Basel III, albeit delayed, is set to change the banking landscape. More capital and greater liquidity will change the way banks do business in the future. More interestingly, Basel III could well lead a change in the financial services landscape globally. A "Shadow Banking Sector" is already a reality and Basel III opens up significant opportunities for capital rich emerging market banks. This is a first in a series of presentations exploring Basel III, its impact on the global banking sector and most importantly possible response strategies banks could adopt to gain competitive advantage.

1. What is Basel III
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2. Evolution of Basel Requirements
Pillar II
Pillar I Pillar III Market
Liquidity Ratios Leverage Ratio Supervisory
Capital Ratios Discipline
Review
Capital RWA LCR NSFR
Tier 1 Tier 2
Credit Market Operational Concentration
(EU Large
Exposure)
Standard CCR BIA
Derivative
IRB F Exposure
Standard
IRB A CEM Standard VAR AMA
CVA Brand new with Basel III
Stress
EPE IMA Updated with Basel III
VAR
WWR Updated with Basel 2.5
Source: Moody’s Analytics
IRC No Change from Basel 2
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3. Basel 2.5 Changes
Objectives
• Strengthen Market Risk Framework –
capture key risks
The Changes
• Higher capital charge for market risk
• Regular VaR & Stressed VaR
• Incremental Risk Charge
• Securitisation Charge
• Comprehensive Risk Model (Structured
Credit)
Impact
• Significant increase in aggregated IV RWA
• Increase in Attributed Equity
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4. Key Elements of Basel III
Objectives
• Strengthen global capital and liquidity
rules to promote resilience
The Changes
• Higher Minimum Tier 1 Capital
Requirement
• New Capital Conservation Buffer
• Countercyclical Capital Buffer
• Higher Minimum Tier 1 Common Equity
Requirements
• Liquidity Standard
• Leverage Ratio
• Minimum Total Capital Ratio
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5. Basel III Requirements Explored
Basel III Objective Requirements
Raising quality, consistency & • Tier 1 – common shares and retained earnings
transparency of capital • Hybrid capital instruments phased out
• Tier 3 capital eliminated
• Deductions harmonised
Enhancing risk coverage • Stressed VaR capital requirements based on 12
month period of significant financial stress
• Higher capital for resecuritisation
• Strengthen Pillar 2 and Pillar 3
• Stressed counterparty credit risk capital req.
• CVA – capital charge for mark to market losses
• Strengthening collateral management – longer
margining period
• Move to central counterparty over OTC
• Treatment of wrong way risk & backtesting
Source: Basel Committee on Banking Supervision, Bank of International Settlements
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6. Basel III Requirements Explored
Basel III Objective Requirements
Supplementing risk based capital • Constrain leverage
requirement with leverage ratio • Non risk based backstop measure
Reducing procyclicality and • Dampen cyclicality of the minimum requirements
promoting countercyclical buffers • Long term data for PD and LGD
• Stress test considering downward migration of
credit portfolio in recession
• FSA – scalar converting outputs of underlying PD
models into through the cycle estimates
• Forward looking provisioning
• Capital conservation standards
• Excess credit growth
Source: Basel Committee on Banking Supervision, Bank of International Settlements
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7. Basel III Requirements Explored
Basel III Objective Requirements
Addressing systemic risk & • Move to central counterparties for OTC
interconnectedness • High req for trading, derivative, complex
securitization and off balance sheet activities
• High req for inter-financial sector exposures
• Liquidity requirements penalising excessive reliance
on short term, interbank funding to support long
dated assets
Source: Basel Committee on Banking Supervision, Bank of International Settlements
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8. Complex Phase In Arrangement
Source: Basel Committee on Banking Supervision, Bank of International Settlements
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9. How Far are Banks in
Implementation
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10. Basel III Implementation – Some take the
leads……
Germany
Pushes ahead Switzerland
EU To impose stricter
Final Rules delayed requirements to BIII
Japan
Weaker Rules to BIII Final rules published
– Weaker rules
UK
Proposing stricter
USA requirements Russia
Extend comment Implementing Basel
period for Basel II III in 2015
rules
Weaker rules to BIII
China
Early adoption of BIII Philippines
& higher capital Full implementation
Mexico by 2014 for systemic
First country in world India banks
to implement Basel III Brazil Final rules issued
(Sept 2012) Full implementation
Early adoption of
Higher capital req. Mar 2018- Higher
Basel III and higher
capital requirements capital requirements
to BIII
Australia
UAE Capital rules issues Mar
… creating a new world order and new Implement Basel III
earlier – LCR 2015
2012 & Liquidity rules Nov
2011. Implementation 2
arbitrage opportunities? years sooner
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11. Implementation Progress as at End May
2012
Basel II Basel 2.5 Basel III
• 21 of 27 implemented • 20 out of 27 countries • India, Japan & Saudi
Basel II have implemented Arabia – published final
• Indonesia & Russia – • Russia & US – issued Regs.
Pillar 1 implemented but draft Regs. on market • Europe – draft Directive
not Pillar 2 & 3 risk & Regs published – final
• Turkey – compliant by • US Regs modified in Dec Rules delayed to Oct
2012 2011 2012
• China – final Regs issued • Argentina, Indonesia, • Argentina, Hong
• USA – Parallel run – Mexico, Saudi Arabia & Kong, SAR, Indonesia, Ko
Basel 1 legal min Turkey – not rea, Russia, Turkey & US
implemented Basel 2.5 – not issued Draft Regs.
Source Report to G20 Leaders on Basel III Implementation.. Basel Committee on Banking Supervision, Bank of International Settlements. June 2012
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12. Is Basel III set to avert future crisis?
