Basel 3 News July 2011

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Basel iii Compliance Professionals Association (BiiiCPA)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Web: www.basel-iii-association.com
Basel III News, July 2011

Dear Member,
Is it true that investors will lose money because of Basel III?

It is true. This is the price we pay because the banking system becomes more resilient. More risks, more profits - do you remember the principle? You cannot make much money in a "deep, liquid and transparent" market where you take limited risks.
Is it that simple? Less profit because of fewer risks?

There is a second reason. The objective of the Basel III reforms is to reduce the probability and severity of future crises. So, we will face fewer risks. But this involves costs arising from stronger regulatory capital and liquidity requirements and more intense and intrusive supervision. We will do have "benefits to the society that will well exceed the costs to individual institutions", but investors will pay the cost. According to the Bank for International Settlements (BIS), banks may need to scale back their profit expectations. According to the annual report of the BIS, we could have lower, more stable returns on equity (ROEs), a key measure of profitability, since bank balance sheets will be less risky.
Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
There is a third reason also. Basel III makes regulatory arbitrage harder. Basel II allowed banks to play more games. Basel II mispriced the risk inherent in securitizations and let banks load up on off-balance-sheet instruments and collateralized debt obligations. Basel III adds a leverage ratio, and capital has to be at least 3% of total assets (TOTAL assets, not risk weighted assets). Yes, Basel III introduces a simple leverage ratio that provides a backstop to the risk-based regime. The supplementary ratio, which is a measure of a banks Tier 1 capital as a percentage of its assets plus off-balance sheet exposures and derivatives, will serve as an additional safeguard against attempts to game the risk-based requirements, and will mitigate model risk. The packaging and selling of loans is no longer the great way to avoid capital requirements. Banks must consolidate positions from all their trading desks and make their trading book compatible with their banking book (a read IT and data management challenge). Another opportunity lost - it will not be that simple for banks to transfer assets out of their banking book into the trading book to get better capital treatment. Oh, yes, this is going to be a real challenge for US banks that are not currently under the Basel II framework. The moral of the story: Forget bank returns that are at the range of 20 percent.
I was surprised to read that Deutsche Bank AG is targeting a pretax investment bank return of 20 to 25 percent after 2013 (down from 28 percent in 2010). Deutsche Bank AG may have to raise additional capital for another reason: Regulators have agreed to make as many as 30 of the worlds largest and systemically important banks hold as much as 2.5 percent more capital than the 7 percent core Tier 1 capital required. This adds to the problem that banks cannot use hybrid capital instruments that are using now, such as contingent convertible bonds, to meet the target. HSBC Holdings Plc (HSBA), Bank of America Corp. (BAC), Citigroup, Deutsche Bank, BNP Paribas, JPMorgan Chase & Co. (JPM), Barclays Plc (BARC) and Royal Bank of Scotland Group Plc may be subject to the surcharge of the 2.5 percent. UBS AG, Credit Suisse, Goldman Sachs Group Inc. and Societe Generale may be subject to a lower charge of 2 percent. The size of the potential market for contingent convertible bonds (CoCos) in the UK has already shrunk by two thirds, as banks cannot count the instruments as capital cushions, according to an analysis by Bank of America/Merrill Lynch. The U.K.s Financial Services Authority has asked banks to prepare a flight path to put them in compliance with the Basel III capital rules, taking into account dividends, bonuses and stress testing (they must take into account the possibility of another economic recession). Paul Tucker, Deputy Governor of the Bank of England, challenges banks and asks them to build up capital ahead of the Basel III requirements (rather than using strong earnings to make payouts to staff and investors).
In the States, although major banks try to keep a brave face, they have already challenged Fed Chairman Ben S. Bernanke on whether regulators have gone too far and are slowing economic growth. According to Mario Draghi, incoming European Central Bank president, banks already claim that opposing jurisdictions seek to water down Basel, and at the same time these banks have tried to weaken Basel III within their respective jurisdictions.
Important parts of the 81st Annual Report of the BIS

