragein the banking sector
Introduce additional safeguards againstmodel riskandmeasurement errorby
supplementing the risk based measure with a simpler measure that is based on gross
exposures.
Fourth, the Committee is introducing a series of measures to promote the build up of capital buffers in
good times that can be drawn upon in periods of stress ("Reducing procyclicality and promoting
countercyclical buffers").
The Committee is introducing a series of measures to address procyclicality:
Dampen any excess cyclicality of the minimum capital requirement;
Promote more forward looking provisions;
Conserve capital to build buffers at individual banks and the banking sector that can be used
in stress; and
Achieve the broadermacroprudentialgoal of protecting the banking sector from periods of
excess credit growth.
Requirement to use long term data horizons to estimate probabilities of default,
downturn loss-given-defaultestimates, recommended in Basel II, to become mandatory
Improvedcalibration of the risk functions, which convert loss estimates into regulatory capital
requirements.
Banks must conductstress teststhat include wideningcredit spreadsin recessionary
scenarios.
Promoting stronger provisioning practices (forward looking provisioning):
Advocating a change in the accounting standards towards an expected loss (EL) approach
(usually, EL amount:=LGD*PD*EAD).[6]
Fifth, the Committee is introducing a global minimum liquidity standard for internationally active banks
that includes a 30-day liquidity coverage ratio requirement underpinned by a longer-term structural
liquidity ratio called theNet Stable Funding Ratio. (In January 2012, the oversight panel of the Basel
Committee on Banking Supervision issued a statement saying that regulators will allow banks to dip
below their required liquidity levels, the liquidity coverage ratio, during periods of stress.[7]
)
http://en.wikipedia.org/wiki/Risk_management#Areas_of_risk_managementhttp://en.wikipedia.org/wiki/Risk_management#Areas_of_risk_managementhttp://en.wikipedia.org/wiki/Risk_management#Areas_of_risk_managementhttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Model_riskhttp://en.wikipedia.org/wiki/Model_riskhttp://en.wikipedia.org/wiki/Model_riskhttp://en.wikipedia.org/wiki/Sampling_errorhttp://en.wikipedia.org/wiki/Sampling_errorhttp://en.wikipedia.org/wiki/Sampling_errorhttp://en.wikipedia.org/wiki/Macroprudentialhttp://en.wikipedia.org/wiki/Macroprudentialhttp://en.wikipedia.org/wiki/Macroprudentialhttp://en.wikipedia.org/wiki/Loss_given_default#Downturn_LGDhttp://en.wikipedia.org/wiki/Loss_given_default#Downturn_LGDhttp://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis#Inconsistent_capital_requirements_and_risk_classificationhttp://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis#Inconsistent_capital_requirements_and_risk_classificationhttp://en.wikipedia.org/wiki/Stress_testing#Financial_sectorhttp://en.wikipedia.org/wiki/Stress_testing#Financial_sectorhttp://en.wikipedia.org/wiki/Stress_testing#Financial_sectorhttp://en.wikipedia.org/wiki/Credit_spread_(bond)http://en.wikipedia.org/wiki/Credit_spread_(bond)http://en.wikipedia.org/wiki/Credit_spread_(bond)http://en.wikipedia.org/wiki/Loss_given_defaulthttp://en.wikipedia.org/wiki/Loss_given_defaulthttp://en.wikipedia.org/wiki/Probability_of_defaulthttp://en.wikipedia.org/wiki/Probability_of_defaulthttp://en.wikipedia.org/wiki/Exposure_at_defaulthttp://en.wikipedia.org/wiki/Exposure_at_defaulthttp://en.wikipedia.org/wiki/Exposure_at_defaulthttp://en.wikipedia.org/wiki/Basel_III#cite_note-5http://en.wikipedia.org/wiki/Basel_III#cite_note-5http://en.wikipedia.org/wiki/Basel_III#cite_note-5http://en.wikipedia.org/wiki/Net_Stable_Funding_Ratiohttp://en.wikipedia.org/wiki/Net_Stable_Funding_Ratiohttp://en.wikipedia.org/wiki/Net_Stable_Funding_Ratiohttp://en.wikipedia.org/wiki/Basel_III#cite_note-6http://en.wikipedia.org/wiki/Basel_III#cite_note-6http://en.wikipedia.org/wiki/Basel_III#cite_note-6http://en.wikipedia.org/wiki/Basel_III#cite_note-6http://en.wikipedia.org/wiki/Net_Stable_Funding_Ratiohttp://en.wikipedia.org/wiki/Basel_III#cite_note-5http://en.wikipedia.org/wiki/Exposure_at_defaulthttp://en.wikipedia.org/wiki/Probability_of_defaulthttp://en.wikipedia.org/wiki/Loss_given_defaulthttp://en.wikipedia.org/wiki/Credit_spread_(bond)http://en.wikipedia.org/wiki/Stress_testing#Financial_sectorhttp://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis#Inconsistent_capital_requirements_and_risk_classificationhttp://en.wikipedia.org/wiki/Loss_given_default#Downturn_LGDhttp://en.wikipedia.org/wiki/Macroprudentialhttp://en.wikipedia.org/wiki/Sampling_errorhttp://en.wikipedia.org/wiki/Model_riskhttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Risk_management#Areas_of_risk_management8/2/2019 Basel in Banking Sector
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The Committee also is reviewing the need for additional capital, liquidity or other supervisory
measures to reduce theexternalitiescreated bysystemically importantinstitutions.
As on Sept 2010, Proposed Basel III norms ask for ratios as: 7-9.5%(4.5% +2.5%(conservation buffer) +
0-2.5%(seasonal buffer)) for Common equity and 8.5-11% for tier 1 cap and 10.5 to 13 for total
capital (Proposed Basel III Guidelines: A Credit Positive for Indian Banks)'
[edit]US implementation
The USFederal Reserveannounced in December 2011 that it would implement substantially all of the
Basel III rules.[1]. It summarized them as follows[2], and made clear they would apply not only to banks
but to all institutions with more than US$50 billion in assets:
"Risk-based capital and leverage requirements" including firstannual capital plans, conductstress
tests, andcapital adequacy"including a tier onecommon risk-based capital ratiogreater than 5
percent, under both expected and stressed conditions" - seescenario analysison this. Arisk-based
capital surcharge
Market liquidity, first based on the US's own "interagency liquidity risk-management guidanceissued
in March 2010" that requireliquidity stress testsand set internal quantitative limits, later moving to a
full Basel III regime - see below.
TheFederal Reserve Boarditself would conduct tests annually "using three economic and financial
market scenarios." Institutions would be encouraged to use at least five scenarios reflecting
improbable events, and especially those considered impossible by management, but no standards
apply yet to extreme scenarios. Only a summary of the three official Fed scenarios "includingcompany-specific information, would be made public" but one or more internal company-run stress
tests must be run each year with summaries published.
Single-counterparty credit limitsto cut "credit exposureof a covered financial firm to a single
counterparty as a percentage of the firm's regulatory capital. Credit exposure between the largest
financial companies would be subject to a tighter limit."
"Early remediation requirements" to ensure that "financial weaknesses are addressed at an early
stage". One or more "triggers for remediation--such as capital levels, stress test results, and risk-
management weaknesses--in some cases calibrated to be forward-looking" would be proposed by
the Board in 2012. "Required actions would vary based on the severity of the situation, but could
include restrictions on growth, capital distributions, and executive compensation, as well as capital
raising or asset sales."