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13. What’s Missing
Financial
crisis on
Etc. etc. etc...
eave of Is more Capital the only
Basel III
Answer?
Libor Scandal
Failed Money
Laundering
Controls
Jamie Dimon, blamed
“errors, sloppiness and bad
judgment” for the loss.
RBS Systems Out
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14. Unintended Consequences
• Reduced lending & subsequent impact on economic growth
(covered above)
• Reduce appetite of investors to invest in banks – at a time when
capital most needed
• Inconsistent implementation – opening regulatory arbitrage
opportunities
• Incentives to move risks to “shadow banking sector”
• End of free banking?
• Increased cost of banking & loans
• ………..
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15. Appendix
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16. Level of Implementation
Main Countries Basel II Basel Basel III Notes
2.5
Belgium 4 4 2 Basel III Follow EU Process
France 4 4 2 Basel III Follow EU Process
Germany 4 4 2 Basel III Follow EU Process
Italy 4 4 2 Basel III Follow EU Process
Luxembourg 4 4 2 Basel III Follow EU Process
The Netherlands 4 4 2 Basel III Follow EU Process
Spain 4 4 2 Basel III Follow EU Process
Sweden 4 4,1 2 Basel 2.5 –
(4) Final rules for the Basel 2.5 agreement are in force.
(1) A new national ICAAP guideline is still under development.
Basel III Follow EU Process
United Kingdom 4 4 2 Basel III Follow EU Process
Key
Number and colour code: 1 = draft regulation not published; 2 = draft regulation published; 3 = final rule published; 4 = final rule in force. Green = implementation completed; Yellow
= implementation in process; Red = no implementation.
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17. Level of Implementation
Main Countries Basel II Basel Basel III Notes
2.5
Australia 4 4 2 Basel III - Draft rules for capital requirements issued on 30 March 2012.
Draft rules to implement liquidity requirements issued in November 2011 for
public consultation until 17 February 2012.
Brazil 4 4 2 Basel III - Draft regulation published for public consultation on 17 February 2012.
Canada 4 4 2 Basel III - On 1 February 2011, banks were directed to meet the 7% CET1 standard
as of January 2013.
Regulations for (i) non-viability contingent capital and (ii) transitioning for non-
qualifying instruments published August and October 2011 respectively.
Draft regulation for definition of capital and counterparty credit risk issued to
banks in March 2012.
Source: Basel Committee on Banking Supervision
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18. Level of Implementation
Main Countries Basel II Basel Basel III Notes
2.5
China 4 4 2 Supervisory guidelines released between 2007 and 2010 which will be integrated
into new capital regulation combining BII, B2.5 and BIII. Large banks submitted
application for advanced approaches currently assessed by CBRC.
Basel III - Draft regulation combines BII, B2.5 and BIII. Public consultation ended in
2011. Final rule expected to come into force in Q3 2012. Will be applied to all
banking institutions.
Hong Kong 4 4 1,3 Basel III - (3) Bill passed by the Legislative Council on 29 February 2012 and
published for the purpose of creating rule-making powers for the implementation
of Basel III.
(1) Industry consultation underway on policy proposals for inclusion in rules.
Consultation on draft text of rules scheduled for second half of 2012.
India 4 4 2 Basel III - Draft regulation released for comments on 30 December 2011.
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19. Level of Implementation
Main Countries Basel II Basel Basel III Notes
2.5
Japan 4 4 3 Basel III - Draft regulation published on 7 February 2012 – Final rules published on
30 March 2012
Russia 1, 4 1,2 1 Basel II - 1) Pillar 2 expected to be implemented not earlier than in 2014.
(4) Simplified standardised approach for credit risk, simplified approach for market
risk and the Basic Indicator Approach for operational risk implemented.
Basel 2.5
(1) Pillar 2 expected to be implemented not earlier than in 2014.
(2) Final regulation (revision to the simplified approach for market risk) expected
shortly - regulation expected to come into force during Q2 2012.
Basel III - Draft regulations under development.
Saudi Arabia 4 3 3 Basel III - Final regulation issued to banks.
Singapore 4 4 2 Basel III - Public consultation on draft ended in February 2012. Final rule is
expected to be published in mid-2012.
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20. Level of Implementation
Main Countries Basel II Basel Basel III Notes
2.5
South Africa 4 4 1 Basel III - Draft amendments to legislation issued on 30 March 2012 for
consultation.
Switzerland 4 4 2 Basel III
Public consultation on draft regulation on Basel III has been finished in January
2012. Decision on final rules text expected until mid-2012. Final SIFI regulation
(level: Banking Act) adopted by Parliament on 30 September 2011 – Draft SIFI
regulation (level: accompanying ordinances) was published in December 2011;
decision on final rule text expected before end-2012.
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21. Level of Implementation
Main Countries Basel II Basel Basel III Notes
2.5
United States 4 1.2 1 Basel II
Parallel run on-going –Basel II mandatory institutions required to implement the
advanced approaches to credit risk and operational risk. Those Banks have made
significant progress in implementation efforts Basel 2.5
(2) Market risk capital requirements have been proposed and remain to be
finalised. These proposed requirements were modified in December 2011 to
incorporate restrictions on the use of credit ratings as set forth in the Dodd-Frank
regulatory reform legislation.
(1) Other Basel 2.5 revisions are under development as part of the proposed Basel
III rule currently expected to be issued for comment during Q2 2012.
Basel III
Draft regulation for consultation planned during Q2 2012. Basel 2.5 and Basel III
rulemakings in the United States must be coordinated with applicable work on
implementation of the Dodd-Frank regulatory reform legislation.
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