In the 81st Annual Report of the BIS we read that the Basel III rules need to be implemented in a timely and globally consistent manner. All member countries of the Basel Committee must now translate the Basel III texts into national regulations and legislation in time to meet the 2013 deadline. The Committee and its oversight body of Governors and Heads of Supervision have consistently stated that the new standards will be introduced in a manner that does not impede the economic recovery. Thus, they have chosen a staggered timeline for implementation. For example, the July 2009 enhancements that strengthen regulatory capital and disclosure requirements are due to take effect no later than the end of 2011. The Basel III requirements themselves begin to take effect from the beginning of 2013 and will be phased in by 2019. This time frame includes an observation period to review the implications of the liquidity standards for individual banks, the banking sector and
financial markets, with a view to addressing any unintended consequences. Similarly, the Committee will assess the impact of the leverage ratio on business models during the transition period in order to ensure that it achieves its objectives. Like all Basel Committee standards, Basel III sets out minimum requirements, and the transitional arrangements are the deadlines for adopting the new standards. Countries should move faster if their banks are profitable and are able to apply the standards without having to restrict credit. Banks should not be permitted to increase their capital distributions simply because the deadline for achieving the minimum standards is still some way off, particularly if there are signs of growing macroeconomic risks and imbalances. Therefore, banks, for their part, must also begin to plan and to prepare. Basel III is the core regulatory response to problems revealed by the financial crisis. Delay or weakening of the agreements would jeopardise financial stability and the robustness of the recovery over the long term. The full, timely and consistent implementation of all relevant standards by banks, along with rigorous enforcement by supervisors, is critical. Ultimately, both the official and the private sector will reap the benefits of a more stable financial system. The severity of the crisis owed much to the fact that the banking sector in many countries had taken on too much risk without a commensurate increase in capital.
Furthermore, this inadequate level of capital was of insufficient quality, as the latter had gradually eroded. Basel III tightens capital requirements, encompasses a broader array of risks, and explicitly addresses macroprudential aspects of banking system stability. Basel III substantially raises the quality as well as the quantity of capital, with a much greater emphasis on common equity. During the crisis, losses reduced banks common equity. However, some banks maintained deceptively high ratios of Tier 1 capital to risk-weighted assets through the inclusion of other forms of financial instruments in the capital base. Moreover, non-common Tier 1 capital instruments often did not share in banks losses through reduced coupon or principal payments and so did not contribute to maintaining the institutions as going concerns in any meaningful way. The artificially high Tier 1 risk-based ratios also meant that banks were building up high levels of leverage. Basel III therefore also introduces a simple leverage ratio that provides a backstop to the risk-based regime. The supplementary ratio, which is a measure of a banks Tier 1 capital as a percentage of its assets plus off-balance sheet exposures and derivatives, will serve as an additional safeguard against attempts to game the risk-based requirements, and will mitigate model risk. The Basel Committee has also improved the risk coverage of the regulatory capital framework for capital market activities a salient feature of the recent crisis, where trading exposures accounted for much of the build-up of leverage and were an important source of losses.
Weak capital, excessive leverage and inadequate risk coverage prevented the banking system from fully absorbing systemic trading and credit losses. Nor could it cope with the reintermediation of large off-balance sheet exposures that had built up in the shadow banking system. Under Basel III, banks will have to hold more capital against their less liquid, credit-sensitive assets whose holding periods are much longer than traditional trading positions. Trading activities will also be The Basel Committee has also improved the risk coverage of the regulatory capital framework for capital market activities a salient feature of the recent crisis, where trading exposures accounted for much of the build-up of leverage and were an important source of losses. Weak capital, excessive leverage and inadequate risk coverage prevented the banking system from fully absorbing systemic trading and credit losses. Nor could it cope with the reintermediation of large off-balance sheet exposures that had built up in the shadow banking system. Under Basel III, banks will have to hold more capital against their less liquid, credit-sensitive assets whose holding periods are much longer than traditional trading positions.
Measures for global systemically important banks agreed by the Group of Governors and Heads of Supervision - 25 June 2011
At its 25 June 2011 meeting, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS), agreed on a consultative document setting out measures for global systemically important banks (G-SIBs).
These measures include the methodology for assessing systemic importance, the additional required capital and the arrangements by which they will be phased in. These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time. This package of measures will be issued for consultation around the end of July 2011. The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: 1. Size 2. Interconnectedness 3. Lack of substitutability 4. Global (cross-jurisdictional) activity and 5. Complexity. The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance. To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% surcharge would be applied in such circumstances. The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019.
The GHOS and BCBS will continue to review contingent capital, and support the use of contingent capital to meet higher national loss absorbency requirements than the global minimum, as high-trigger contingent capital could help absorb losses on a going concern basis. Mr Jean-Claude Trichet, President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today will help address the negative externalities and moral hazard posed by global systemically important banks." Mr Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, added that "the proposed measures will increase the going-concern loss absorbency of G-SIBs. This will contribute to enhancing the resiliency of the banking system and help mitigate the wider spill-over risks of global systemically important banks".
More about the G-SIBs and the new Basel III rules from the FSB
From the Report of the Financial Stability Board (FSB) to G20 Finance Ministers and Central Bank Governors (10 April 2011) Following the endorsement by the G20 Leaders of the Basel III package of capital and liquidity reforms at the November Seoul Summit, and the issuance by the Basel Committee of the Basel III rules text in December 2010, all members will now put in place the necessary regulations and/or legislation to implement the Basel III framework on 1 January 2013, such that it can be fully phased in by 1 January 2019. Some issues have been raised pertaining to the new liquidity requirements. These revolve around the calibration of the ratios, rather than the conceptual basis of the liquidity framework.
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The Basel Committee will use the observation period to review the implications of the standards for individual banks, the banking sector, and financial markets, addressing any unintended consequences as necessary. The Committee is focused on ensuring that the calibration of the liquidity framework is appropriate. Certain aspects of the calibration will be examined and this will involve regular data collection from banks. Adjustments will be based on additional information and rigorous analyses. In February 2011, the Basel Committee issued revisions to the Basel II market risk framework, updated to reflect the adjustments to the framework announced by the Basel Committee in its June 2010 press release and the stress testing guidance for the correlation trading portfolio. Addressing systemically important financial institutions (SIFIs) At the November 2010 Summit, the G20 Leaders endorsed the policy framework, work processes and timelines set out in the October 2010 FSB report Reducing the moral hazard posed by systemically important financial institutions. At their February 2011 meeting, the G20 Finance Ministers and Central Bank Governors asked the FSB to deliver to the November 2011 Summit the recommendations that had been scheduled for end-2011 in the October 2010 report. The FSB and its members have agreed an accelerated timetable in order to meet that request.
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G-SIFI determination and loss absorbency The Basel Committee (BCBS) has broadly agreed a methodology to assist the FSB and national authorities in assessing the systemic importance of financial institutions at a global level. This methodology incorporates revisions based on feedback from the Group of Governors and Heads of Supervision (the Committees oversight body) and from the FSB. The revised methodology is based on quantitative indicators for five categories: global activity, size, interconnectedness, substitutability, and complexity. The BCBSs methodology will be used as input to the determination by the FSB and national authorities, in consultation with standard-setters, of the banking institutions to which the FSB global SIFI (G-SIFI) recommendations will initially apply. The International Association of Insurance Supervisors (IAIS) is developing a provisional methodology and set of indicators for assessing the global systemic importance of insurers as input to the initial determination by the FSB and national authorities of G-SIFIs. A status report on the development of the methodology was provided to the FSB in March and the IAIS expects to finalise its methodology in September 2011. In Seoul, the G20 Leaders endorsed a requirement that SIFIs and initially in particular GSIFIs should have higher loss absorbency capacity to reflect the greater risks that these firms pose to the global financial system. Depending on national circumstances, this greater capacity could be drawn from a menu of viable alternatives and could be achieved by a
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combination of a capital surcharge, a quantitative requirement for contingent capital instruments and a share of debt instruments or other liabilities. As requested by the FSB, the BCBS expects to complete by June 2011 its study of the magnitude of additional loss absorbency along with an assessment of the extent of going concern loss absorbency which could be provided by the various proposed instruments. As noted in the next section, the FSB Bail-in Working Group, working on contractual and statutory bail-in, also expects to finalise its proposals by mid-2011. Drawing on these analyses, the FSB, in consultation with the BCBS, will recommend by the G20 Summit an additional degree of loss absorbency for globally systemic banks and the instruments by which this can be met. Public consultations will take place during the second half of 2011 on the identification methodology, amounts and instruments of added loss absorbency and implementation horizon, before the recommendations are finalised and delivered to the November Summit.
Resolution tools and regimes

