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1

The “Basel Process” and Recent Work to

Address Financial Stability Issues

World Bank/IMF/Federal Reserve Seminar for Senior

Bank Supervisors from Emerging Economies

Washington, DC

18 October 2010

Elizabeth Roberts

Director, FSI

(2)
(3)

3 March April May June July Aug Sept Oct Nov Jan

FSF Report: Enhancing Market & Institutional Resilience April 08 FSF Report: Follow-up Implementation Oct 08 G-20 Communiqué Nov 08 Summit on Financial Markets & World Economy

Nov 08 BCBS, Nov 08 Comprehensive Strategy to Address Lessons of Banking Crisis BCBS, April 08 Steps to Strengthen Resilience of Banking System Senior Supervisors Group:

Observations on Risk Management During Recent

Market Turbulence, Mar 08 President’s Working Group on Financial Markets, Mar 08 Public Sector BCBS CGFS:

Central Bank Operations Response to Financial Turmoil Jul 2008 BCBS, Jan 09 Enhancementsto the Basel II Framework -………. - Pillar 2 BCBS: Scaling for Complexityin Implementation of Pillar 2 BCBS, Jan 09 Principles for Sound

Stress Testing Practices & Supervision BCBS, Nov 08 Supervisory Guidance for Assessing Banks’ Financial Instruments Fair Value Practices BCBS, Sept 08 Principles for Sound Liquidity Risk Management & Supervision BCBS, Aug 08 Range of Practices & Issues in Economic Capital Modelling

(4)

Basel Committee

IAIS

IOSCO

(5)

For most issues, there are clear assignments

 The three standard-setters are very much in charge of

establishing globally accepted supervisory policies and practices

 The IMF (and to a lesser extent the World Bank) has

established itself as the international police force (FSAPs, ROSCs, etc)

 The Financial Stability Board is now the leading group for

giving guidance and direction to other interested parties, including the standard-setters

 Much of the work takes place at the BIS in Basel,

(6)

The BIS

 An international financial institution that fosters monetary

and financial cooperation globally

 A bank for central banks (no dealings with the public)

 A centre for economic and monetary research

(7)

The BIS

 The BIS is owned by 56 central banks

 The Board of Directors is comprised of the heads of the

G10 central banks plus China and Brazil

 Total assets of approximately $150 billion

 550 employees

 Headquarters in Basel

(8)

The BIS

 The BIS serves as the home to many international

committees

• Basel Committee on Banking Supervision

• Committee on Payment and Settlement Systems

• Committee on the Global Financial System

 Financial Stability Board

 International Association of Insurance Supervisors

 International Association of Deposit Insurers

(9)

The FSB

 An international body established to address financial

system vulnerabilities and to drive the development and implementation of strong regulatory, supervisory and other policies in the interest of financial stability

 Has a broad-based agenda for strengthening national

financial systems, as well as global stability

• Diagnosis of problems

• Policy development and coordination

(10)

The FSB

 Early work of the FSF related to the Asian financial crisis

and the LTCM debacle

 Focused on issues in developed financial centres

 Major change came with the onset of the financial crisis of

2007-09

 FSB launched in April 2009 as a successor to the FSF

• expanded membership

• broader mandate

(11)

FSB membership

 National financial authorities

• central banks

• supervisory authorities

• finance ministries

 International financial institutions

 International regulatory and supervisory groups

 Committees of central bank experts

(12)

What is the Basel Committee?

