“Making Great Ideas Become Reality” Basel lll Summary
Basel lll BASELIII is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervisoion in 2010-11.This, the third of the Basel Accords which was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank 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 on mortgage-backed securities, credit default swaps and other instruments that proved in practice to be extremely bad credit risks. In Basel III a more formal scenario analysis is applied (three official scenarios from regulators, with ratings agencies and firms urged to apply more extreme ones).
Basel lll (cont) 3 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
Basel lll (cont) • Basel lll Main Features: • - Better quality capital, specifically common equity • More capital (e.g. 4.5% common equity, 6% tier 1 capital) • More risk coverage wrt capital computation • Countercyclical capital buffers • Stronger regulation and supervision • Strengthened pillar 2 requirements – Risk governance and management • Enhanced Pillar 3 disclosure • Leverage ratio • Enhanced liquidity requirements • Adjusted market risk framework • Macroprudential overlay • Procyclicality measures • Interlinkages and common exposures – consideration of entire system • Phased in over 5 years from 2013
Concerns Addressed in Basel lll 5 • Increased focus on trading book and securitizations • Focus on Counterparty Credit Risk • Increased Capital Buffers • Liquidity Risk main theme • Procyclicality addressed
How CMA can Help • At CMA we have some of the most experienced resources in the areas of risk, • capital and liquidity management. Our risk and compliance resources bring with • them their diverse background in industry regulation, consultancy, government • and academia. We have undertaken major engagements for financial sector • clients of all sizes and varieties across a broad spectrum of issues including: • impact analysis • model development and validation • capital and portfolio management • liquidity planning • governance, processes and frameworks • valuations • stress testing Our integrated approach is aimed at providing a tailored multi-dimensional service for our clients that meet their specific needs.
Services CMA can Provide • In general, CMAs’ role as a facilitator in the implementation of the Basel lll • framework could include (but is not restricted to): • Documentation, including policies and procedures • Migration Management - Incremental changes for additional regulatory requirements - Gap analysis • Capital Attribution - Attribution of risk capital to business units and risk centers - Determining trading diversification benefits • Capital Calculation - Market and credit risk capital for both Basel ll and Basel lll • Model Validation - Validation of clients internal models for market risk - Testing inputs. theory, back testing, testing of hypothetical portfolios • Data Aggregation - Incorporating relevant information from various systems into proper formats - Migration from manual Excel format to more reliable systems