Work towards the implementation of the recommendations on resolution set out in the FSBs October 2010 SIFI report is progressing. The FSB has established a Steering Group responsible for delivering the overall work programme on resolution and for developing the Key Attributes of Effective Resolution Regimes which will identify the essential features that national resolution regimes for financial institutions, including non-bank financial institutions, should have.
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To make resolution possible in a cross-border context, the Steering Group is also considering the essential elements for institution-specific cooperation agreements. These should serve as a benchmark and point of reference to national authorities as they negotiate these agreements (which are to be drawn up by end-2011). The FSB will discuss the set of draft proposals at its Plenary meeting in July. The FSB Cross-border Crisis Management Group (CBCM) is monitoring the development of G-SIFIs recovery and resolution plans in close cooperation with the institution-specific Crisis Management Groups. To assist this process the CBCM is developing Essential Elements of Effective Recovery and Resolution Plans as well as a framework for the assessment of resolvability of individual SIFIs, including by drawing on the groups technical analysis of obstacles to effective resolution arising from internal interconnectedness, global payments operations and information systems. The FSB also has work underway on the technical aspects and financial stability implications of both contractual and statutory bail-in instruments and mechanisms to provide for higher loss absorbency and improve resolvability of SIFIs. The FSB Bail-in Working Group will report in mid-2011 on the characteristics that contractual and statutory bail-in should have to be effective. The BCBS Cross-border Bank Resolution Group (CBRG) conducted a comprehensive survey in the first quarter of 2011 to take stock of existing national resolution regimes and tools.
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The CBRG will be reporting on its findings from the survey around mid-2011. The FSB will draw on the CBRGs findings as one of the inputs for the elaboration of the Key Attributes. A public consultation will take place during the second half of 2011 on the measures that the FSB will propose to improve resolution tools and regimes, before the recommendations are finalised and delivered to the November Summit.
Supervisory intensity and effectiveness

