Osakwe, VictorFinancial Stability Seminar

July 3rd, 2015

The more destructive power an institution has when it fails determines how important it is for the financial system!

What is a Systemically Important Institution? How is it Defined (Basel)

2

Systemically Important Financial InstitutionsBanksNon-Bank Entities

(Insurers)

Evaluation, Conclusion and Prospect

Introduction

Brief History and Definition

Basel III and ImplementationEuropean Union

ImplementationUnited States

Implementation

Overview

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The global financial crises of 2007-2008

is making the international

community to be proactive in

protecting the global financial system by

preventing or limiting the effects

of failure of a systemically

important financial institution (SIFI).

Results

Introduction

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A set of rules for regulating the SIFIs are contained in the Basel report with new versions at different time and circumstance.

The Basel Committee and the Financial Stability Board research and develop policy; advise and recommend as contained in the Basel reports.

Each country determines which institution qualifies as a SIFI.

The global scale and interconnectedness of financial institutions make it more difficult to ascertain if a firm is a SIFI until crisis break out and the effect assessed

Introduction

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1988: World central bankers agreed on a set of international standards for the regulation of banks.

1988: The Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published first set of minimum capital requirements for banks (Basel I).

1999: The (BCBS) released Basel II for regulating the activities of banks and other financial institutions.

Basel II was revised in 2001, 2003, 2004 and 2005. The implementation began in 2007

2011: First version of Basel III appeared alongside Basel 2.5.

Brief History

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What is a SIFI? The starting point for identifying a SIFI is having the assertion that the insolvency of such an institution may destabilize the financial system and having negative effects on the real economy (Bongini and Nieri, 2014).

An institution is systemically relevant if it cannot exit the market without causing major disruptions to the financial system.

Factors used in identifying SIFIs are: size, complexity, interconnectedness, absence of substitutes for the financial infrastructure it provides, and global activity(Basel Committee 2011).

SIFIs are not only banks but includes insurance companies and financial market infrastructure providers.

Definition

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It is a global and voluntary regulatory framework on the adequacy of bank capital, market liquidity risk and stress testing.

First version published in late 2011 giving banks approximately three years to satisfy all requirements.

Developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007-2008.

Major focus is on the run on the bank risk by requiring differing levels of reserves for different forms of bank deposits and other borrowings.

Basel III

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Capital Requirements:

Leverage Ratio:

Liquidity Requirements:

Basel III: Key Principles

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Europe: The implementing act of the Basel III agreements in the European Union has been the new legislative package comprising Directive 2013/36/EU (CRD IV) and Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (CRR). The new package, approved in 2013, replaced the Capital Requirements Directives (2006/48 and 2006/49); (www.europa.eu).

U.S.A: The U.S. Federal Reserve will implement substantially all of the Basel III rules for institutions with assets over US$50 billion as announced in December 2011, Wyatt (2011); though still on the process of implementation as of January 2014 and with some differences in calculation.

Basel III: Implementation

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The first official version of the G-SIB list was published in November 2011 and updated yearly (Slovik 2012).

G-SIBs and D-SIBs headquartered in Europe and USA are required to submit an updated emergency resolution plan to their Financial Supervision Authority each year.

On November 10, 2014; the FSB issued a consultative document that defines a global standard for minimum amounts of TLAC to be held by G-SIBs in addition to the Basel III Capital Adequacy Ratio requirements.

Criteria for assessing, stress testing and adopting a SIB varies with country and continent.

Systemically Important Financial Institutions (Banks)

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SIBs: Europe

Entity

HQ Country

HQ

Currency

FSB-G-

SIB

Total Capital Ratio

Requirement (% of

RWA)

Dexia Group Belgium €, Euro 2011 -

BNP Paribas France €, Euro 2011– 12.5%

(CET1=min.9%)

Crédit Agricole France €, Euro 2011–

11.5% (CET1=min.8%)

Banque Populaire CE France €, Euro 2011–

11.5% (CET1=min.8%)

Société Générale France €, Euro 2011–

11.5% (CET1=min.8%)

Commerzbank Germany €, Euro 2011 10.5%

(CET1=min.7%)

Deutsche Bank Germany €, Euro 2011– 12.5%

(CET1=min.9%)

Unicredit Group Italy €, Euro 2011–

11.5% (CET1=min.8%)

ING Bank Netherla

nds €, Euro 2011– 11.5%

(CET1=min.8%)

