BASEL III:BASEL III:

CHALLENGES FOR DEVELOPING CHALLENGES FOR DEVELOPING COUNTRIESCOUNTRIES

GROUP 4: MembersGROUP 4: Members

Maureen NishaMaureen Nisha Vania Tzolova Petchova KosterVania Tzolova Petchova Koster Sai Kyaw KyawSai Kyaw Kyaw Ashot NarinyanAshot Narinyan Jigme NidupJigme Nidup Sonam GyeltshenSonam Gyeltshen Zoran LazicZoran Lazic

INTRODUCTIONINTRODUCTION

Basel III is developed from the existing Basel II framework

introduce of liquidity and leverage ratios,

Enhanced minimum capital requirements.

Comparison of Basel II ToComparison of Basel II To Basel III Basel III

Pillar I

Minimum Capital Requirement

Pillar II Supervisory Review

Process

Pillar IIIDisclosure and

Market Discipline

Pillar I

Enhance Minimum Capital &

LiquidityRequirement

Pillar II Enhanced Supervisory Review

ProcessFor Firm-wide Risk Management and capital Planning

Pillar II Enhanced Risk Disclosure & Market Discipline

Basel III ObjectivesBasel III Objectives

Strengthening capital base Strengthening capital base

Avoid too much leverage Avoid too much leverage

Improve risk management as well as governance Improve risk management as well as governance

Strengthen banks’ transparency and disclosures Strengthen banks’ transparency and disclosures

main tools: “liquidity” and “capital” standardsmain tools: “liquidity” and “capital” standards

Basel IIIBasel III

BASEL IIIBASEL III is a global regulatory standard on bank capital adequacy, stress is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed by the members of the BCBS in testing and market liquidity risk agreed by the members of the BCBS in 2010-11.2010-11.

Response to the ineffectiveness in financial regulation revealed by the 2008 -Response to the ineffectiveness in financial regulation revealed by the 2008 -2010 financial crisis. 2010 financial crisis.

Strengthens bank capital requirements and introduces new regulatory Strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.requirements on bank liquidity and bank leverage.

Formal scenario analysis will be applied.Formal scenario analysis will be applied.

Basel II one of the principal factors of financial risk management was out-Basel II one of the principal factors of financial risk management was out-sourced to companies that were not subject to supervision, sourced to companies that were not subject to supervision, credit rating credit rating agenciesagencies,, leading to AAA ratings on MBS, CDO and other instruments based leading to AAA ratings on MBS, CDO and other instruments based on expectation of price appreciation, Hyman Minsky – Ponzi Unit.on expectation of price appreciation, Hyman Minsky – Ponzi Unit.

Ponzi borrowerPonzi borrower

The "hedge borrower" can make debt payments (covering interest and The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. principal) from current cash flows from investments.

For the "speculative borrower", the cash flow from investments can service For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. over, or re-borrow, the principal.

The "Ponzi borrower" (The "Ponzi borrower" (Ponzi scheme) borrows based on the belief that the ) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloatPonzi borrower afloat

Basel IIIBasel III

Basel III is an opportunity as well as a challenge for banks. Basel III is an opportunity as well as a challenge for banks.

It can provide a solid foundation for the next developments in the banking It can provide a solid foundation for the next developments in the banking sector.sector.

Basel III is changing the way that banks address the management of risk Basel III is changing the way that banks address the management of risk and finance. and finance.

Greater integration of the finance and risk management functions. Greater integration of the finance and risk management functions.

Basel III provides a framework for true enterprise risk management, which Basel III provides a framework for true enterprise risk management, which involves covering all risks to the business.involves covering all risks to the business.

Basel III - Proposed changesBasel III - Proposed changes 1.1. Quality, consistency, and transparency of the capital base will be raised,Quality, consistency, and transparency of the capital base will be raised,2.2. Risk coverage of the capital framework will be strengthened,Risk coverage of the capital framework will be strengthened,3.3. Leverage ratio will be introduced as a supplementary measure.Leverage ratio will be introduced as a supplementary measure.4.4. Promote the build up of capital buffers in good times that can be drawn Promote the build up of capital buffers in good times that can be drawn

upon in periods of stress,upon in periods of stress,5.5. Global minimum liquidity standard - Net Stable Funding Ratio. Global minimum liquidity standard - Net Stable Funding Ratio. 6.6. During periods of stress regulators will allow banks to dip below their During periods of stress regulators will allow banks to dip below their

required liquidity levels.required liquidity levels.

Basel IIIBasel III Require banks to hold 4.5% of common equity (up from 2% in Basel II). Require banks to hold 4.5% of common equity (up from 2% in Basel II). Require banks 6% of Tier I capital (up from 4% in Basel II) of risk-Require banks 6% of Tier I capital (up from 4% in Basel II) of risk-

weighted assets (RWA). weighted assets (RWA). Introduces additional capital buffers:Introduces additional capital buffers: - a mandatory capital conservation buffer of 2.5% and - a mandatory capital conservation buffer of 2.5% and - a discretionary countercyclical buffer, another 2.5% of capital during - a discretionary countercyclical buffer, another 2.5% of capital during

periods of high credit growth.periods of high credit growth.