National supervisors and standard setters continue to address the recommendations set out in the FSBs November 2010 report on Intensity and Effectiveness of SIFI Supervision. National supervisors are to submit in June their self-assessments against the Basel Core Principles (BCPs) covering mandates, powers, resources and independence, which create the foundation for effective supervision. IAIS members will submit their self assessments against the revised Insurance Core Principles (ICPs) covering mandates, powers, resources, independence and group wide and consolidated supervision by March 2012. In addition, based on a survey of its members, the BCBS will provide a draft report to the FSB Supervisory Intensity and Effectiveness (SIE) group in June on the changes national supervisors are making to improve their methods and techniques. Standard setters are tightening their core principles, implementation standards and assessment methodologies and criteria.
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The IAISs proposed changes to its ICPs are currently out for public consultation and are expected to be finalised in October 2011. The BCBS intends to issue a consultative paper on revised BCPs in December 2011. The IMF and World Bank, in conjunction with the BCBS and IAIS, are considering the FSB recommendation that more weight be given to the BCP additional criteria and the IAIS advanced criteria when assessing against core principles and expect to provide draft revisions to the assessment methodologies to the FSB in September 2011. The FSB will review by November 2011 a status report on whether further steps should be taken to implement or complement the recommendations set out in the November 2010 report.
Shadow Banking
At the November 2010 Summit, the G20 Leaders requested that the FSB, in collaboration with international standard-setting bodies, develop recommendations to strengthen the regulation and oversight of the shadow banking system by mid-2011. The FSB has formed a task force to develop initial recommendations for discussion that would: 1. Clarify what is meant by the shadow banking system; 2. Set out potential approaches for monitoring the shadow banking system; and 3. Explore possible regulatory measures to address the systemic risk and regulatory arbitrage concerns posed by the shadow banking system.
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The FSB will consider initial draft recommendations at its July Plenary meeting and thereafter further develop the recommendations to be submitted to the G20 in the autumn. The FSB this month is publishing a short background note on this project, setting out current thinking and inviting public comments on taking the work forward. The note proposes that monitoring and responses be guided by a two-stage approach: Firstly, casting the net wide, looking at all nonbank credit intermediation to ensure that data gathering and surveillance cover all the activities within which shadow banking-related risks might arise; and Second, then narrowing the focus, concentrating on the subset of non-bank credit intermediation where maturity/liquidity transformation and/or flawed credit risk transfer and/or leverage create important risks.
Improving the OTC and commodity derivatives markets