 Established in 1974 as a forum for international

cooperation in banking supervision (formerly within G10 countries and between G10 and non-G10 banking

supervisors)

 Quarterly meetings of the heads of supervision from

member countries

 Supported by numerous working groups and task forces

 Secretariat provided by the BIS

 Used to report to G10 central bank Governors – now to

(13)

Legal status of the Basel Committee

 No legally binding regulations

 Rather, the members have committed to implementing the

Basel standards in their respective countries

 No authority over non-member countries but viewed as

yardstick for banking supervisory standards globally

(14)

Types of work of the Basel Committee

 Exchanges of information

 Sound supervisory practices (recommended to members

and supervisory authorities around the world)

 Binding minimum standards (1988 Capital Accord,

(15)

One response to the crisis: broader membership

 In mid-2009, the Committee broadened its membership

• from 13 to 27 jurisdictions (24 to 44 organisations)

• G20 countries that were not on the Committee

• Hong Kong SAR and Singapore

 Committee’s governing body (GHoS) similarly expanded

(normally meets twice a year)

 Creation of Basel Consultative Group (meets two or three

(16)

Argentina India Saudi Arabia

Australia * Indonesia Singapore

Belgium * Italy South Africa

Brazil Japan * Spain

Canada * Korea * Sweden *

China * Luxembourg Switzerland *

France * Mexico * Turkey *

Germany * Netherlands United Kingdom *

(17)

Standards Implementation Group Policy Development Group Accounting Task Force Conceptual Framework Issues Subgroup Financial Instruments Practices Subgroup Audit Subgroup Validation Subgroup Operational Risk Subgroup Risk Management and Modelling Group

Research Task Force

Working Group on Liquidity

Definition of Capital Subgroup Basel II Capital Monitoring Group Trading Book Subgroup Basel II and Capital Workstreams G20 High Level Working Group Task Force on Supervisory Colleges

Task Force on Compensation

Task Force on Monitoring Standards and Procedures

(18)

What is the Basel Committee best known for?

 Most “famous” work to date are the three Cs:

• the Concordat

• the Core Principles for Effective Banking Supervision

(19)

The Concordat

 1975: the Basel Committee issued this document setting

out the basic responsibilities of “home” and “host” country supervisors

 Only five pages long!

 Basic premise: no foreign banking establishment should

escape supervision

 Responsibility for liquidity rests primarily with the host

supervisors

 Responsibility for capital adequacy rests primarily with the

home supervisor

(20)

The Concordat

 1983: the Concordat was revised to emphasise the need

for consolidated supervision

 1990: the Concordat was supplemented by

 1996: The Supervision of Cross-border Banking

 Many other documents published related to this critical

(21)

The Core Principles for Effective Banking

Supervision

 Issued in 1997 after a year-long multinational process

 1998 survey of over 100 countries regarding

implementation

 Ratified at 1998 Sydney ICBS – but needs more “meat”

 Expanded through the Core Principles Methodology

 Revised in 2006 and discussions now under way in the

(22)

What are the Core Principles?

 The Core Principles are a set of supervisory guidelines or

principles aimed at providing a general framework for

effective banking supervision. They are intended for G-10 as well as non-G-10 countries

 To be used as a reference document by national

supervisors and international institutions

 Contribution of the Basel Committee to the objective of

"strengthening supervisory standards in emerging and developing countries”

(23)

The Core Principles cover a broad range of

topics:

 Supervisory objectives and powers

 Permissible activities

 Licensing process

 Approval for changes in ownership and activities

 Prudential regulations and requirements

 Arrangements for ongoing banking supervision

 This is why they serve as the foundation for an effective

(24)

Objectives of IMF/World Bank assessments

 FSAPs, ROSCs

 Determine whether banking supervisors are able to

supervise the banking industry in an adequate and effective manner

 Propose a course of action to address identified

(25)

The Basel Capital Accord (Basel I)

 This multi-year project was finalised in 1988 with the

issuance of the paper International Convergence of

Capital Measurement and Capital Standards (Basel I)

 A common definition of capital and risk-weight categories

was agreed

 It represented the first time that a capital standard would

be applied across numerous countries

 Intended for the G10 countries but ultimately adopted by

virtually all major jurisdictions

 It was also the first time that the Committee had issued a

(26)

From Basel I to Basel II

 In the late 1990s, the Basel Committee, in recognition of

weaknesses in Basel I, began to develop a more risk-sensitive approach to capital adequacy calculations

 This included specific recognition of the need to hold

capital against operational risk (market risk had been added to Basel I in 1996)

 It also included two new pillars:

• the supervisory review process (Pillar 2)