Basel III introduces a minimum 3% leverage ratio and two required Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios.liquidity ratios.

The Liquidity Coverage Ratio requires a bank to hold sufficient high-The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days.quality liquid assets to cover its total net cash outflows over 30 days.

Net Stable Funding Ratio requires the available amount of stable funding Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period to exceed the required amount of stable funding over a one-year period of extended stress.of extended stress.

Impact on BOPImpact on BOP Capital requirements : Capital requirements :

Need of additional resources through FDI Need of additional resources through FDI More retained earnings More retained earnings

Higher capital requirements for complex securitizations/ Higher capital requirements for complex securitizations/ resecuritizations /trading resecuritizations /trading book/mark-to-market lossesbook/mark-to-market losses

Liquidity standards: need of high quality liquid assets Liquidity standards: need of high quality liquid assets Purchases of government debt, domestic and also foreign Purchases of government debt, domestic and also foreign Changes in borrowing horizon Changes in borrowing horizon Inevitable disillusionment of the Inevitable disillusionment of the Ponzi borrowerPonzi borrower can cause the system to seize can cause the system to seize

up: when the bubble pops, i.e., when the asset prices stop increasing, the up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able speculative borrower can no longer refinance (roll over) the principal even if able to cover interest paymentsto cover interest payments As with a line of As with a line of dominoes, collapse of the speculative , collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.despite the apparent soundness of the underlying investments.

Basel III – ChallengesBasel III – Challenges

1.1. An OECD study, estimates that the medium-term impact of Basel An OECD study, estimates that the medium-term impact of Basel III implementation on GDP growth is in the range of −0.05 to III implementation on GDP growth is in the range of −0.05 to −0.15 percentage point per year. −0.15 percentage point per year.

2.2. The estimates of the International Institute of Finance (IIF), is The estimates of the International Institute of Finance (IIF), is that level of GDP will be 3.2% lower.that level of GDP will be 3.2% lower.

3.3. Study conducted by McKinsey suggest that, Basel III would Study conducted by McKinsey suggest that, Basel III would reduce return on equity (RoE) by about 4 percentage points in reduce return on equity (RoE) by about 4 percentage points in Europe and about 3 percentage points in the United States. Europe and about 3 percentage points in the United States.

4.4. The Banks are estimated to increase their lending spreads on The Banks are estimated to increase their lending spreads on average by about 15 -50 basis points. average by about 15 -50 basis points.

5.5. Downgrade of the credit rating, loss of deposits, loss of funding, a Downgrade of the credit rating, loss of deposits, loss of funding, a significant increase in secured funding haircuts and increases in significant increase in secured funding haircuts and increases in derivative collateral calls.derivative collateral calls.

6.6. Reduction in distribution of dividend, share buyback and staff Reduction in distribution of dividend, share buyback and staff bonus payments or raising capital from the private sector in case bonus payments or raising capital from the private sector in case were buffers have been drawn down.were buffers have been drawn down.

CONCLUSIONCONCLUSION

To estimate possible effect of new Basel accord on developing countries, we To estimate possible effect of new Basel accord on developing countries, we have to consider banks current financial and market conditions and have to consider banks current financial and market conditions and macroeconomic variables: current account deficit, fiscal deficit, GDP growth, macroeconomic variables: current account deficit, fiscal deficit, GDP growth, leverage (D/GDP), etc.leverage (D/GDP), etc.

Imposing OECD and IIF predictions, we could conclude that developing Imposing OECD and IIF predictions, we could conclude that developing countries, particularly those who rely on FDI and portfolio investment, from countries, particularly those who rely on FDI and portfolio investment, from abroad, could suffer even more damage due to high leveraged financial sistem:abroad, could suffer even more damage due to high leveraged financial sistem:

1.1. Cost of investment will increase,Cost of investment will increase,2.2. Investment in infrastructural and productive projects will decrease,Investment in infrastructural and productive projects will decrease,3.3. Net capital outflow,Net capital outflow,4.4. Depreciation of the national currencies (highly dolarized ecconomies)Depreciation of the national currencies (highly dolarized ecconomies)5.5. Lower rate of GDP growth.Lower rate of GDP growth.

The Basel III impact on economic output could be offset by a reduction in The Basel III impact on economic output could be offset by a reduction in monetary policy rates.monetary policy rates.

Fonte: BIS – Progress report on Basell III Implementation – set/2011

Regras definitivas publicadas

Plano de implementação publicadoPlano de implementação preliminar publicado 14

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