In its October 2010 report on Implementing OTC Derivatives Market Reforms, the FSB made 21 recommendations addressing practical issues that authorities may encounter in implementing the G-20 Leaders commitments concerning standardisation, central clearing, exchange or electronic platform trading, and reporting of transactions to trade repositories by end-2012. The FSB has surveyed the actions being taken to implement the recommendations and is publishing a separate, more detailed report on progress, based on the analysis of its OTC derivatives working group. The following paragraphs give a brief summary.
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Major implementation projects are underway in the largest OTC derivatives markets, and international policy development is proceeding according to the timetable set out in the October report, including the following steps: 1. The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) published in March a consultative report on harmonised principles for financial market infrastructures, covering payment systems, central securities depositories, securities settlement systems, and central counterparties (CCPs), and including guidance on trade repositories. 2. IOSCO published in February a study evaluating the benefits and challenges associated with the implementation of measures aimed at increasing exchange and electronic trading. It will conduct further analysis on the current market use of multi or single-dealer platforms. 3. The largest derivatives dealers and other major market participants delivered in March a letter to the OTC Derivatives Supervisors Group, setting out broad objectives, specific initiatives and supporting commitments in this letter as the foundation of a roadmap for implementation of G20 objectives. 4. The CGFS, CPSS, and IOSCO held a forum in January 2011 and are organizing follow-up work to promote expanding access to central clearing to a broader set of participants, and links between CCPs, without sacrificing the rigour of CCP risk controls. Nevertheless, although implementation is still in its early stages, the FSB is concerned that many jurisdictions may not meet the end-2012 deadline, and believes that in order for this target to be achieved, jurisdictions need to take substantial, concrete steps toward implementation immediately. Differences in approaches are emerging that could weaken the effectiveness of reforms in these markets, create potential opportunities
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for regulatory arbitrage, or subject market participants and infrastructures to conflicting regulatory requirements. Divergent approaches to requirements for the reporting of transaction data to trade repositories may lead to difficulties in cross-border sharing of data or aggregating data on a global basis unless steps are taken to ensure consistency. Potential emerging inconsistencies may also be seen in the development and future application of clearing requirements and strengthened margining/collateralisation practices across asset classes, products and market participants, and requirements for trading on multi-dealer versus single dealer platforms. In this context, the FSB has requested that IOSCO undertake further analysis on market use of multi- or single-dealer platforms. More generally, the FSB will continue to monitor developments as implementation progresses and flag emerging inconsistencies that it identifies. The FSBs next report on progress in implementing OTC derivatives reforms will be delivered by October 2011. The FSB expects that this later report will provide greater insight as to whether progress is on track and greater detail on implementation by asset class (covering interest rate, credit, equity, commodity, and foreign exchange). With respect to the commodity derivatives markets, steps are being taken to improve transparency, mitigate systemic risk, and protect against market abuse. In the first place, all these objectives should be furthered through implementation of the recommendations in the FSBs October 2010 report on OTC derivatives market reforms, which apply equally to commodity derivatives as to other asset classes.
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In addition, the March 2011 report of the IOSCO Task Force on Commodity Futures Markets proposes future work to address these goals, including, by October 2011, updating standards of best practice set out in the 1997 Tokyo Communiqu and producing a joint report with the International Energy Agency, International Energy Forum and OPEC on the impact of price reporting agencies, and working towards the creation of a trade repository for the financial oil market by the first quarter of 2012. The FSB will consider next steps following the Task Forces report to it in September 2011
Breaking News BIS invites new members, 26 June 2011