(27)

From Basel I to Basel II

Tier 1 & Tier 2 (& Tier 3) Capital Credit Risk Risk-weighted assets measured by: Standardised Approach IRB approach - Foundation - Advanced or + 12.5 x + 12.5 x Market Risk

Capital charges measured by:

Operational Risk

Capital charges measured by:

- Basic Indicator Approach, or

- Standardised Approach, or

- Advanced Measurement Approaches

8 %

New elements in Basel II Major modifications in Basel II Same as in Basel I

- Standardised Approach or

- Internal Models Approach

(28)

Basel II structure

Standardised Internal Credit risk

Basic Standardised Advanced Operational risk Standardised Models Market risks Risk weighted assets Core

Capital SupplementaryCapital Definition of

capital Minimum capital

requirements Supervisory reviewprocess disciplineMarket Three

(29)

Pre-crisis problems

 Too little capital and much of it of questionable quality

 Excess market liquidity and the search for yield

 Weak governance and risk management

 Perverse incentives (salaries and bonuses)

 Poor underwriting and excessive risk taking

 System-wide risk and interconnections

 Deficiencies in regulation and supervision

 Perimeter of regulation insufficient

(30)

Originate-to-hold Originate-to-distribute

Raise retail deposits and grant loans which are held on B/S till they mature High customer focus

Originate/outsource loans and distribute through securitisation. Not retained on B/S - Incentives for credit risk assessment? Assets – Loans

Revenue – interest income Liabilities – retail deposits

Securities Fee income

Wholesale funding Credit origination, servicing and

monitoring performed by the same bank

Split up into several distinct activities performed by several separate entities

(31)

The age-old problem

 Lower capital higher returns for shareholders

 Lower capital smaller buffer to cover loan defaults and

investment losses

 Less liquidity (more maturity mismatches) higher

interest rate margins and profits

 Less liquidity higher bank exposure to sudden

withdrawals of deposits and difficulties rolling over debt

 Left to make the decision themselves, banks will typically

(32)

The age-old problem

 The recent financial crisis reminded us that:

• the upside of these risks belongs to shareholders and bank management

• but a significant portion of the downside risk is borne by society in general, most especially taxpayers

• “capitalize profits and nationalize losses”

• this is especially true for “too big to fail” institutions

 The size of a bank’s capital and liquidity cushions

(33)

Capital – Basel II’s role in the crisis

 Basel I was in effect during the build-up to the crisis

• limited scope (credit risk)

• limited risk sensitivity (limited risk weight categories)

• perverse incentives led to regulatory arbitrage

 Crisis has affirmed the need for a better capital framework

• improved risk management

• improved supervisory understanding of risk

(34)

Strengthening Basel II

 Not only more capital but higher quality capital

 Better risk coverage

• Failure to capture key risks amplified stress

• Enhanced treatments for:

• Trading book

• Off-balance sheet exposures

• Securitisations and external ratings

• Counterparty credit risk

 Address any excess cyclicality and promote

(35)

Strengthening Basel II

 In 2009 the Committee issued two important documents,

among others, in response to the recent financial crisis:

Enhancements to the Basel II framework, July 2009

(includes supplemental Pillar 2 guidance)

Strengthening the resilience of the banking sector

(36)

Risk management and market transparency

 Focus today is on “quantitative” measures

 But also significant enhancements to existing

requirements for risk management, corporate governance and market transparency already introduced by the Basel Committee

• Pillar 2 and Pillar 3 enhancements

• Various guidance (on stress testing, valuation,

(37)

Implementation issues

 Impact assessment started at the beginning of 2010

 Calibration to be completed by the end of 2010

 Phase-in certain reforms over time so as not to impede the

recovery of the real economy

 Implementation is crucial → Standards Implementation

Group

(38)
(39)

Basel III – what is it?

 Basel III is a comprehensive set of measures to strengthen

the regulation, supervision and risk management of the banking sector

 These measures aim to:

• improve the banking sector's ability to absorb shocks

arising from financial and economic stress, whatever the source

• improve risk management and governance

• strengthen banks' transparency and disclosures

 The reforms target:

• bank-level, or microprudential, supervision

(40)

What about Basel II?

