...Basel II to Basel III: Changes and Requirements Hesham Hamdy Chief Risk Officer, Arab International Bank Nairobi, 7-8 March 2012 Basel; what is it? • A New Standard for the Measurement of Risks in Banks, and for the Allocation of Capital to cover those risks, published by the Basel Committee of G10 Central Banks. • What Does Basel Committee Do? - Acts as Think-Tank for banking regulators - Issues guidance on best practice for banks - Standards accepted worldwide - Generally incorporated in national banking regulations Basel I • Basel I was the round of deliberations by central banks from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This was known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992 . • Basel I primarily focused on credit risk. Assets of banks were classified and grouped in five categories according to credit risk, carrying risk weights of zero (for example home country sovereign debt), ten, twenty, fifty, and up to one hundred percent (this category has, as an example, most corporate debt). Basel I (continued) • Banks with international presence were required to hold capital equal to 8 % of the risk-weighted assets. • Basel I was then widely viewed as outmoded because the world has changed as financial corporations, financial innovation and risk management have developed. Therefore, a more comprehensive set of...
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...Basel I DEFINITION OF 'BASEL I' A set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets. Basel II is the second of the Basel Accords, (now extended and partially superseded[clarification needed] by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. BREAKING DOWN 'Basel I' The first accord was the Basel I. It was issued in 1988 and focused mainly on credit risk by creating a bank asset classification system. This classification system grouped a bank's assets into five risk categories: 0% - cash, central bank and government debt and any OECD government debt 0%, 10%, 20% or 50% - public sector debt 20% - development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt (under one year maturity) and non-OECD public sector debt, cash in collection 50% - residential mortgages 100% - private sector debt, non-OECD bank debt (maturity over a year), real estate, plant and equipment, capital instruments issued at other banks The bank must maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted assets. For example, if a bank has risk-weighted assets of $100 million, it is required to maintain...
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...www.pwc.com/journal The Journal Capital management in banking: The way forward Looking ahead, the future for banking is becoming clearer. It is a future of more capital, more liquidity and less risk. In this article we look into Basel III and the challenges firms will face as these changes come into operation. December 2010 The future of banking is becoming clearer. It is a future of more capital, more liquidity and less risk. And, inevitably, it is a future with lower returns on capital, higher costs of doing business and slower growth with ultimate effects to be felt by shareholders and end consumers. Greater scrutiny by investors, regulators and other stakeholders regarding balance sheet usage is also expected. Basel III is set to redraw the banking landscape. It will have a profound impact PwC (US) on profitability and force many banks to +1 (646) 471 5257 transform their business models. It will fernando.de.la.mora@us.pwc.com also require firms to undertake significant process and system changes. Fernando De La Mora challenges but also keep abreast of the competition. The markets have already started to price Basel III impact. As shown in Figure 1, the credit default swap (CDS) market already pays more attention to banks’ pro-forma capital adequacy levels under Basel III rather than to the current standards. As the equity markets better understand the return on equity (ROE) impact of new standards and bank strategies become more clearly articulated, investors...
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...BASEL III Overview: BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision. The main purpose was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. Moreover, Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash flows over 30 days; the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress. Summary of proposed changes First, the quality, consistency, and transparency of the capital base will be raised. Second, the risk coverage of the capital framework will be strengthened. Third, the Committee will introduce...
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...Basel III Basel III overview Concepts of Basel III 1/25/2016 Lessons of Financial Crisis – • Insufficient common equity, • Hybrid capital (Tier 2 and Tier 3) not sufficiently loss absorbent, • Insufficient capital buffers above minimum, • Inadequate risk capture (Securitizations, Trading and derivatives activities, Counterparty credit risk), • No constraint on leverage, • No recognition of greater risk posed by systemically important banks, • Insufficient liquidity and vulnerable structural liquidity profiles, • Weak governance resulting in poor underwriting and risk management, • Risk management/supervision overly focused at institutional level • Systemic risks: procyclicality and interconnectedness After the financial crisis, the Basel Committee has revised Basel II; Basel III introduced: Strengthening the global capital framework; Capital conservation buffer ; Countercyclical buffer. Leverage ratio; Global liquidity standard; Capital ● Pillar 1 Capital: Quality and level of capital (Going Concern Capital, Gone concern capital), Capital conservation buffer, Risk coverage: Securitizations, Trading book, Counterparty credit risk Containing leverage: Leverage ratio ● Pillar 2 Risk management and supervision: Supplemental Pillar 2 requirements. ● Pillar 3 Market discipline: Revised Pillar 3 disclosures requirements New Definition of Capital According to Basel III, bank capital will be divided into...
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...COMMERCIAL BANKS AND NEW CAPITAL REGULATION MAF 202 Prepared By: Simardeep Sran - 211689444 Due: September 12, 2013 Table of Contents 1. Introduction 4 2. Findings 5 3.1. Move from Basel II to Basel III 5 3.2.1. The Global Financial Crisis and Basel II Shortcomings 5 3.2. Basel III 6 3.3.2. Main Features 6 3.3.3. Basel II and Basel III Difference 8 3.3. Implications of Basel III 9 3.4.4. Global Banking System 9 3.4.5. Banking System in Australia 9 3.4.6. Banking System in Japan 10 3. Conclusions 11 4. Reference List 12 1. Introduction The financial system is beyond indispensable in the global economy, with commercial banks playing a vital role as the main form of a financial institution. Within the financial system it is crucial to have regulations and guidelines for financial institutions...
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...FORE School of Management A DISSERTATION REPORT ON Impact of Basel III norms on select Indian & European banks Submitted By: DEEPANSHU CHANDRA, 053009 FORE SCHOOL OF MANAGEMENT, DELHI A Report submitted in partial fulfilment of the requirement of Post Graduate Diploma Program in Management SUBMITTED TO: Faculty Guide: Prof. Sanghamitra Buddhapriya FORE School of Management 1 FORE School of Management CERTIFICATE This is to certify that Mr. Deepanshu Chandra has completed his Dissertation under my guidance and has submitted this project report entitled Impact of Basel III norms on select Indian and European banks towards partial fulfilment of the requirements for the award of the Post Graduate Diploma Program in Management (FORE, Delhi) 2011-2013. This Report is the result of his own work and to the best of our knowledge. This project was carried out under my overall supervision. Date: Place: ---------------------------------- Prof. Sanghamitra Buddhapriya (Faculty Guide) FORE School of Management 2 FORE School of Management ACKNOWLEDGEMENT I would like to take this opportunity to thank all those who helped me in the successful completion of my Dissertation. To start with, I would like to thank the organization FORE School of Management for providing me the chance to undertake this Dissertation. I wish to place on records, my deep sense of gratitude and sincere appreciation to my Mentor, Prof. Sanghamitra Buddhapriya, Faculty...
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...WORKING PAPER NO: 470 BASEL BANKING NORMS – A PRIMER Akshay Uday Shenoy PGP Student Indian Institute of Management Bangalore Bannerghatta Road, Bangalore – 560076 akshay.shenoy@iimb.ernet.in Yatin Balkrishna Mohane PGP Student Indian Institute of Management Bangalore Bannerghatta Road, Bangalore – 560076 yatin.mohane@iimb.ernet.in Charan Singh RBI Chair Professor Economics & Social Science Indian Institute of Management Bangalore Bannerghatta Road, Bangalore – 5600 76 Ph: 080-26993818 charansingh@iimb.ernet.in Year of Publication-October 2014 Basel Banking Norms – A Primer1 Abstract This paper aims to first build a deeper understanding of the emergence of Basel banking norms (Basel I), and the transition to each of the subsequent regulations (Basel II and Basel III). The primary purpose of developing this understanding is to further analyze the extent of effectiveness of the Basel norms. To explore how such regulations impact an economy, we have specifically looked at five economies of the world (including India), which are geographically apart, in this context. The idea here is to study how, for instance, banking institutions have shaped up to these norms – and whether the effects were favorable or adverse. We then conclude by conceptually looking at the future direction of regulations such as the Basel norms in the banking industry. Keywords: Banking, Financial Services, Regulation, Basel Norms, Capital Adequacy, Liquidity 1 The authors...