The Board of Directors of the Bank for International Settlements (BIS) announced its decision to invite 4 central banks to become BIS members: 1. Colombia 2. Luxembourg 3. Peru and 4. The United Arab Emirates to become BIS members. These central banks were selected in accordance with Article 8.3 of the BIS Statutes. The invitations to membership constitute a further step in a process that began in 1996 with invitations to nine central banks: 1. Central Bank of Brazil 2. People's Bank of China 3. Hong Kong Monetary Authority 4. Reserve Bank of India 5. Bank of Korea 6. Bank of Mexico
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7. Central Bank of the Russian Federation 8. Saudi Arabian Monetary Agency and 9. Monetary Authority of Singapore The invitations to membership continued in 1999 with four new members: 1. Central Bank of Argentina 2. European Central Bank 3. Central Bank of Malaysia and 4. Bank of Thailand. The invitations to membership continued in 2003 with six new members: 1. Bank of Algeria 2. Central Bank of Chile 3. Bank Indonesia 4. Bank of Israel 5. Reserve Bank of New Zealand and 6. Bangko Sentral Pilipinas. General Manager's speech: Building a lasting foundation for sustainable growth Speech delivered by Mr Jaime Caruana, General Manager of the BIS, on the occasion of the Bank's Annual General Meeting, Basel, 26 June 2011. Good afternoon, ladies and gentlemen. In a number of crucial respects, the picture today is better than it was a year ago, and much better than it was in June 2009. While serious vulnerabilities remain and hard work lies ahead, it is important that we don't lose sight of how far we have come. Taking the global economy as a whole, the gap between world demand and
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productive capacity is closing. And the world economy is growing at a historically respectable rate of around 4 per cent. The recovery, although slow and uneven, has raised output to its pre-crisis levels in some of the countries hardest hit. The resurgence of demand has put concerns about deflation behind us. Accordingly, the need for continued extraordinary monetary accommodation has faded. The financial reform agenda has moved forward rapidly with the agreement reached on Basel III. Banks have already increased their capital base significantly. A macroprudential approach that focuses on systemic risk forms a fundamental part of the new framework and internationally agreed standards. These are no small achievements, and not one of them was assured a year ago. After four years, however, the financial crisis and the ensuing policy responses continue to cast long shadows. Economies and financial systems are still vulnerable to even modest shocks, and the likelihood of severely adverse developments has not decreased. The global recovery remains uneven, and global headline inflation has risen a full percentage point, to 3.6 per cent, since April of last year. In the advanced economies at the centre of the crisis, overall deleveraging and structural adjustment is still incomplete. Excess capacity remains in the financial and construction sectors. The repair of private balance sheets still has some way to go.
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And the threats posed by public sector debt have materialised, reaching a crisis point in some countries. There are still substantial risks of contagion between sovereign and financial sector fragilities. Some emerging market economies exhibit the all-too-familiar signs of rising financial vulnerabilities, as domestic credit and asset prices surge. Sizeable current account imbalances are very much with us, and gross capital flows pose risks even to economies running current account surpluses. As these developments unfold, global monetary and financial conditions remain unusually accommodative. In the remainder of my remarks, I will describe these legacies of the crisis, and then turn to the policies - fiscal, monetary, structural and prudential - that can contribute to the lasting foundation for robust, stable and sustainable growth. Those policies, in turn, need to be part of a broader, integrated framework in which policymakers act promptly both with a long-term perspective paying modest costs today to avoid larger costs tomorrow - and with attention to the global repercussions of their policies. In the end, cooperation will make everyone better off. Challenges and policies for stable and sustainable growth As we leave the crisis behind us, it is important to understand the underlying source of the challenges it has left. We experienced the bust of a global financial cycle.
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During the preceding boom, there was a tendency not only to underestimate financial risk, but to overestimate the economy's potential growth rate and its capacity to generate sustainable tax revenue. And associated with this was a failure to recognise emerging structural imbalances that would ultimately damage the foundations of sustainable long-run growth. I will highlight four challenges that were left by the crisis: fiscal reckoning; inflation; excess capacity together with the unfinished adjustment of private sector balance sheets; and financial vulnerabilities.
Fiscal reckoning
The economic downturn, the tax cuts and expenditure increases in response to the crisis, and the cost of recapitalising the financial sector have all brought forward the fiscal reckoning. In countries that experienced credit booms, policymakers have come to recognise the significant hole left by the collapse in tax revenues that had been only temporarily boosted by the boom. The aftermath is a sovereign debt crisis. In many cases, recent events simply brought forward an approaching problem. Without corrective measures, the fiscal trajectories of some of the world's largest advanced economies are unsustainable. This is not news. Rising dependency ratios, expensive publicly funded programmes for retirement and health care and the like put future commitments well in excess of future revenues. Financial market participants can ignore such looming problems for a long time until, suddenly, they enforce changes that are swift and painful. Thus, the need for fiscal consolidation is even more urgent than when I spoke a year ago. According to the OECD, the average OECD country
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must improve its primary balance by nearly 7 per cent of GDP just to stabilise its debt-to-GDP ratio by 2026. We will not have lasting macroeconomic and financial stability until we have taken decisive measures to put public finances on a sound and credible path. The creditworthiness of the sovereign is a prerequisite for a well-functioning economy. The default of the sovereign breaks the social contract and undermines the trust that is essential to the smooth running of both the state and the economy. No economy - no matter how large, rich and powerful - is immune to the risks posed by fiscal incoherence. Nowhere is the link between fiscal sustainability and financial health more apparent than in parts of Europe today. In some European countries, vulnerabilities in the financial sector weakened the state; in others, public sector weakness has infected the banks; in all, the resulting fragilities now jeopardise the benefits of economic and financial integration. There is no easy way out, no shortcut, no painless solution - that is, no alternative to the rigorous implementation of comprehensive country packages including strict fiscal consolidation and structural reforms. The design of the euro area's fiscal and competitiveness arrangements must lead to predictable, reliable and less discretionary early corrective action in good times. Unfortunately, Europe does not have a monopoly on urgent fiscal challenges.
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The big economies also need to manage their situations carefully and make efforts to consolidate fiscal positions quickly, not least because they have a big impact on global financial conditions.
Inflation, side-effects and low interest rates