http://en.wikipedia.org/wiki/Externalitieshttp://en.wikipedia.org/wiki/Externalitieshttp://en.wikipedia.org/wiki/Externalitieshttp://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=3http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=3http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=3http://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Federal_Reservehttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htmhttp://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htmhttp://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htmhttp://en.wikipedia.org/w/index.php?title=Annual_capital_plan&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Annual_capital_plan&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Annual_capital_plan&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/w/index.php?title=Common_risk-based_capital_ratio&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Common_risk-based_capital_ratio&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Common_risk-based_capital_ratio&action=edit&redlink=1http://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/w/index.php?title=Interagency_liquidity_risk-management_guidance&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Interagency_liquidity_risk-management_guidance&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Interagency_liquidity_risk-management_guidance&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Liquidity_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Liquidity_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Liquidity_stress_test&action=edit&redlink=1http://en.wikipedia.org/wiki/Federal_Reserve_Boardhttp://en.wikipedia.org/wiki/Federal_Reserve_Boardhttp://en.wikipedia.org/wiki/Federal_Reserve_Boardhttp://en.wikipedia.org/w/index.php?title=Single-counterparty_credit_limit&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Single-counterparty_credit_limit&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Credit_exposure&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Credit_exposure&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Credit_exposure&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Credit_exposure&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Single-counterparty_credit_limit&action=edit&redlink=1http://en.wikipedia.org/wiki/Federal_Reserve_Boardhttp://en.wikipedia.org/w/index.php?title=Liquidity_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Interagency_liquidity_risk-management_guidance&action=edit&redlink=1http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/w/index.php?title=Common_risk-based_capital_ratio&action=edit&redlink=1http://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Annual_capital_plan&action=edit&redlink=1http://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htmhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=3http://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Externalities8/2/2019 Basel in Banking Sector
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It was unclear as of December 2011 how these rules would apply toinsurance,hedge fundsand other
large financial players. The announced intent was "to limit the dangers of big financial firms being heavily
intertwined"[3].
[edit]Macroeconomic Impact of Basel III
AnOECDstudy[2]
released on 17 February 2011, estimates that the medium-term impact of Basel III
implementation on GDP growth is in the range of 0.05 to 0.15 percentage point per year. Economic
output is mainly affected by an increase in bank lending spreads as banks pass a rise in bank funding
costs, due to higher capital requirements, to their customers. To meet the capital requirements effective in
2015 (4.5% for the common equity ratio, 6% for the Tier 1 capital ratio), banks are estimated to increase
their lending spreads on average by about 15 basis points. The capital requirements effective as of 2019
(7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by
about 50 basis points. The estimated effects on GDP growth assume no active response from monetary
policy. To the extent that monetary policy will no longer be constrained by the zero lower bound, the
Basel III impact on economic output could be offset by a reduction (or delayed increase) in monetary
policy rates by about 30 to 80 basis points.[8]
Basel III is an opportunity as well as a challenge for banks. It can provide a solid foundation for the next
developments in the banking sector, and it can ensure that past excesses are avoided. Basel III is
changing the way that banks address the management of risk and finance. The new regime seeks much
greater integration of the finance and risk management functions. This will probably drive the
convergence of the responsibilities of CFOs and CROs in delivering the strategic objectives of the
business. However, the adoption of a more rigorous regulatory stance might be hampered by a reliance
on multiple data silos and by a separation of powers between those who are responsible for finance and
those who manage risk. The new emphasis on risk management that is inherent in Basel III requires the
introduction or evolution of a risk management framework that is as robust as the existing finance
management infrastructures. As well as being a regulatory regime, Basel III in many ways provides a
framework for true enterprise risk management, which involves covering all risks to the business.[9]
[edit]Key dates
[edit]Capital Requirements
Date Milestone: Capital Requirement
2013 Minimum capital requirements: Start of the gradual phasing-in of the higher minimum capital requirements.
http://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Hedge_fundhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=4http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=4http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=4http://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Abstract:_Macroeconomic_Impact_of_Basel_III-7http://en.wikipedia.org/wiki/Basel_III#cite_note-Abstract:_Macroeconomic_Impact_of_Basel_III-7http://en.wikipedia.org/wiki/Basel_III#cite_note-Abstract:_Macroeconomic_Impact_of_Basel_III-7http://en.wikipedia.org/wiki/Basel_III#cite_note-Implementing_Basel_III_:_Challenges.2C_Options_.26_Opportunities-8http://en.wikipedia.org/wiki/Basel_III#cite_note-Implementing_Basel_III_:_Challenges.2C_Options_.26_Opportunities-8http://en.wikipedia.org/wiki/Basel_III#cite_note-Implementing_Basel_III_:_Challenges.2C_Options_.26_Opportunities-8http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=5http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=5http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=5http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=6http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=6http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=6http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=6http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=5http://en.wikipedia.org/wiki/Basel_III#cite_note-Implementing_Basel_III_:_Challenges.2C_Options_.26_Opportunities-8http://en.wikipedia.org/wiki/Basel_III#cite_note-Abstract:_Macroeconomic_Impact_of_Basel_III-7http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=4http://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Insurance8/2/2019 Basel in Banking Sector
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2015 Minimum capital requirements: Higher minimum capital requirements are fully implemented.
