Download - fs ppt.pptx

8/10/2019 fs ppt.pptx

1/28

Basel Norms

1


2/28

Capital Adequacy Ratio (CAR)

Expressed as a percentage of a bank's riskweighted credit exposures.

Also known as "Capital to Risk Weighted AssetsRatio (CRAR).

Ratio is used to protect depositors and promotethe stability and efficiency of financial systemsaround the world.

2


3/28

WHY CAPITAL REQUIREMENT?

While banks assets (loans & investments) are risky andprone to losses, its liability (deposits) are certain.

Assets = External Liabilities + Capital.Liabilities (deposits) to be honoured. Hencereduction in capital. When capital is wiped out

Bank fails.

Bank failures - mainly by losses in assetsdefault byborrowers (Credit Risk), losses of investment in differentsecurities (Market Risk) and frauds, system and processfailures (Operational Risk)


4/28

ABOUT THE BIS(Bank for InternationalSettlements)

Established on 17 May 1930

The BIS is theworldsoldest internationalfinancial organization

Head office is in Basel, Switzerland andrepresentative offices in Hong Kong and inMexico City.

The BIS currently employs around 550staff from 50 countries.

4


5/28

MEMBER CENTRAL BANKS Algeria Argentina Australia Austria Belgium Bosnia and Herzegovina Brazil Bulgaria Canada Chile China Croatia The Czech Republic Denmark Estonia Finland France Germany

Greece Hong Kong SAR Hungary Iceland India Indonesia, Ireland Israel Italy Japan Korea Latvia Lithuania The Republic of Macedonia Malaysia Mexico the Netherlands New Zealand Norway

the Philippines Poland Portugal Romania

Russia Saudi Arabia Singapore Slovakia Slovenia South Africa Spain Sweden

Switzerland Thailand Turkey The United Kingdom The United States The European Central Bank

5


6/28

BASEL COMMITTEE

Committeea group of eleven nations

Liquidation of Cologne-based Bank Herstatt

To achieve this goal G-10 countries agreed in Basel,Switzerland to form a quarterly committee

Comprising of each countrys central bank and leadbank supervisory authority

6


7/28

Basel committee on BankingSupervision (BCBS) A set of agreements

Regulations and recommendations on Creditrisk , market risk and operational risk

Purpose to have enough capital on account tomeet obligations and absorb unexpected losses

7


8/28

4 Sub-committees

Standard Implementation GroupPolicy Development Group

Accounting Task Force

Basel Committee Group

8


9/28

What is Tier 1 Capital ? Core capital

Includes (Equity, Perpetual Non-Convertible PreferenceShares, Disclosed Reserves) Maximum 15% usage Tier 1 Capital Ratio = Equity capital/RWA

What is Tier 2 Capital? Supplementary Capital Includes (Undisclosed Reserves, Revaluation Reserves,

GP,Hybrid instruments, unsecured debt.)

100% Usage

9


10/28

Basel 1 Set up an international 'minimum' amount of capital that banks should

hold.

minimum amount of capitalminimum risk-based capital adequacy

The set of agreement- mainly focuses on risks to banks the financial system

To ensure that financial institutions

have enough capital on account to meet obligations absorb unexpected losses.

Focused on credit risk.

Supervision should be adequate.

10


11/28

THE ACCORD

Divided into 4 pillars:

1. The Constituents of Capital

2. Risk Weighting

3. A Target Standard Ratio

4. Transitional and Implementing Agreements

11


12/28

PITFALLS Limited differentiation of credit risk

Static measure of default risk

No recognition of term-structure of credit risk

Simplified calculation of potential future counterpartyrisk

Lack of recognition of portfolio diversification effects

Falsification of balance sheets

12


13/28

SHIFT FROM BASEL I TO BASEL II

13


14/28

Basel II Norms Basel II was intended :

to create an international standard for banking regulators

to maintain sufficient consistency of regulations. protect the international financial system

Addition of operational risk in the existing norms

Defined new calculations of credit risk

Ensuring that capital allocation is more risksensitive


15/28

Objectives of BASEL II

1. Better Evaluation of Risks

2. Better Allocation of resources

3. Supervisors should review each banks own

risk assessment and capital strategies.

