Description
This is a presentation about the key features of Basel 3 and impact of basel 3 norms on indian banks.
Introduction to Basel Norms
• BCBS –Committee of Central bankers from across the world
• Tier 1 Capital and Tier 2 capital
• Risk Weighted Assets
Basel I ? Basel II
• Minimum capital requirement of 8% • Assets were risk-weighted according to the identity of the borrower • Basel II - Risk-weighted according to the credit ratings
Basel II ? Basel III
• No change in overall capital requirement • TIER 1 Capital – 4 % to 6 % • Common Equity - 2 % to 4.5% • Capital conservation buffer – 2.5 %
Key Basel III components
Areas
Main Basel III components
1 Capital definition 2 Countercyclical buffers 3 Leverage ratio 4 Minimum capital standards 5 Systemic risk
Capital ratios and targets
RWA requirements
Liquidity standards
6 Counterparty risk 7 Trading book and securitisation (also known as Basel II.5) 8 Liquidity coverage ratio 9 Net stable funding ratio
The approach to buffers
11.Volatility buffer 10. Impact of future accounting changes 9. Management buffer 8. Market buffer 7.Economic growth buffer 6. Systemic buffer (tbc) 5. Countercyclical buffer (0.0% - 2.5%) 4.Conservation buffer (2.5%)
Target CT1 ratio
3. Definition change
Basel III
2. Basel III RWAs 1.TTC adjustments.
Basel III minimum (4.5%) Basel II minimum (2.0%)
Basel III and other regulatory changes
Additional considerations in setting target CT1 ratio
5
Capital buffers - Capital Conservation Buffer
• Purpose - to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions. • Capital Conservation Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity, after the application of deductions. • Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%.
• Capital Conservation Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity, after the application of deductions.
6
Capital buffers - Countercyclical Capital Buffer
• A countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.
• Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts of dividends, share buybacks and bonuses.
• The buffer will be phased in from January 2016 and will be fully effective in January 2019.
• Countercyclical Capital Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%
7
Regulatory Capital Ratio
• Total Regulatory Capital Ratio = [Tier 1 Capital Ratio] + [Capital Conservation Buffer] + [Countercyclical Capital Buffer] + [Capital for Systemically Important Banks]
8
Why so much importance for more capital??? • To sustain any losses incurred by the bank • To manage any financially stressful situation when the bank loses its credibility. • Above all, as a response to the economics of moral hazard
- discourages banks from involving in riskier activities like issuing CDS/Mortgage backed loans to unworthy borrowers, which happened in case of sub-prime crisis.
9
Leverage ratio
Issues • Pre-crisis build up of excessive leverage in the banking system
Basel III proposals • Constrain build-up of leverage in the banking sector
• Crisis market pressure to reduce leverage, amplified downward pressure on asset prices
• Capture Off-Balance Sheet (OBS) items
• Mitigate destabilising deleveraging which damages financial system and economy
• Reinforce risk-based requirements with a simple, non-risk-based backstop measure based on gross exposure • Limiting excessive credit growth
Observations during crisis situations • Build up of excessive leverage – e.g. Current debt of European banks & nations
10
Liquidity Coverage Ratio (LCR)
• The ratio is intended to ensure that a bank maintains adequate levels of unencumbered high quality assets to meet its liquidity needs. • Measured as the ratio of the bank’s high quality liquid assets (numerator), divided by its net cash outflows over a 30-day period (denominator) • The high quality assets included in the numerator include only Cash, central bank reserves that can be accessed during times of stress, marketable securities meeting certain criteria, and government or central bank debt • The denominator will be calculated by taking into account certain “run-off factors”
High-quality liquid assets LCR = Net Cash Outflow (30 days)
11
Net Stable Funding Ratio (NSFR)
• To promote medium to long term structural funding of assets and activities • “Stable funding” – the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon under conditions of extended stress • Defined as Available amount of stable funding / Required amount of stable funding > 100%
12
Basel III : Transitional Arrangements
1 2
3
13
Impact on Indian Banks
Regulatory Capital Adequacy Levels
Proposed Basel III Norm 4.5% 2.5% 0-2.5% 7-9.5%
Existing RBI Norm 3.6% (9.2%) Nil Nil 3.6% (9.2%)
Common equity (after deductions) Conservation Buffer Countercyclical Buffer Common equity + Conservation buffer + Countercyclical buffer
Tier I(including the buffer)
Total capital (including the buffers)
8.5-11%
10.5-13%
6% (10%)
9% (14.5%)
14
Basel III impact on Public Sector Banks
15
doc_258269862.pptx
This is a presentation about the key features of Basel 3 and impact of basel 3 norms on indian banks.
