BASEL III NORMS
B Y: RANJIT RAMKUMAR RASHMI.S

RENUKA PRASANNA

MEANING OF "BASEL III":

A comprehensive set of reform measures designed to improve the regulation, supervision and risk management within the banking sector. The Basel Committee on Banking Supervision published the first version of Basel III in late 2009, giving banks approximately three years to satisfy all requirements. Largely in response to the credit crisis, banks are required to maintain proper leverage ratios and meet certain capital requirements.

REASONS FOR FORMULATION OF BASEL III
Reducing profitability of small banks and threat of takeover Lack of comprehensive approach to address risks Self-regulation in area of asset securitization Lack of safety Inability to strengthen the stability of financial system

Failure to achieve large capital reductions
Failure in enhancing the competitive equality amongst banks

AIMS & OBJECTIVES OF BASEL III
To minimize the probability of recurrence of crises to greater extent. To improve the banking sector's ability to absorb shocks arising from financial and economic stress. To improve risk management and governance.

To strengthen banks' transparency and disclosures .
To minimize the probability of recurrence of crises to greater extent.

STRUCTURE OF BASEL III

PILLAR 1- MINIMUM CAPITAL REQUIREMENTS
Calculate required capital Required capital based on    Market risk Credit risk Operational risk

Used to monitor funding concentration

PILLAR 2- SUPERVISORY REVIEW PROCESS
Bank should have strong internal process Adequacy of capital based on risk evaluation

PILLAR 3 – ENHANCED DISCLOSURE
Provide market discipline Intends to provide information about banks exposure to risk

SIGNIFICANT METHODS OF MEASUREMENT
The pillar is divided in three types of risk for which capital should be held: Credit Risk Operational risk Market risk

CREDIT RISK Credit risk is the risk that those who owe you money will not pay you back. Historically credit risk is the larger risk banks run. BIS II proposes three approaches by which a bank may calculate its required capital for credit risk. Standardized approach Internal rating based (IRB) advanced Internal rating based (IRB) foundation

OPERATIONAL RISK
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Comparable to credit risk, BIS II proposes three methods for measuring operational risk. Basic indicator approach Standardized approach Advanced measurement approach (AMA)

MARKET RISK
Market risk is the risk of losses due to changes in the market price of an asset. Market risk will only have to be calculated for assets in the trading book. Foreign exchange rate risk and commodities risk are part of the market risk. Two methods may be used: Standardized measurement method Internal models approach

CHALLENGES IN IMPLEMENTATION OF BASEL III NORMS
Banks usually have 3 types of challenges 1. 2. 3. Functional challenges Technical challenges Organizational challenges

FUNCTIONAL CHALLENGES
Developing specifications for the new regulatory requirements, such as the mapping of positions (assets and liabilities) to the new liquidity and funding categories in the LCR and NSFR calculations. the specification of the new requirements for trading book positions and within the CCR framework (e.g. CVA) as well as adjustments of the limit systems with regard to the new capital and liquidity ratios.

Crucial is the integration of new regulatory requirements into existing capital and risk management as some measures to improve new ratios (e.g. liquidity ratios) might have a negative effect on existing figures.

TECHNICAL CHALLENGES
•The technical challenges includes the availability of data, data completeness, and data quality and data consistency to calculate the new ratios. • The financial reporting system with regard to the new ratios and the creation of effective interfaces with the existing risk management systems.

OPERATIONAL CHALLENGES
• The operational challenges includes stricter capital

definition lowers banks’ available capital. At the same time the risk weighted assets (RWA) for securitizations, trading book positions and certain counterparty credit risk exposures are significantly increased.
• The stricter capital requirements, the introduction of the LCR and NSFR will force banks to rethink their liquidity position, and potentially require banks to increase their stock of high-quality liquid assets and to use more stable sources of funding.

BENEFITS OF IMPLEMENTATION…
Demonstrate that the banking system is recovering well from the global financial crisis of 2008 and has been developing the resilience to future shocks. Contribute to a bank’s competitiveness by delivering better management insight into the business, allowing it to take advantage of future opportunities. Strengthen the financial system of both developing and developed countries by addressing the weaknesses in the measurement of risk under Basel II framework revealed during the crisis.

CONT’D…
Delivers a much safer financial system with reduced probability of banking crises at affordable costs. The impact of costs is minimized through long phase-in. It is expected that as the proportion of equity in the capital structure of banks rises, it would reduce the incremental costs of raising further equity as well as non-common equity capital.

CONCLUSION
Basel III introduces a paradigm shift in capital and liquidity standards. It was constructed and agreed in relatively record time which leaves many elements unfinished. The final implementation date a long way off. Market pressure and competitor pressure already driving considerable change at a range of firms. Firms therefore should ensure to engage with Basel III as soon as possible to be competitively advantaged in the new post-crisis financial risk and regulatory landscape.