4. Improved Risk management

5. To strengthen international banking systems.

15


16/28

BASEL II FRAMEWORK


17/28

Failure of BASEL II Banks defined their own risk metrics and derivative investments

Depends on good underlying data

Most of the institutional cogs in the credit crisis arent covered

No independent standard.

Wrong assumptions in case of mortgage-related risk calculations.

Inadequate level of capital required by the new discipline

8


18/28

BASEL III ACCORD

The G20 endorsed the new Basel 3 capital and liquidity

requirements.

Extension of Basel II with critical additions, such as a leverage ratio,a macro prudential overview and the liquidity framework.

Basel III accord provides a substantial strengthening of capitalrequirements.

Basel III will place greater emphasis on loss-absorbency capacity on a goingconcern basis

The proposed changes are to be phased from 2013 to 2015

The creation of a conservation buffer could be set up by banks during theperiod January 2016 to 2019.

18


19/28

Basel III-Objectives

Special emphasis on the Capital Adequacy Ratio

Capital Adequacy Ratio is calculated as CAR = (Tier 1 Capital + Tier 2 Capital) / Risk Weighted Assets

Reducing risk spillover to the real economy

Comprehensive set of reform measures tostrengthen the banking sector.

Strengthens banks transparency and disclosures.

Improve the banking sectors ability to absorbshocks arising from financial and economicstress.

19


20/28

Major features of Basel III

Revised Minimum Equity & Tier 1 Capital

Requirements Better Capital Quality Backstop Leverage Ratio Short term and long term liquidity funding

Inclusion of Leverage Ratio & Liquidity Ratios Rigorous credit risk management Counter Cyclical Buffer Capital conservation Buffer

21


21/28

Pillars Minimum Regulatory Capital Requirement based on Risk weighted assets

Maintaining capital ( Credit, market and Operational Risk)

Supervisory Review Process Regulatory Tools and Frameworks to deal with risks.

Market Discipline. Transparency of Banks

21

22


22/28

Ratios Leverage Ratio 3%

Liquidity Coverage Ratio =

Stock of high quality liquid assets 100%

Net cash outflows over a 30-day period

Net Stable Funding Ratio (NSFR) =Available amount of stable funding 100%

Required amount of stable funding

22

Comparison o Capita


23/28

Comparison o CapitaRequirements

under Basel II and Basel III :Requirements Under Basel II Under Basel IIIMinimum Ratio of Total

Capital To RWAs8% 11.50%

Minimum Ratio of Common

Equity to RWAs

2% 4.50% to 7.00%

Tier I capital to RWAs 4% 6.00%

Core Tier I capital to RWAs 2% 5.00%

Capital Conservation Buffers

to RWAsNone 2.50%

Leverage Ratio None 3.00%

Countercyclical Buffer None 0% to 2.50%

Minimum Liquidity Coverage

RatioNone TBD (2015)

Minimum Net Stable Funding

Ratio None TBD (2018)

24


24/28

Impact on Indian banking system

Profitability Capital acquisition

Liquidity Needs

Limits on lending Bank consolidation

Pressure on Yield on Assets

Pressure on Return on Equity:

Stability in the Banking system

24

25


25/28

Impact on Public Sector Public sector banks- needs Rs.1 trillion over 10-5

years

Some public sector banks are likely to fall short ofthe revised core capital adequacy requirement.

Government to recapitalize an estimated Rs 900

billion or be ready to reduce their equity stake inbanks below 50%.

Increase in the requirement of capital will affect theROE of the Public banks.

25

26


26/28

Potential responses by banks Operational responses

RWA optimization, Stricter credit approval processes

Tactical responses Risk-sensitive pricing, Shift to longer-term funding

Reduction of securitization exposures

Strategic responses

- Sale of business unit, Change of holdingstructure

26

27


27/28

Challenges of Basel 327

28


28/28

CONCLUSION

Monetary policies of Central Banks in eachcountry (example RBIs CRR, SLR, Repo etc.)

make it difficult to uniformly implement BASEL

norms

Exercising controls on the capital, liquidity andleveraging of banks will ensure that they havethe ability to withstand crises.

28

Download - fs ppt.pptx

Top Related