The welcome recovery and absorption of spare resources have brought with them the less welcome spectre of inflation. As they did in the early 1970s, booming commodity prices may point to a more serious problem. Prices of food, energy, metals and the like are more sensitive to shifts in supply and demand than are the prices of either manufactured goods or services. And, unlike in the past two decades, prices of internationally traded manufactured goods look to provide little inflation offset, as wages and prices are rising in emerging markets. Despite the apparent persistence of slack in some parts of the world, there are risks of second-round effects and of rising inflation expectations. Very accommodative monetary policy conditions in the economic regions most affected by the turmoil have been transmitted globally through bond and equity markets and bank credit. Double-digit growth in US dollar loans to non-US residents is just one example of how borrowing in major currencies is providing cheap credit even where central banks have tightened. Extraordinarily loose financial conditions may have undesirable side-effects. We are all familiar with the list.
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Low interest rates can delay balance-sheet repair, encourage dangerous risk-taking in segments of financial markets and, in the process, make the eventual exit from official support more hazardous. They can intensify investors' eagerness to place funds in booming emerging market economies, encouraging the build-up of financial imbalances there. The more active deployment of macroprudential tools in emerging market economies is welcome, but cannot substitute for monetary tightening. The longer that interest rates are low, the more severe these side-effects and the greater the risk of a disruption when yields inevitably rise. There is a need to normalise monetary policy. The prevailing, extraordinarily accommodative policy rates will not deliver lasting monetary and financial stability. Real short-term interest rates have actually fallen in the past year, from minus 0.6 per cent to minus 1.3 per cent globally. History teaches us that recoveries from financial crises are slower and less robust than those after ordinary recessions. After a financial crisis, it takes longer for debt burdens to fall, balance sheets to be repaired, unproductive capital to be scrapped, and labour to be reallocated. Policymakers should not hinder this inevitable adjustment. Normalising policy too late and too slowly may undermine inflation-fighting credibility as well as risk further damage from the delay of structural and balance-sheet adjustments.
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More normal interest rates lessen the temptation to muddle through, and they place the focus squarely on the needed adjustments. Monetary policy tightening can also aid the adjustment in current account imbalances. By encouraging currency appreciation in countries that are growing more quickly, it will contribute to correcting imbalances there. It can also complement the structural policies needed to rebalance growth patterns globally, moving us away from the unsustainable combination of leverage-led and export-led growth. Excess capacity and unfinished balance-sheet adjustments Excess capacity in finance and real estate points to unfinished adjustments in the crisis-stricken economies. The financial industry has built capital buffers, but overall leverage in the economy - private and public - remains too high. The simple mean of household debt-to-GDP for the US, the UK and Spain declined by only 2 percentage points from 2007 to the end of 2010, while over the same period for the same countries, government debt-to-GDP rose 30 percentage points. Until losses are revealed and balance sheets repaired, funding problems and distortions will persist. This is an important feature of economies after the bust of a credit boom. In particular, the post-crisis financial system remains large relative to the economy as a whole: excess leverage and excess capacity have not been shed. Policymakers must intensify their efforts to promote the repair of financial sector balance sheets and to set the conditions for banks' long-term profitability.
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The macroeconomic road is likely to be at least as bumpy next year as it has been this year. This means making sure that banks are ready when the next shock inevitably comes. Tough stress tests, supported by recapitalisation measures, are essential. Moreover, without a stronger and leaner financial system, it will be impossible to withdraw the extensive public support that is still in place. No financial system can operate safely and effectively under conditions that are creating both moral hazard and the resource misallocations that come with it.
Financial vulnerabilities
Despite efforts to date, sovereign and financial sector risks continue to feed on each other. Short-term bank funding needs remain high, and the risks of interest rate surprises continue to be elevated. Elements of global finance are prolonging financial fragilities: these include not only low policy rates and expectations of continued official support, but also high expectations of returns on bank equity. Investors need to lower their expectations of such returns in accord with lower bank leverage. At the same time, there are signs of a return to excessive risk-taking. While encouraging investors to take some risk was part of crisis management, there are signs that, in some areas, investors may be going too far again. Moreover, several of the more vibrant economies of the world are exhibiting signs of an unsustainable credit boom. Credit levels and asset prices have moved outside their historical ranges, signalling the emergence of financial vulnerabilities.