 Basel II is NOT dead – nor is Basel I

• they continue to be viable capital standards

 Basel III does NOT replace Basel I or Basel II – rather it

supplements these two standards

(41)

Basel Committee’s reform package – broad

objectives

 Strengthen micro- and macroprudential frameworks

 Increase financial system’s ‘shock absorbers’

 Reduce channels of procyclicality

 Address externalities of systemically important firms

 Review perimeter and scope of regulation

(42)

Committee’s reform package – key elements

 Stronger capital framework

• increase significantly the quality of bank capital

• increase the coverage of bank capital

• increase the required level of bank capital

 Larger capital ‘buffers’ / reduced procyclicality

 Robust global liquidity standards

 Enhanced governance and risk management guidance

(43)

The process to develop Basel III

 July 2009: Enhancements to Basel II

 December 2009: proposals published for consultation

Strengthening the resilience of the banking sector

International framework for liquidity risk measurement,

standards and monitoring

• more than 300 comments received

 July 2010: agreement on the overall design of the capital

and liquidity reform package

 September 2010: agreement on the calibration of the new

rules and on the transitional arrangements

(44)

Stronger capital framework

(45)

Reminder: the components of a capital ratio

Capital

Credit risk + Market risk + Operational risk

>8%

 3 key components:

(46)

The components of a capital ratio

Capital

Credit risk + Market risk + Operational risk

(47)

 At least six sub-tiers in many jurisdictions:

• Common equity Tier 1

• Non-innovative tier 1

• Innovative Tier 1

• Upper Tier 2

• Lower Tier 2

• Tier 3

 Complicated system of maximums and minimums for

each element or group of elements

(48)

Erosion of the quality of capital

 Over the past decade or so, the quality of bank capital has

eroded

 Tier 1, which was intended to be the purest forms of

capital, was particularly weakened

 The financial crisis highlighted the fact that many Tier 2

capital instruments were actually debt

(49)

Common Debt

Preferred

Source-Viral V. Acharya, Irvind Gujral & Hyun Song Shin, Dividends and Bank Capital in the Financial Crisis of 2007-2009

• $1.76 trillion capital raised by above banks

• $1.64 trillion (93%) of capital raised was in the form of debt

(50)

Problems with existing definition of capital

 Common equity can be just 2% of RWAs

 Deductions not applied to common equity

• tangible common equity can be zero or even negative

 No harmonised list of deductions

 Weak transparency

 Global banking system entered the crisis with an

insufficient level and quality of capital:

(51)

Basel II vs Basel III

Standardised

Approach Ratings-basedInternal Approach Credit risk Basic Indicator Approach Standardised

Approach MeasurementAdvanced Approaches Operational

risk

Standardised

Approach ApproachModels Market

risks Risk weighted

assets

Core

Capital SupplementaryCapital Definition of

capital Minimum capital

requirements Supervisory reviewprocess disciplineMarket Three

(52)

 Objective:

• Raise quality, consistency and transparency of Tier 1

• Tighten definition of common equity (focus on

common shares and retained earnings)

• Limit what qualifies as Tier 1 capital (regulatory

adjustments such as deductions)

 Main driver of new definition: loss absorption capacity

 Inclusion based on clear principles

 Harmonised internationally and simplified

(53)

 Just three elements (much stricter definition)

• Common equity Tier 1 (predominant form of Tier 1)

• Tier 1 additional going concern capital

• Tier 2 (gone concern) capital

 No sub-categories of Tier 2

 Elimination of the Tier 3 category (no real impact)

 Minimum requirements established for common equity

Tier 1, Tier 1 and total capital

(54)

Open issues

 Role of contingent and convertible capital

 Gone concern capital

• Define entry criteria

• See consultative document “Proposal to ensure the

loss absorbency of regulatory capital at the point of

non-viability” published in August 2010

 Going concern capital

• BCBS reviewing possible role and use in the new

(55)

