Basel III rules published - White & Case

More documents

Recommendations

Info

Basel III rules published (iii) Countercyclical capital buffer This additional buffer of up to 2.5% of common equity Tier 1 or other fully loss-absorbing capital will have to be built up in periods of rapid aggregate credit growth which, in the opinion of national authorities, aggravates system-wide risk. The countercyclical capital buffer can be released during a downturn and, if in effect, would be an extension of the capital conservation buffer. (iv) Additional requirements for systemically important financial institutions Systemically important financial institutions could be subject to additional requirements reflecting the greater risks to financial stability that their failure would present. Work on this will continue in 2011 and areas under consideration may include capital surcharges and the introduction of contingent capital or “bail-in” debt. (v) Leverage ratio A non-risk-weighted minimum leverage ratio of Tier 1 capital to total exposures (including on-balance sheet and off-balance sheet items) will be introduced to address concerns about leverage in the financial system and back up the risk-based requirements outlined above, which may be affected by modelling errors. A minimum ratio of 3% will be tested. Comparison of Basel II and proposed Basel III capital requirements The table below provides an overview of the differences between the Basel II and the proposed Basel III quantitative capital requirements. As a result of the revised qualitative capital standards the real impact of the proposed changes will be greater than these quantitative requirements might otherwise suggest. 2. Enhancing risk coverage The minimum common equity, Tier 1 and total capital requirements are calculated relative to risk-weighted assets. Under Basel III, risk-weighted assets will increase as a result of enhanced risk coverage in relation to capital market activities. Besides, Basel III aims to address certain concerns about the reliance on external credit ratings when determining risk-weights. Higher capital requirements for trading and securitisation activities In July 2009, the Basel Committee announced, among other things, higher capital requirements for trading and securitisation activities. The trading book reforms will, among other things, introduce new risk weights to better capture risks in trading portfolios. The securitisation reforms also include an increase in the risk-weighting of certain securitisations and resecuritisation exposures. Capital requirements for certain counterparty credit risk exposures Basel III will enhance capital requirements and risk management standards for counterparty credit risk exposures arising from derivatives, repos and securities financing activities. The aim is to reduce the risk of transmission of shocks between financial institutions whilst also creating incentives to move OTC derivative exposures to central counterparties and exchanges. The measures include, for example, the use of stressed inputs to determine capital requirements for counterparty credit default risk and a capital charge for mark-to-market losses associated with a deterioration in the credit worthiness of counterparties. External credit ratings in the Basel III framework Basel III contains measures in relation to the use of external credit ratings in the capital framework. Amongst other things, Basel III will incorporate elements of the International Organization of Securities Commissions’ (IOSCO) Code of Fundamentals for Credit Rating Agencies and require banks to carry out internal assessments of externally rated securitisation exposures. 2 Basel II Basel III Common Equity Tier 1 Capital Total Capital Common Equity Tier 1 Capital Total Capital Minimum requirements 2.0% 4.0% 8.0% 4.5% 6.0% 8.0% Additional capital conservation buffer Not applicable 2.5% Additional countercyclical buffer range Not applicable 0%-2.5% 2 Additional requirements for systemically important financial institutions Not applicable May be added to the other risk-weighted requirements Leverage ratio Not applicable May in effect add to the risk-weighted requirements 2 Common equity or other fully loss-absorbing capital
3. Introducing liquidity requirements A combination of (i) a minimum liquidity coverage ratio to enhance short-term cash flow resilience and (ii) a structural minimum net stable funding ratio to encourage banks to better match the liquidity profile of their assets and liabilities are to be introduced. Liquidity coverage ratio The liquidity coverage ratio is designed to promote short term liquidity resilience and compares the stock of high quality liquid assets held by a bank to its net cash outflows during a hypothetical 30-day severe stress scenario. The liquidity coverage ratio will be set at a minimum of 100%, requiring high quality liquid assets to fully cover the net cash outflows in such a scenario. The liquidity coverage ratio needs to be maintained at all times. High quality liquid assets need to meet certain criteria. Some assets, for example cash and central bank reserves that can be drawn down in times of stress, qualify in their entirety. Certain other assets can be taken into account up to a limit and subject to a haircut. Net cash outflows equal cash outflows minus cash inflows, where cash inflows are capped at 75% of outflows, thus limiting a bank’s reliance on anticipated inflows to meet the liquidity requirements. Weightings are given to different types of inflows and outflows to reflect the speed at which they are expected to become available or to be withdrawn in the stress scenario. Net stable funding ratio The net stable funding ratio aims to promote resilience over a longer term horizon and incentivise banks to fund their activities with more stable sources of funding on an ongoing basis. The ratio compares the longer term stable funding available to a bank to the stable funding it requires over a one year period of extended stress and will be set at a minimum of 100%, meaning that available stable funding will have to fully match required stable funding. The minimum net stable funding ratio needs to be met at all times. Stable funding includes that share of certain types of equity and debt finance which is expected to be reliably available over the one year stress scenario. How much stable funding is required depends on the liquidity risk profiles of an institution’s assets and off-balance sheet exposures. Weightings are assigned to such assets and exposures to reflect the amount of the item which supervisors believe should be supported by stable funding. 4. Timeline The higher capital requirements for trading and securitisation activities are expected to be implemented at the end of 2011. Other Basel III measures are to be phased in gradually from 1 January 2013, as set out in the table below: 2 2011 2012 2013 2014 2015 2016 2017 2018 As of 1 January 2019 Minimum common equity 2.0% 2.0% 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% Minimum Tier 1 capital 4.0% 4.0% 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0% Minimum total capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Capital conservation buffer 0.625% 1.25% 1.875% 2.50% Countercyclical buffer ≤ 0.625% ≤ 1.25 ≤ 1.875 ≤ 2.50% Leverage ratio Supervisory monitoring Initially set at 3% during observation period from 1 January 2013 to The plan is to migrate to 1 January 2017; any final adjustments in first half of 2017 Pillar 1 treatment on 1 January 2018 Capital instruments that Either excluded from 1 January 2013 or, if they meet certain criteria, phased out over 10 years no longer qualify as common equity starting with 2013 Capital instruments that Phased out over 10 years starting with 2013 (though existing public sector capital injections will no longer qualify as non-common equity Tier 1 capital or Tier 2 capital be grandfathered until 1 January 2018) Phase in of regulatory adjustments 20% 40% 60% 80% 100% 100% Liquidity coverage ratio (LCR) Observation period Minimum standard applies Net stable funding ratio (NFR) Observation period Minimum standard applies 2 See also Basel Committee on Banking Supervision, “Basel III: A global regulatory framework for more resilient banks and banking systems”, Annex 4, 16 December 2010, http://bis.org/publ/bcbs189.pdf. White & Case 3
Page 1: Insight: Regulatory January 2011 Ba

Basel III rules published - White & Case

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?