BASEL III_PPT (1)

8/10/2019 BASEL III_PPT (1)

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RISK MANAGEMENT IN BANKING

BASEL III


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INTRODUCTION

Basel presents the Basel Committees reforms tostrengthen global capital and liquidity rules of thecountry with the goal of promoting a more resilient

banking sector.The economic and financial crisis, started in 2007became so severe because the banking sectors ofmany countries had built up excessive on and off-

balance sheet leverage.Objective is to:

improve the banking sectors ability to absorb shocksreduce the risk of overflow from the financial sector tothe real economy.


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BASEL II AND BASEL III COMPARATIVE ANALYSIS

Capital Requirements Liquidity Standards

Provisioning NormsLess Cyclical than current incurred loss

approach

Disclosure RequirementsOne of the lessons of the crisis and the failure of Basel

II to prevent or at least contain the same is that thedisclosures made by banks on their risky exposuresand on regulatory capital were neither appropriate norsufficiently transparent to afford any comparativeanalysis

Basel III requires banks to disclose all relevant details ,

including any regulatory adjustments, as regards thecomposition of the regulatory capital of the bank


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FRAMEWORK OFBASEL IIIReform measures, by BCBS to strengthen the regulation,supervision and risk management of banking sector

Building BlocksImproving Quality, Consistency &Transparency of Capitalo To ensure that banks are better able to absorb losseso The Tier I capital to mainly consist of common equity to beraised to 7% of RWA by March 31st, 2015o Most of the adjustments to be from CET1 capital(phased

manner)o all elements of capital to be disclosed with reconciliation to

the published accountso Tier 1 ratio of 6.0% for scheduled commercial banks in India

maintainedo Stricter norms for deductions from capital (accumulated

losses, deferred tax assets net of deferred tax liabilities,investments in financial institutions, good will)


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BUILDING BLOCKSPromoting the buildup of capital buffers in goodtimeso Capital conservation buffer that can be used to absorb

losses during periods of financial and economic stressCapital conservation buffer of 2.5% to be phased inover a period of time .

o Countercyclical buffer for broader macro-prudential goalof protecting the banking sector from periods of excessaggregate credit growth .

To be warranted where credit growth perceivedaggressive & leading to the system-wide buildup ofrisk .

Within a range of 0 2.5% of RWAs in the form ofCommon Equity will be implemented according to


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BUILDING BLOCKS

Introducing internationally harmonized leverageratioo Risk-based capital measureo To contain the build-up of excessive leverage in the

system .o Leverage Ratio minimum 4.5% Tier I Capital of Total

Exposure, (both On Balance Sheet & Off BalanceSheet exposure)

o Increasing the risk coverage of the capitalframework( for trading , securitizations, exposuresto off-balance sheet vehicles and counterparty credit

exposures arising from derivatives )


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BUILDING BLOCKSIntroducing minimum global liquidity standardso LCR to ensure that banks to have sufficient high-

quality liquid assets to withstand a stressed fundingscenario

o Net stable funding ratio (NSFR) is a longer-termratio to address liquidity mismatches .

o It covers the entire balance sheet and providesincentives for banks to use stable sources( typesand amounts of equity and liability financingexpected to be reliable sources of funds over aone-year time horizon under conditions of extended


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BUILDING BLOCKS

Raising standards for supervisory reviewprocess & disclosureso Valuation practiceso Stress testing:o Sound compensation practices and incentives tobetter manage risk and returno Corporate governanceo Supervisory collegeso Firm-wide governance and risk management.o Capturing the risk of off-balance sheet exposures

and securitization activities.o Managing risk concentrations.


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BUILDING BLOCKSMarket Disciplineo Banks disclose all elements of the regulatory

capital base, the deductions applied & fullreconciliation to financial accounts .

o

Banks to disclose clear, comprehensive andtimely information about remuneration practicesMacro Prudentil Requirements

o Pro-cyclicality: from incurred losses model toexpected losses model of provisioning

o Systemic Risk and Interconnectedness:Systemically important banks to have loss

absorbing capacity beyond the minimumstandards


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TRANSFORMATION ROADMAP


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BASEL III IMPLEMENTATION

RequirementPreparation forMigration

Higher Common Equity

Non Common Equity to be lossabsorbing

Limits on AT1 and Tier 2 Capital

Capital Conservation Buffer

Countercyclical Buffer

SIFI Charge

Leverage RatioLiquidity Ratios

Risk Data Infrastructure Ability to extract, compute, analyzedata

RWA OptimizationRemove data gaps, Refinemethodology, Diversification benefitsManaging ROEBetter pricing of risks, Fee basedincome, Risk adjusted returns

Capital OptimizationRetention of profits, Full utilization ofNon Common Equity limitsRisk ManagementBetter risk governance, stresstesting, risk culture


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BASEL III IMPLEMENTATION

Capital Management under Basel III Sustainable Management of Riskand Capital


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IMPLICATIONS OF BASEL III

Increased quality of capitalIncreased quantity of capitalReduced leverage through introduction of backstop

leverage ratioIncreased short term liquidity coverageIncreased stable long-term balance sheet fundingStrengthened risk capture, notably counterparty risk


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EMERGENCE OF BASEL IVChanges from Basel III to Basel

IVHigher minimumleverage ratioInternal Models : riskweightings generated by

banksRevised approach to theLiquidity Coverage Ratio(LCR)Pillar 2 capital add-ons :capital conservation andcounter-cyclical capitalbuffersGreater disclosure bybanks


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BANKS

Significant higher capital requirements combination of higher minimum leverage ratio restrictions on internal models based calculations imposing stress test

Pillar 2 cushion above minimum capital requirements

Capital Management Requirements by banks

Less risk-sensitive approach to both capitalratios and internal modeling

banks to re-examine the balance between lower and higherrisk businesses


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India: Basel III implementation will begin on April 1, 2013 and

will be fully phased in on March 31, 2018 as indicatedbelow in % terms:


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CONCLUSION

It is natural to fear the unknownDespite Basel III's shortcomings,we are yet to hear of a bettersolution than combining RWAs with a good strong, leverageratio

RWAs can help bank examinersidentify exactly what risk exposuresbanks have, and they can thenspend more time focusing on theriskier areas of a bankThe use of RWAs can also providea fair basis for a level playingfield for banks in different bankingstructuresThe risk-weighted approach is alsogood for the banks in that it helpsthem determine what businessesare riskier and not sufficientlyrewarded

We require good, uniformguidelines for banks to followand inputs need to be disclosed tothe publicIn most guidelines, the BaselCommittee has been reiterating the

need for transparencyThe need is for market disciplineand to force banks to comply withits disclosure requirementsWe already have all the major thetools to reform banks, we just haveto use themIf we use the tools to reform thebanks judiciously andtransparently, we must hope thatbanks in particular, will be betterprepared against any majorfinancial crisis in future


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RECOMMENDATIONS

The new Basel III package affords thefinancial industry more clarity on theregulatory front

Countercyclical capital buffer would beactivated by national authoritiesMultiplicity of regulatory reforms under way the more and more of everything approach to

regulationBanks need to consider the combined impactof Basel III and of moves towards Basel IV


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THANK YOU

Documents

BASEL III_PPT (1)