The components of a capital ratio

Capital

Credit risk + Market risk + Operational risk

(56)

Denominator – better risk coverage

 The financial crisis highlighted the fact that capital

requirements for certain transactions were much too low

• trading book exposures

• complex securitisation exposures, off-balance sheet

exposures (eg SIVs)

• counterparty credit risk

 The Committee increased the capital requirements for

many transactions in its July 2009 document

(57)

The components of a capital ratio

Capital

Credit risk + Market risk + Operational risk

(58)

Increase the required level of bank capital

 The capital adequacy ratio is being raised

• Minimum common equity requirement will be 4.5%

(as compared to the current 2%)

• A capital conservation buffer of 2.5% will be added

to the 4.5% to make a total requirement of 7% common equity to total risk-weighted assets

(59)

Capital conservation buffer

 Lesson from the crisis: banks were distributing earnings

even during stress periods

 Demonstrated the importance of building capital buffers

during good times in order to create a cushion

 These buffers should be capable of being drawn down

 Buffer range above the minimum capital requirement

established (2.5%)

 If bank’s capital levels fall within this buffer range,

constraints on the distribution of dividends, on bonuses and share buybacks (but not on the way the bank

(60)

Countercyclical buffer

 The Committee has endorsed the creation of a

counter-cyclical buffer that will increase the capital conservation buffer by up to an additional 2.5 percentage points during periods of excess credit growth

 This buffer will be imposed when a credit bubble has

given rise to the build-up of system-wide risk

 The buffer would be released when, in the judgement of

supervisors, it would help absorb losses in the banking system that pose a risk to financial stability

(61)

 Proposed capital conservation

buffer will establish a fixed range above the Tier 1 minimum capital requirement. When a bank’s Tier 1 ratio falls into this range it becomes subject to restrictions on

distributions

 Proposed countercyclical capital

buffer works by extending size of capital conservation buffer during periods of excess credit growth

The functioning of the capital buffers

Minimum requirements Conservation buffer Countercyclical buffer Restrictions on distributions

(62)

Calibration of the Capital Framework

Capital requirements and buffers (all numbers in percent) Common Equity (after deductions) Tier 1 capital Total capital Minimum 4.5 6.0 8.0 Conservation buffer 2.5 " "

Minimum plus buffer 7.0 8.5 10.5

Countercyclical buffer range

(63)

Leverage ratio

 Another lesson of the crisis: there are circumstances in

which risk-weighted capital ratios provide a misleading picture of banks’ overall health (the risk-weighting rules understate the actual risks, models are flawed, etc)

(64)

Leverage ratio: objectives

 Objectives:

• Supplement the risk-based framework with a simple

measure based on total assets plus off-balance sheet exposures (no risk-weighting involved)

• Introduce additional safeguards against model risk and

risk measurement error

• Contain build-up of leverage in the banking system

during boom periods

(65)

Leverage ratio: main features

 Supplementary measure to risk-based framework with a

view to migrating to a Pillar 1 treatment based on appropriate review and calibration.

 Calibration using QIS data to become a binding constraint

during periods of rapid credit expansion or when a bank seeks to take on excessive leverage

 Include off-balance-sheet items (eg credit card exposures)

and derivatives

 Harmonise internationally

• Reconcile differences across accounting regimes (IFRS vs US GAAP)

(66)

Leverage ratio: implementation

 The leverage ratio will be calculated as an average over

the quarter

 Agreement to have a long transition and an observation

phase:

• Supervisory monitoring from 1 January 2011

• Parallel run period from 1 January 2013 and until 1

January 2017

• Public disclosure at bank level from 1 January 2015

• Migration to Pillar 1 in 2018 (after appropriate review

(67)
(68)

The new global liquidity standard

 Currently no international liquidity standard

 Two global liquidity standards to be introduced

• Liquidity Coverage Ratio (LCR) – short-term

• Longer-term structural ratio: Net Stable Funding

Ratio (NSFR)

 Supplement the 2008 “Principles for sound liquidity

(69)