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...Overview[edit] Unlike Basel I and Basel II, which focus primarily on the level of bank loss reserves that banks are required to hold, Basel III focuses primarily on the risk of a run on the bank by requiring differing levels of reserves for different forms of bank deposits and other borrowings. Therefore Basel III rules do not, for the most part, supersede the guidelines known as Basel I and Basel II; rather, it will work alongside them. Key principles[edit] Capital requirements[edit] The original Basel III rule from 2010 was supposed to require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (including common equity and up from 4% in Basel II) of "risk-weighted assets" (RWAs).[3] Basel III introduced two additional "capital buffers"—a "mandatory capital conservation buffer" of 2.5% and a "discretionary counter-cyclical buffer" to allow national regulators to require up to an additional 2.5% of capital during periods of high credit growth. Leverage ratio[edit] Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated by dividing Tier 1 capital by the bank's average total consolidated assets (not risk weighted);[4][5] The banks were expected to maintain a leverage ratio in excess of 3% under Basel III. In July 2013, the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured bank holding companies...
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...23/08/2012 BASEL- III GUIDELINES Background : ➢ RBI released its final guidelines on 2nd May,2012 on the implementation of Basel – III capital regulation in India. ➢ These guidelines will be effective from 1st January,2013 in a phased manner & will be fully implemented by 31st March,2018. ➢ For the FY 2013, Banks will have to disclose the capital ratios computed under the existing guidelines (Basel – II) on capital adequacy as well as those computed under the Basel – III capital adequacy framework. Purpose : • Implementation of Basel III is essential for restoring confidence in the regulatory framework for banks and to ensure a safe & stable global banking system. • Basel-III urges banks to raise the quality of Capital to absorb unexpected losses, to reduce the chance of another financial crisis. Need arose due to : • The U S sub-prime crisis has highlighted the linkages of the main types of risks, especially Credit, Market & Liquidity risks and since then the need for strengthening the capital regime has emerged prominently. Important Points : ➢ Greater focus on “Common Equity” i.e. paid up capital, reserves, retained earnings etc. raising the minimum common equity requirements from the existing 2% of risk-weighted assets to 5.50% by 31st March,2018, and a capital conservation buffer of 2.50%, bring the total common equity requirements to 8% by 2018. ➢ The overall minimum Tier – I capital requirements, which includes common equity and...
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...Is Basel III a better support to Islamic banks than Basel II? International Interdisciplinary Conference On Changes, Challenges and Consequences In Commerce, Engineering, Technology and Social Science. Institute of Business Management and Research, Chakan & Choice Institute of Management Studies and Research, pune, 15th March, 2014. Dr. Atmaram palnitkar Research Guide& Principal of Dayanand College OF Commerce, Latur. palnitkarav@rediffmail.com&9423347478 Abdul-Jabbar Qasem Ali Al-badaani Research Scholar of Com and Magt Sci, SRTM University, Nanded. Amaf3600@gmail.com&7709670130 ------------------------------------------------- ------------------------------------------------- ABSTRACT Banking activities involve many risks calculated and otherwise. Banks have to take appropriate measures and require management of their capital and credit and implementation procedures in keeping with the best international practices, to mitigate potential losses and avoid projected pitfalls. In view of the recent financial crisis, due to wrong management or improper implementation as well as the collapse of large economies has had a cascading effect all round the world in the form of collapses of famous institutions and banks, and thus arose a decision to have a better financial control in the form of Basel I to be later followed by Basel II and Basel III. Thus a new culture in financial controls and risk management has arisen to safeguard the banking...