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SIBs: Europe

Entity

HQ Country

HQ

Currency

FSB-G-

SIB

Total Capital Ratio

Requirement (% of

RWA)

Banco Bilbao Vizcaya Argentaria Spain €, Euro 2012–

11.5% (CET1=min.8%)

Santander Spain €, Euro 2011– 11.5%

(CET1=min.8%)

Nordea Sweden Kr, Krona 2011– 11.5%

(CET1=min.8%)

Credit Suisse Switzerla

nd Fr, Swiss franc 2011–

12.0% (CET1=min.8.5%)

UBS Switzerla

nd Fr, Swiss franc 2011–

11.5% (CET1=min.8%)

Royal Bank of Scotland

United Kingdom £, GBP 2011–

12.0% (CET1=min.8.5%)

Barclays United

Kingdom £, GBP 2011– 12.5%

(CET1=min.9%)

HSBC United

Kingdom $, USD 2011– 13.0%

(CET1=min.9.5%)

Lloyds Banking Group

United Kingdom £, GBP 2011

10.5% (CET1=min.7%)

Standard Chartered

United Kingdom £, GBP 2012–

11.5% (CET1=min.8%)

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Entity

HQ Country

HQ

Currency

FSB-G-

SIB

Total Capital Ratio

Requirement (% of

RWA)

Mizuho FG Japan ¥, Yen 2011– 11.5%

(CET1=min.8%)

Sumitomo Mitsui Japan ¥, Yen 2011–

11.5% (CET1=min.8%)

Mitsubishi UFJ FG Japan ¥, Yen 2011–

12.0% (CET1=min.8.5%)

Bank of China China ¥ or 元,Renminbi 2011–

11.5% (CET1=min.8%)

ICBC China ¥ or 元, Renminbi 2013–

11.5% (CET1=min.8%)

Agricultural Bank of China China

¥ or 元, Renminbi 2014–

11.5% (CET1=min.8%)

SIBs: Asia

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Entity

HQ Country

HQ

Currency

FSB-G-

SIB

Total Capital Ratio

Requirement (% of

RWA)

Bank of America USA $, USD 2011–

12.0% (CET1=min.8.5%)

Bank of New York Mellon USA $, USD 2011–

11.5% (CET1=min.8%)

Citigroup USA $, USD 2011– 12.5%

(CET1=min.9%)

Goldman Sachs USA $, USD 2011–

12.0% (CET1=min.8.5%)

JP Morgan Chase USA $, USD 2011–

13.0% (CET1=min.9.5%)

Morgan Stanley USA $, USD 2011–

12.0% (CET1=min.8.5%)

State Street USA $, USD 2011– 11.5%

(CET1=min.8%)

Wells Fargo USA $, USD 2011– 11.5%

(CET1=min.8%)

SIBs: America

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Insurance companies are perceived to be non-relevant for financial stability in the past due to relatively low levels of interconnectedness with the rest of the financial system.

In October 2014, IAIS published the first-ever global insurance capital standard; Basic Capital Requirements (BCR).

BCR ratio is expected this year but will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for purposes of refining the BCR as necessary.

From January 2019, all G-SIIs will be required to hold capital not lower than the BCR plus HLA. This is subject to jurisdictional regulator and not the FSB/IAIS.

Systemically Important Financial Institutions:Non-Bank Entities (Insurers)

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Allianz

AIG

Assicurazioni Generali

Aviva

AXA

MetLife

Ping An

Prudential

Prudential Financial

G-SIIs

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SIFIs have been in the financial literature for a while, 2007-08 financial crises brought it to limelight and has continue to enjoy much attention both from the financial institutions, regulators, and the academic world.

There still a fundamental error with Basel reports, it only expand regulatory base without questioning its main principles, importantly the ever-growing reliance on standardized assessments of "credit risk”(Marc Labonte, 2014).

Implementation of Basel III is 2019 technically but how long it will be in force is dependent on the necessity and how soon a new report emerged from the mist.

Evaluation and Conclusion

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Many criticism of Basel III and the developments in the banking market in recent times suggests stricter rules may be applied and it won’t be long before the subsequent framework make its way out and is being labelled Basel IV.

The BCBS had already released a consultative paper to seek out views on its plan to change how capital requirements and market risks are to be calculated.

Basel IV may include: 1. meeting higher minimum leverage ratios; 2. highlighting standardised models for calculation of capital requirements; 3. more detailed disclosure of available reserves and other financial statistics.

Prospect

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Question & Discussion

Thanks for listening!

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