Liquidity coverage ratio (LCR)

 Promote short-term resilience by requiring sufficient

high-quality liquid assets to survive acute stress lasting for one month

 Stock of high quality liquid assets in relation to net cash

outflows over 30-day stress period should be at least 100%

(70)

Net stable funding ratio (NSFR)

 Lessons from the crisis: over-reliance on short-term

wholesale funding

 Promote resilience over longer term through incentives

for banks to fund activities with more stable sources of funding

(71)

Global liquidity standards

 Liquidity Coverage Ratio (short-term)

 Net Stable Funding Ratio (longer-term, structural)

Net cash outflows over a 30-day time period Stock of high quality liquid assets

≥ 100%

Required amount of stable funding (ie uses) Available amount of stable funding (ie sources)

(72)

Introduction of the new liquidity standard

 New set of standards requires careful approach

 LCR

• Observation period from 2011

• Introduction as a minimum standard in 2015

 NSFR

• Observation period from 2012

(73)
(74)

Enhanced corporate governance

 Simple fact: without sound corporate governance, capital

and other standards are a waste of time!

 Corporate governance issues are not always deemed

“important” because there is no math involved! (ie, economists can not model governance)

 The Basel Committee has been working on corporate

governance issues related to banks since the mid-1990s

 Most recent revision of the corporate governance paper

(75)

Enhanced corporate governance

 The Principles for Enhancing Corporate Governance

address many of the fundamental weaknesses in bank governance highlighted during the financial crisis

 Key areas covered:

• role of the board of directors

• the risk management function

• compensation issues

• “know your structure”

• the role of supervisors in promoting sound corporate

(76)

Enhanced risk management

 Use Pillar 2 to strengthen risk management (July 2009)

• Firm-wide governance and risk management

• Compensation and incentive practices

• Securitization and off-balance sheet risks

• Reputational risk

 Valuation practices (April 2009)

 Stress testing principles (May 2009)

(77)

Better cross-border bank resolution

frameworks

(78)

Cross-border bank resolution

 Promote more orderly resolution, reduce systemic risk

 Help address ‘too big to fail’ problem

 Current arrangements not designed for cross-border crises

 Ten recommendations, including:

• Strengthen national resolution powers

• Improve firm-specific contingency planning

(79)

Greater emphasis on macroprudential

supervision

(80)

What do we mean by “macroprudential”

supervision?

 Definition of the macroprudential approach to regulation

and supervision: “ [The] use of prudential tools with the explicit objective of promoting the stability of the financial system as a whole, not necessarily of the individual

(81)

What do we mean by “macroprudential”

supervision?

 Two dimensions are important:

• Time dimension: how aggregate risk evolves over time

Focus on the procyclicality of the financial system

• Cross-sectional: how aggregate risk is distributed

across the financial system at a point in time

Focus on common exposures and inter-linkages,

(82)

Addressing procyclicality

 Make the banking sector a shock absorber as opposed to

a shock amplifier

 Self-reinforcing mechanisms within the financial system

and between the financial system and the real economy can exacerbate boom-bust cycles

• Most prominent in downward phase

• Most critical (but hidden) in expansion phase: credit

(83)

The current Basel Committee approach to

addressing procyclicality

 Dampen any excess cyclicality of the minimum capital

requirement

Capital conservation buffer: conserve capital to build

buffers at individual banks and the banking sector that can be used in stress

Countercyclical buffer: achieve the broader

macroprudential goal of protecting the banking sector from periods of excess credit growth

(84)

Countercyclical capital buffer proposal:

objective

 Primary objective : Protect banking sector from periods of

excess aggregate credit growth often associated with build-up of system-wide risk

 Aim is for banking sector in aggregate to have capital on

hand to help maintain flow of credit during periods of system-wide stress

 During times of expansion, potential moderating effect on

(85)

Countercyclical capital buffer proposal

 Each jurisdiction responsible for calculating countercyclical

capital buffer applicable to all credit exposures in its jurisdiction

• Methodology developed to assist authorities for taking

buffer decisions (credit-to-GDP guide)