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...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 ...
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...BASEL NORMS – BOON OR BANE? BY Pallabi ROY (PGDMB13/035) PRITAM SATHPATY (PGDMB13/077) SAGAR CHoUDHARY (PGDMB13/081) SHERIN MATHEWS (PGDMB13/049) SOHINI BANERJEE (PGDMB13/052) TUSHAR SHARMA (PGDMB13/086) table of contents TOPIC PAGE NO. 1. INTRODUCTION 1 2. Importance of Regulation of Bank Capital 2 3. BCBS : A Historical Background 3 4. BASEL I ACCORD 4 I. SALIENT FEATURES 5 II. ADVANTAGES OF BASEL I 9 III. SHORTCOMINGS OF BASEL I 11 5. baSEL II 13 I. from basel i to basel ii - the journey continues 13 II. OBJECTIVES 15 III. THE ACCORD IN OPERATION 15 IV. IMPACT OF BASEL II ON INDIA 26 a. IMPACT ON THE INDIAN BANKING SYSTEM 26 b. POSITIVE IMPACT 27 c. NEGATIVE IMPACT 29 V. Basel II and the global financial crisis 30 6. BASEL III 32 I. INTRODUCTION 32 II. OBJECTIVES 32 III. CHANGES MADE IN THE BASEL ACCORD 33 IV. COMPARISON OF CAPITAL REQUIREMENTS UNDER 39 BASEL II AND BASEL III V. macroeconomic impact of basel iii 40 A. Impact on Individual Banks 40 B. IMPACT ON THE FINANCIAL SYSTEM 40 C. impact of basel iii on the indian 42 banking system VI. RBI GUIDELINES 44 VII. CONCERNS WITH BASEL III 45 7. CONCLUSION ` 50 Introduction Banks are...
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...percent of bank assets or risk-weighted bank assets. Bank capital serves as an important cushion against unexpected losses. It creates a strong incentive to manage a bank in a prudent manner, because the bank owners’ equity is at risk in the event of a failure. Thus, bank capital plays a critical role in the safety and soundness of individual banks and the banking system. Role of bank capital: • Source of funds – Start-up costs – Growth or expansion (mergers and acquisitions) – Modernization costs • Cushion to absorb unexpected operating losses – Insufficient capital to absorb losses will cause insolvency – Long-term debt can only absorb losses in the event of institution failure • Adequate capital – Regulatory requirements to promote bank safety and soundness – Mitigate moral hazard problems of deposit insurance by increasing shareholders’ exposure to bank operating losses – Market confidence is important to depositors and other bank claimants Capital Adequacy Capital Adequacy is the minimum amount of capital that a bank must hold to function effectively. It is a measure of financial strength and stability. It is usually expressed as a ratio of its capital to its assets. A ratio that can indicate a bank’s ability to maintain equity...
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...CAPITAL ADEQUACY FRAMEWORK AND RISK MANAGEMENT IN BANKS GUEST LECTURE: MR. R M PATTANAIK EX GM- INDIAN OVERSEAS BANK CAPITAL ADEQUACY RATIO (CAR) Also known as Capital to Risk (Weighted) Assets Ratio (CRAR) is the ratio of a bank’s capital to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirements. It is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. CAR= Capital funds/ Total risk weighted assets (TRWA) WHAT IS RISK? Risk is the possibility of suffering a loss which is UNEXPECTED, UNFORSEEN and UNCERTAIN. Expected losses can be managed and covered by “Provisions” like Loan loss or NPA provisions, Provision for depreciation and investments etc. However, unexpected losses can be taken care by maintaining adequate capital. The capital acts as cushion or shock absorber for the bank in times of unforeseen losses. RISK MANAGEMENT Whatever activities you undertake there is a certain degree of risk associated with it. This risk however...
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