BASEL3
SURYANARAYAN MOHAPATRA
Dear Students,
Wish you all a very very Happy Diwali.
“Basel III" measures developed at the back drop of financial crisis in 2008 and it aims to:
- improve the banking sector's ability to absorb shocks arising from financial and economic stress
- improve risk management and governance
- strengthen banks' transparency and disclosures.
The reforms target:
- bank-level, or micro prudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress.
- macro prudential, system wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time.
These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks. More stress on common equity capital, banks should have Capital Conservation Buffer comprising common equity of 2.5% of risk-weighted assets and sufficient high-quality liquid assets to withstand a 30-day stressed funding scenario that is specified by supervisors
RBI guidelines for BASEL-III implementation
(a) Minimum Capital Requirements
- Tier 1 capital must be at least 7% of RWAs
Out of Tier-1, Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs);
- Tier 2 capital maximum up to 2% of RWAs
- Total capital must be at least 9% of RWAs.
(b) Capital Conservation Buffer
- The capital conservation buffer in the form of Common Equity to be 2.5% of RWAs.
(c) Transitional arrangements to BASEL-3
- AS per RBI, implementation period of minimum capital requirements and deductions from Common Equity will begin from January 1, 2013 and be fully implemented as on March 31, 2017.
- Capital conservation buffer requirement is proposed to be implemented between March 31, 2014 and March 31, 2017.
- Instruments which no longer qualify as regulatory capital instruments will be phased-out during the period beginning from January 1, 2013 to March 31, 2022.
DETAILS of BASEL-3 Frame work
In Basel 3 emphasis is given on both CAPITAL & LIQUIDY of the banks
A)CAPITAL CONSIDERATION
It has three components - Capital, Risk Coverage and Leverage
a) Capital (Revised Pillar-1)
(i)Quality and level of capital
Greater focus on common equity. The minimum will be raised to 4.5% of risk-weighted assets, after deductions. In India it is 5.5% of RWA as per RBI
(ii)Capital loss absorption at the point of non-viability
Contractual terms of capital instruments that allows – write-off or conversion to common shares if the bank is judged to be non-viable. This is aimed at resolving future banking crises and thereby reduces moral hazard.
(iii)Capital conservation buffer
Comprising common equity of 2.5% of risk-weighted assets
(iv)Countercyclical buffer
0-2.5% comprising common equity, when authorities judge credit growth is resulting in an unacceptable build up of systematic risk.
b) Risk Coverage
For Securitisations, Trading book and Exposure to central counter parties
Securitisation : Capital treatment for complex securitisations.
Trading book : Higher capital for trading and derivatives activities and introduction of a stressed value-at-risk framework to help mitigate procyclicality.
Counter party credit risk : More stringent requirements for measuring exposure; capital incentives for banks to use central counterparties for derivatives; and higher capital for inter-financial sector exposures.
Bank exposures to central counterparties (CCPs) : Trade exposures to a qualifying CCP will receive a 2% risk weight and default fund exposures to a qualifying CCP will be capitalised according to a risk-based method that consistently and simply estimates risk arising from such default fund.
c) Leverage
Leverage ratio : A non-risk-based leverage ratio that includes off-balance sheet exposures will serve as a backstop to the risk-based capital requirement. Also helps contain system wide build up of leverage.
Revised Pillar 2 requirements. ( Risk management & supervision)
· capturing the risk of off-balance sheet exposures and securitisation activities;
· managing risk concentrations;
· providing incentives for banks to better manage risk and returns over the long term; sound compensation practices;
· stress testing;
· accounting standards for financial instruments;
· corporate governance and supervisory colleges.
Revised Pillar 3 requirements (disclosures requirements)
- Securitisation exposures and sponsorship of off-balance sheet vehicle
- Enhanced disclosures on the detail of the components of regulatory capital and their reconciliation to the reported accounts, including a comprehensive explanation of how a bank calculates its regulatory capital ratios.
B) LIQUIDITY
Based on the experience learned from 2008 crises
Liquidity coverage ratio (LCR)
· Banks to have sufficient high-quality liquid assets to withstand a 30-day stressed funding scenario that is specified by supervisors.
Net stable funding ratio (NSFR)
· A longer-term structural ratio designed to address liquidity mismatches.
Prof. Surya Mohapatra
tanim...@gmail.com
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