 Buffer subject to an upper bound (to be determined –

calibration)

 Home-host issue important and still under consideration by

the BCBS

(86)

Countercyclical capital buffer proposal

 If capital falls within extended buffer range, a bank would

have twelve months to get its capital above top of range before capital conservation buffer restrictions come into effect

 Proposal published in July 2010 – rules finalised by

(87)

Systemically important institutions

 Expose financial system and real economy to significant

risk → need to address “too big to fail” issues

 Key challenge: measuring systemic importance

 Basel Committee coordinating work with FSB

 Factors to consider

• Size (balance sheet, market share, …)

• Substitutability (can others provide the same service)

• Interconnectedness (linkages with other institutions)

 Policy options include surcharge (capital, liquidity), more

intense supervision, ‘living wills’ / orderly process for winding up

(88)
(89)

Allow sufficient time for a smooth transition

 The timetable for implementing the new standards is very

generous

 This recognises the need for banks to raise capital and

retain earnings in order to meet the new requirements

 It also highlights the Basel Committee’s commitment to

(90)

Transition to the new regime

 Basel III: a substantial strengthening of existing

requirements

 Transition arrangements to enable banks to meet the new

standards while supporting the economic recovery

 Transition arrangements :

• From 2013 to 2018

(91)

2011 2012 2013 2014 2015 2016 2017 2018 As of 1 January

2019

Leverage Ratio Supervisory monitoring

Parallel run 1 Jan 2013 – 1 Jan 2017 Disclosure starts 1 Jan 2015

Migration to Pillar 1

Minimum Common Equity Capital Ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5%

Capital Conservation Buffer 0.625% 1.25% 1.875% 2.50%

Minimum common equity plus capital

conservation buffer 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0%

Phase-in of deductions from CET1 (including amounts exceeding the limit for

DTAs, MSRs and financials ) 20% 40% 60% 80% 100% 100%

Minimum Tier 1 Capital 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%

Minimum Total Capital plus conservation

buffer 8.0% 8.0% 8.0% 8.625% 9.125% 9.875% 10.5%

Capital instruments that no longer qualify

as non-core Tier 1 capital or Tier 2 capital Phased out over 10 year horizon beginning 2013

Liquidity coverage ratio Observation period begins

Introduce minimum standard

Net stable funding ratio Observation period begins

Introduce minimum standard

(92)

Next steps

 Situation today:

• Overall design, content and calibration of “Basel III”

already decided and published

• Only a few open prudential issues left – details of some

rules to be finalised

 Next milestone: November G20 Leader Summit (Seoul)

(93)

Basel III conclusions

 Basel III: a comprehensive reform

• Capital requirements (minimum and buffers), leverage,

liquidity…

• Micro and macro-prudential components

 Main decisions taken – final and detailed text expected

later this year

 Significant strengthening of the regulation

• Banking system should be more resilient in the future

 Long transition period to avoid negative impact on the

(94)

More details on Basel III on the BIS

(95)

Other important work of the Basel Committee

Good Practice Principles on Supervisory Colleges

(October 2010)

Range of Methodologies for Risk and Performance

Alignment of Remuneration (October 2010)

Microfinance Activities and the Core Principles for

(96)

Other important work of the Basel Committee

 Preparing to revise the Core Principles for Effective

Banking Supervision to reflect the lessons learned

from the financial crisis

 Monitoring and providing input into work on revising

IAS 39 and other accounting issues relevant for banks

(97)

More details on other work of the Basel

Committee on the BIS website:

(98)

Some Reminders

 Banks need risk managers, not risk scientists.

 Profits that financial institutions don’t understand can

be more dangerous than losses they do understand.

 Off-balance sheet is often more important than

on-balance sheet.

 Contagion is a major force in a globalised and

securitised world.

 Capital is no substitute for liquidity and liquidity is no

(99)

99

Questions

Elizabeth Roberts

Director

Financial Stability Institute

Bank for International Settlements

elizabeth.roberts@bis.org

References

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