2016 Conservation buffer: Start of the gradual phasing-in of the conservation buffer.
2019 Conservation buffer: The conservation buffer is fully implemented.
[edit]Leverage Ratio
Date Milestone: Leverage Ratio
2011 Supervisory monitoring: Developing templates to track the leverage ratio and the underlying components.
2013Parallel run I: The leverage ratio and its components will be tracked by supervisors but not disclosed and not
mandatory.
2015 Parallel run II: The leverage ratio and its components will be tracked and disclosed but not mandatory.
2017Final adjustments: Based on the results of the parallel run period, any final adjustments to the leverage
ratio.
2018 Mandatory requirement: The leverage ratio will become a mandatory part of Basel III requirements.
[edit]Liquidity Requirements
Date Milestone: Liquidity Requirements
2011 Observation period: Developing templates and supervisory monitoring of the liquidity ratios.
2015 Introduction of the LCR: Introduction of the Liquidity Coverage Ratio (LCR).
2018 Introduction of the NSFR: Introduction of the Net Stable Funding Ratio (NSFR).
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[edit]Studies on Basel III
In addition to articles used for references (see References), this section lists links to recent high-quality
publicly-available studies on Basel III. This section may be updated frequently as Basel III is currently
under development.
Date Source Article Title / Link Comments
Dec
2011
OECD: Economics
Department
Systemically Important
Banks
OECD analysis on the failure of bank regulation and markets
to discipline systemically important banks.
Jun
2011
BNP Paribas:
Economic Research
Department
Basel III: no Achilles'
spear
BNP Paribas' Economic Research Department study on Basel
III.
Feb
2011
OECD: Economics
Department
Macroeconomic Impact
of Basel III OECD analysis on the macroeconomic impact of Basel III.
Jan
2011Moody's Analytics
Basel III New Capital and
Liquidity Standards
FAQs
Basel III standards, key elements of new regulations,
framework, and key implementation dates.
May
2010
OECD Journal:
Financial Market
Trends
Thinking Beyond Basel
IIIOECD study on Basel I, Basel II and III.
May
2010
Bloomberg
BusinessWeek
FDICs Bair Says Europe
Should Make Banks Hold
More Capital
Bair said regulators around the world need to work together
on the next round of capital standards for banks ... the next
round of international standards, known as Basel III, which
Bair said must meet very aggressive goals.
May
2010Reuters
FACTBOX-G20 progress
on financial regulation
Finance ministers from the G20 group of industrial and
emerging countries meet in Busan, Korea, on June 45 to
review pledges made in 2009 to strengthen regulation and
learn lessons from the financial crisis.
http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=9http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=9http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=9http://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://en.wikipedia.org/wiki/Moody%27s_Analyticshttp://en.wikipedia.org/wiki/Moody%27s_Analyticshttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://www.webcitation.org/5q4GU5WGwhttp://www.webcitation.org/5q4GU5WGwhttp://www.webcitation.org/5q4GU5WGwhttp://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5q4GU5WGwhttp://www.webcitation.org/5q4GU5WGwhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://en.wikipedia.org/wiki/Moody%27s_Analyticshttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit§ion=98/2/2019 Basel in Banking Sector
12/12
May
2010The Economist
The banks battle back
A behind-the-scenes
brawl over new capital
and liquidity rules
"The most important bit of reform is the international set of
rules known as Basel 3, which will govern the capital and
liquidity buffers banks carry. It is here that the most vicious
and least public skirmish between banks and their regulators
is taking place."
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