BASEL III

BY Chaitanya Kekre 9261 Rahul Umarani 9257

AGENDA

Basel II Norms Basel II Criticism & Stress test results Basel III Proposals & Implementation Impact on U.S, EU, Indian Banks Basel III Criticism Conclusion

BASEL I
Basel II Finalization of Consultation Revised starts framework

BASEL II
Basel III Proposals

BASEL III ???

Market Risk

Pre-Basel

Credit Risk

Credit + Market + Credit Risk + Market Risks Op. Risks Pillars 2 and 3

Jul 1988

1996 1998

2001

2004

Jan Dec 2008 09

Evolution of Basel framework

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Minimum Capital Requirements

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Supervisory Review Process

The supervisory review process of the framework is intended not only to ensure that banks have adequate capital to support all the risks in their business but also to encourage the banks to develop and use better risk management techniques. The key principles of Supervisory review 1.Banks should have the process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels. 2.Intervention at the early stage to prevent capital from declining to below benchmark level. 3.Review of internal capital adequacy assessment and strategy 4.Assessment of overall capital in relation with risk profile.

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Market Discipline
With the adoption of the IRB approach of the New Accord, according to which banks have greater discretion in determining their capital needs, market discipline through public disclosure is called for.

This pillar is complementary to the first two pillars of the Model. It seeks to encourage the market discipline and the public disclosure, so as to allow shareholders, stakeholders and market players to know about key information about risk profile and available capital resources. The disclosure of capital structure, risk measurement and management practices, disclosure of risk profile of the bank are expected to improve the disclosures of the banks using the Internal Risk based approaches.

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Stress Test Results

Capital Needs of Big U.S. Banks EU BANKS

Bank American Express Bank of America Citigroup Wells Frago Morgan Stanley Goldamn Sachs JP Morgan Chase

Capital Needs None $33.9 Billion $ 5.5 Billion $13.7 Billion $ 1.87 Billion None None
Seven of the 91 European Union banks subject to stress tests failed with a combined capital shortfall of 3.5 billion Euros ($4.5 billion), stirring concern the evaluations were too lenient.

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Basel III

Broadly, these reforms will require banks to hold more and better quality capital and to carry more liquid assets, will limit their leverage and mandate them to build up capital buffers in good times that can be drawn down in periods of stress. - Dr. D. Subbarao, Governor, Reserve Bank of India (RBI) at the FICCI-IBA Conference on Global Banking: Paradigm Shift on September 7, 2010.

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Basel II

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Basel II

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Basel II

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Basel III

Citigroup is Comfortable with Basel III Requirements, CFO Says

Source: Newyork Times

Wells CFO Says Bank Is Basel Ready

Source: The Street

J.P. Morgan Chase Chairman and CEO James Dimon said that lending costs for bank customers will go up because returns for banks will fall after implementing stricter capital and liquidity requirements from the Basel III capital accord and other financial regulation on the bank
Source: Wall Street Journal

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New rules on bank capital are not particularly tough

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Basel 3 capital norms not to hit Indian banks - RBI

Source: Reuters

Source: Moneycontrol

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Source: Moneycontrol

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Source: Moneycontrol

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Net stable funding ratio. The net stable funding (NSF) ratio measures the amount of longer-term, stable sources of funding employed by an institution relative to the liquidity profiles of the assets funded and the potential for contingent calls on funding liquidity arising from off-balance sheet commitments and obligations. The industry has pushed back very hard on the net stable funding ratio test it would force very substantial and expensive changes to how they fund themselves and invest their assets and that the gain in safety would be marginal.

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Use of a leverage ratio A simple leverage ratio is a useful way of checking to see if the risk-based approach is leading to excessively large balance sheets . Technical problems that could make it very difficult to achieve uniformity. Accounting Standards :Some analyst have suggested that the two different accounting regimes could show total assets on the balance sheet that differed by as much as 100%, so that a fixed leverage ratio could require twice as much capital in one country as another.

Lehman Brothers and Bear Stearns cleared the leverage ratio set by BCBS

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Elimination of softer forms of capital Common stock provides the strongest form of capital protection :is also by far the most expensive form of capital. Banks have softer, and cheaper, forms of capital Perpetual Debts , Preferred Shares. The industry has been fighting back against the elimination of some of these forms. pushing for transition periods in which some or all of these forms of capital would continue to count as capital . Exclusion of some balance sheet items from capital Banks in every country gain considerable benefit from at least one of the balance sheet items that will no longer count as capital Europe: Corporate structures include investments in insurers and minority interests in their banks. US: banks are concerned about deferred tax assets and about mortgage servicing rights.

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Conclusion
India is growing economy , Infrastructure sector is growing rapidly which needs huge capital in coming years. Basel III has introduced higher capital requirement due to this bank cost would increase and may lead to higher interest rates. Fallout : Demand for Infrastructure bonds to be treated with lower risk weightage of 20%.

Banking will be safer, but more expensive, with extensive ramifications throughout the economy.

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