Introduction to Basel Norms
• BCBS –Committee of Central bankers from across the world
• Tier 1 Capital and Tier 2 capital
• Risk Weighted Assets
Basel I ? Basel II
• Minimum capital requirement of 8% • Assets were risk-weighted according to the identity of the borrower • Basel II - Risk-weighted according to the credit ratings
Basel II ? Basel III
• No change in overall capital requirement • TIER 1 Capital – 4 % to 6 % • Common Equity - 2 % to 4.5% • Capital conservation buffer – 2.5 %
Key Basel III components
Areas
Main Basel III components
1 Capital definition 2 Countercyclical buffers 3 Leverage ratio 4 Minimum capital standards 5 Systemic risk
Capital ratios and targets
RWA requirements
Liquidity standards
6 Counterparty risk 7 Trading book and securitisation (also known as Basel II.5) 8 Liquidity coverage ratio 9 Net stable funding ratio
The approach to buffers
11.Volatility buffer 10. Impact of future accounting changes 9. Management buffer 8. Market buffer 7.Economic growth buffer 6. Systemic buffer (tbc) 5. Countercyclical buffer (0.0% - 2.5%) 4.Conservation buffer (2.5%)
Target CT1 ratio
3. Definition change
Basel III
2. Basel III RWAs 1.TTC adjustments.
Basel III minimum (4.5%) Basel II minimum (2.0%)
Basel III and other regulatory changes
Additional considerations in setting target CT1 ratio
5
Capital buffers - Capital Conservation Buffer
• Purpose - to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions. • Capital Conservation Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity, after the application of deductions. • Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%.
• Capital Conservation Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity, after the application of deductions.
6
Capital buffers - Countercyclical Capital Buffer
• A countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.
• Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts of dividends, share buybacks and bonuses.
• The buffer will be phased in from January 2016 and will be fully effective in January 2019.
• Countercyclical Capital Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%
7
Regulatory Capital Ratio
• Total Regulatory Capital Ratio = [Tier 1 Capital Ratio] + [Capital Conservation Buffer] + [Countercyclical Capital Buffer] + [Capital for Systemically Important Banks]
8
Why so much importance for more capital??? • To sustain any losses incurred by the bank • To manage any financially stressful situation when the bank loses its credibility. • Above all, as a response to the economics of moral hazard
- discourages banks from involving in riskier activities like issuing CDS/Mortgage backed loans to unworthy borrowers, which happened in case of sub-prime crisis.
9
Leverage ratio
Issues • Pre-crisis build up of excessive leverage in the banking system
Basel III proposals • Constrain build-up of leverage in the banking sector
• Crisis market pressure to reduce leverage, amplified downward pressure on asset prices
• Capture Off-Balance Sheet (OBS) items
• Mitigate destabilising deleveraging which damages financial system and economy
• Reinforce risk-based requirements with a simple, non-risk-based backstop measure based on gross exposure • Limiting excessive credit growth
Observations during crisis situations • Build up of excessive leverage – e.g. Current debt of European banks & nations
10
Liquidity Coverage Ratio (LCR)
• The ratio is intended to ensure that a bank maintains adequate levels of unencumbered high quality assets to meet its liquidity needs. • Measured as the ratio of the bank’s high quality liquid assets (numerator), divided by its net cash outflows over a 30-day period (denominator) • The high quality assets included in the numerator include only Cash, central bank reserves that can be accessed during times of stress, marketable securities meeting certain criteria, and government or central bank debt • The denominator will be calculated by taking into account certain “run-off factors”
High-quality liquid assets LCR = Net Cash Outflow (30 days)
11
Net Stable Funding Ratio (NSFR)
• To promote medium to long term structural funding of assets and activities • “Stable funding” – the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon under conditions of extended stress • Defined as Available amount of stable funding / Required amount of stable funding > 100%
12
Basel III : Transitional Arrangements
1 2
3
13
Impact on Indian Banks
Regulatory Capital Adequacy Levels
Proposed Basel III Norm 4.5% 2.5% 0-2.5% 7-9.5%
Existing RBI Norm 3.6% (9.2%) Nil Nil 3.6% (9.2%)
Common equity (after deductions) Conservation Buffer Countercyclical Buffer Common equity + Conservation buffer + Countercyclical buffer
Tier I(including the buffer)
Total capital (including the buffers)
8.5-11%
10.5-13%
6% (10%)
9% (14.5%)
14
Basel III impact on Public Sector Banks
15
doc_258269862.pptx