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History may never actually repeat itself, but it does have a recurring tempo and tone. These developments portend yet another damaging financial cycle. We should not underestimate the work required to complete financial reform. Basel III needs full and consistent implementation worldwide. We need to demand higher standards for systemically important financial institutions and credible mechanisms for their orderly resolution. The risks posed by shadow banking systems must be monitored and reduced. Improvements are needed in the statistics and processes for monitoring systemic risks, nationally and globally. Where credit booms and output are advancing strongly, authorities should consider imposing the Basel III countercyclical buffer to make banks more resilient. And throughout all this, we need to make the arrangements flexible enough to keep pace with the rapidly evolving financial system and the incentives to arbitrage restrictions away. To sum up, early action is needed. The question is not whether to consolidate fiscal policy. It is not whether to normalise monetary policy. And it is not whether to accelerate structural adjustment. It is when and how each of these will happen. Fiscal trajectories must be put on sustainable paths, monetary conditions should be normalised, and adjustments in the real economy and balance sheets should be accelerated.
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Early action will reduce vulnerabilities, lower repair costs and strengthen resistance to unexpected events. This is particularly true for the resilience of financial firms. Where possible, we should build strength now. Instead of taking the maximum time to reach the minimum standards, there is a good case for going faster and going further. Perhaps this time we will see a virtuous race to the top. Policy frameworks The more enduring lessons of the crisis, however, are not just about policy actions, but about policy frameworks. A lasting foundation for monetary and financial stability requires regulation and supervision with a strong macroprudential orientation; monetary policy that plays an active role in supporting financial stability; and fiscal policy that amasses the buffers required for effective crisis management. These policies share two features. One rejects short-termism in favour of a long-term view. The other frees us from home bias in policymaking, allowing us to do more than just "keep our own house in order". The first feature requires policymakers to keep an eye on the long-term horizon if they are to pre-empt the slow build-up of financial imbalances that can derail growth, cripple monetary policy and trigger sovereign crises. The governance of macroprudential policy must encourage decision-makers to take a long view based on the principles of independence, clarity and accountability.
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This suggests that central banks should play a key role. Fiscal policy also needs to take a long-term view. Governments, like financial firms, must build up buffers. Fiscal policy should aim at maintaining a very low level of debt during normal times so that governments are ready for the next, inevitable shocks. And policymakers should recognise that the level of revenue collected in the midst of a credit boom is unsustainable. The second feature tells policymakers that, in an integrated global economy, keeping their own house in order is not enough. No individual economy is safe unless the global economy is safe. The fortunes of individual countries and the adequacy of their policies can be accurately assessed only as part of the global conditions that, collectively, they help to shape. For instance, if every central bank views commodity price movements as outside its control, then global monetary policy can be too loose. Just as each big private bank generates systemic effects that it must internalise, so too each country's policies create international spillovers that it must take on board. Building a lasting foundation for low inflation, robust growth and a stable financial system requires early action in the face of uncertainty. It will require not only good ideas, hard work and difficult adjustments but also collaboration, cooperation and coordination both nationally and internationally. Developing a shared understanding of the challenges, and working towards common solutions, is what international cooperation is all about. As it has throughout its history, the BIS will continue to pursue this core mission.
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Certified Basel iii Professional (CBiiiPro) - Distance Learning and Online Certification Program.
The Cost: US$ 297 What is included in this price: A. The official presentations we use in our instructor-led classes (1426 slides) You can find the course synopsis at: www.basel-iii-association.com/Course_Synopsis_Certified_Basel_III_Pr ofessional.html B. Up to 3 Online Exams There is only one exam you need to pass, in order to become a Certified Basel iii Professional (CBiiiPro). If you fail, you must study again the official presentations, but you do not need to spend money to try again. Up to 3 exams are included in the price. To learn more you may visit: www.basel-iii-association.com/Questions_About_The_Certification_An d_The_Exams_1.pdf www.basel-iii-association.com/Certification_Steps_CBiiiPro.pdf C. Personalized Certificate printed in full colour Processing, printing and posting to your office or home To become a Certified Basel iii Professional (CBiiiPro) you must follow the steps described at: www.basel-iii-association.com/Basel_III_Distance_Learning_Online_C ertification.html
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The Basel iii Compliance Professionals Association (BiiiCPA) is the largest association of Basel iii Professionals in the world. It is a business unit of the Basel ii Compliance Professionals Association (BCPA), which is also the largest association of Basel ii Professionals in the world www.basel-iii-association.com

Basel 3 News July 2011

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Basel 3 News July 2011

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Basel iii Compliance Professionals Association (BiiiCPA)

Basel III News, July 2011

Is it true that investors will lose money because of Basel III?

Is it that simple? Less profit because of fewer risks?

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Important parts of the 81st Annual Report of the BIS

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Resolution tools and regimes

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Supervisory intensity and effectiveness

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Improving the OTC and commodity derivatives markets

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Breaking News BIS invites new members, 26 June 2011

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

Inflation, side-effects and low interest rates

Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

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