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An Insider’s Perspective on the Basel Capital and Liquidity Reforms Marc Saidenberg Federal Reserve Bank of New York. The views expressed here are my own and do not necessarily represent the views of the Federal Reserve Bank of New York or the Federal Reserve System. Background and Objectives.
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The views expressed here are my own and do not necessarily represent the views of the Federal Reserve Bank of New York or the Federal Reserve System
Basel Committee developed conceptual definitions to guide calibration efforts
Minimum requirement: the amount of capital needed to be regarded as a viable, going-concern in the market
Capital Conservation Buffer: an amount of capital sufficient to withstand a systemically stressful period and remain above minimum regulatory capital requirements
Conceptual definitions are informative, but they cannot be directly observed (particularly the minimum)Calibrating Capital Requirements (cont.)
Examined historical distribution of earnings relative to RWA for large banks
Key assumption is that a high percentile loss realization is good proxy for market viability test in an ex ante, unconditional way
Return on Risk-weighted Assets (RORWA)
Data from seven countries
Estimated negative tail of the distributions (99th to 99.9th percentile) over different horizonsEmpirical Strategy: Regulatory Minimum
Look at historical episodes of systemic stress in the banking industry and see how much banks lost
Losses (negative net income) in the recent crisis and in past historical crises, U.S. and abroad
Also examine 2009 stress tests results for eight countries
Includes U.S. SCAP resultsEmpirical Strategy: Capital Conservation Buffer
4% to 6% of RWA
Capital conservation buffer results across approaches and samples:
3% to 7% of RWA -- results for some individual banks much bigger
Empirical analysis based on Basel 1 and Basel 2 measures of RWA needs to be “translated” into Basel 3
Minimum: 4% - 6% Basel 1 4.5% Basel 3
Buffer: 3% - 7% Basel 1 2.5% (capital conservation) + max 2.5% (countercyclical) Basel 3
Calibration supported by Quantitative Impact Study (QIS) and analysis of long-run and transitional economic costs and benefits associated with higher capital standardsSummary of Capital Calibration Analysis