1. 1Basel iii Compliance ProfessionalsAssociation (BiiiCPA)1200G Street NW Suite800Washington, DC 20005-6705USA Tel:202-449-9750Web: www.basel-iii-association.comDear Member,Todaywewill start from the3reallyimportant papersthat havetodowiththeimplementationof the Basel iii frameworkin theUSA.Thethree noticesof proposed rulemaking (NPRs), taken together, willrestructuretheBoardscurrent regulatorycapital rulesintoaharmonized,comprehensiveframework,and will revisethecapital requirementstomake them consistent withthe BaselIII capital standardsestablishedbytheBasel Committeeon Banking Supervision (BCBS) and certainprovisionsof the Dodd-Frank Wall Street Reform and ConsumerProtectionAct (Dodd-Frank Act).Theproposalsarepublished in separate NPRsto reflect thedistinctobjectivesof each proposal,toallowinterested partiesto betterunderstandthevariousaspectsoftheoverall capitalframework,includingwhichaspectsof therule wouldapplyto whichbanking organizations,andtohelp interestedparties better focustheir commentson areasofparticular interest.Theproblem iswedid not learnmore about thequantitativeliquidityrequirementsand thecapital surcharge for global systemically importantbanks(thesearenot part of this rulemaking).I hopewewill havemore detailssoon.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com

2. 2Basel III in the USABasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 3. 3Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 4. 4Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 5. 5Basel III in the USA, Board of Governorsof the Federal Reserve3:30PM, Thursday, June 7, 2012- MarrinerS.Eccles FederalReserveBoard Building, 20th Street entrancebetweenConstitutionAvenue andC Streets,N.W., Washington, D.C.Mattersto be Considered:Discussion Agenda:1.Proposed interagencyrulemakings:strengtheningand harmonizingtheregulatorycapital frameworkfor banking organizations,includingproposedrules for implementingBasel III for banking organizationsandproposedconsolidatedcapital requirementsfor savingsand loan holdingcompanies.2. Final interagencyrulemaking:market risk capital rule.Proposed Rulemakingsfor an Integrated Regulatory CapitalFramework, Questions and AnswersJune7, 2012Question 1:What doesthe package of proposed rulemakingscontain and whyisit divided into three parts?Thepackagecontainsthreenoticesof proposedrulemaking(NPRs)that, taken together, wouldrestructure the Boards current regulatorycapital rules intoa harmonized, comprehensiveframework,and wouldrevisethecapital requirementsto make them consistent withtheBaselIIIcapital standardsestablishedby the BaselCommitteeon BankingSupervision (BCBS) andcertainprovisionsof theDodd-Frank Wall StreetReform and Consumer ProtectionAct (Dodd-FrankAct).Theproposalsarepublished in separate NPRsto reflect thedistinctobjectivesof each proposal,toallowinterested partiesto betterunderstandthevariousaspectsoftheoverall capitalframework,includingwhichaspectsof therulewouldapplyto whichbankingorganizations,and tohelp interestedparties better focustheir commentsonareasof particular interest.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 6. 6TheBCBS quantitativeliquidityrequirementsand the BCBS capitalsurchargefor global systemically important banksare not part of thisrulemaking.First Paper: The Basel III NPR1.Thefirst NPR, Regulatory Capital Rules:RegulatoryCapital, Implementation ofBasel III, MinimumRegulatory CapitalRatios,Capital Adequacy, Transition Provisions,and Prompt CorrectiveAction (Basel III NPR), is primarily focused on proposed reformsthatwouldimprovethe overall qualityand quantityof banking organizationscapital.TheNPR wouldrevisetheBoardsrisk-basedand leveragecapitalrequirements,consistent withthe Dodd-FrankAct and withagreementsreached by the BCBSin Basel III: AGlobal Regulatory FrameworkforMoreResilient Banksand BankingSystems (Basel III).Theproposalincludestransitionprovisionsdesignedtoprovidesufficienttimefor banking organizationstomeet the new capital standards whilesupporting lendingtotheeconomy.Second Paper: The Standardized Approach NPR2.Thesecond NPR, RegulatoryCapital Rules:StandardizedApproachfor Risk-weightedAssets;Market Disciplineand DisclosureRequirements(StandardizedApproach NPR), wouldrevise andharmonizethe Boardsrulesfor calculatingrisk-weightedassetstoenhancetheir risk sensitivityand addressweaknessesidentifiedoverrecent years.It wouldincorporateaspectsof theBCBSsBasel II standardizedframeworkintheInternationalConvergenceof Capital Measurement andCapital Standards:ARevised Framework (Basel II), Basel III, andalternativestocredit ratingsfor the treatment of certainexposures,consistent withtheDodd-FrankAct.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 7. 7Third Paper: TheAdvanced Approaches and Market Risk NPR3. The third NPR, Regulatory Capital Rules:AdvancedApproachesRisk-basedCapital Rule;Market RiskCapital Rule(AdvancedApproachesand Market Risk NPR), wouldrevise the advancedapproachesrisk-basedcapital rule (in amanner consistent withtheDodd-FrankAct) and incorporatecertain aspectsof Basel III that theBoard wouldapply onlyto advanced approachesbanking organizations(generally, the largest, most complex banking organizations).This NPR wouldalsocodify the Boardsmarket riskcapital rule and, incombination withthe other componentsdescribedabove, wouldapplyconsolidatedcapitalrequirementstosavingsandloanholdingcompanies(SLHCs).Question 2: Which banking organizationsare covered by theproposed rulemakings?TheBasel III NPR and the StandardizedApproach NPR wouldapply tostatemember banks, bank holding companiesdomiciledin the UnitedStatesnot subject tothe Boards Small Bank Holding Company PolicyStatement (generally, bank holdingcompanieswithlessthan$500millionin consolidatedassets), and SLHCsdomiciledin theUnitedStates.Consistent withSection 171of the Dodd- FrankAct, the proposedrulemakingswouldapplytoall SLHCs regardlessof assetsize.TheAdvanced Approachesand Market Risk NPR would generallyapplytobanking organizationsmeeting specified thresholds.In general, the advanced approachesrisk based capital ruleappliestothosebankingorganizationswithconsolidatedtotal assetsof at least$250billion or consolidatedtotal on-balancesheet foreign exposuresof at least$10billion(excludinginsuranceunderwritingassets)and their depositoryinstitutionsubsidiaries.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 8. 8Themarket risk capital rule generallyappliestothosebankingorganizationswithaggregate trading assetsand tradingliabilitiesequaltoat least 10 percent of quarter-endtotal assetsor $1billion.Question 3: How are these proposed rulemakingsrelated to theDodd-Frank Act?TheNPRs are consistent withstatutoryrequirementsin theDodd-FrankAct.For example, pursuant tosection 171of the Act, the NPRs would establishminimum riskbased and leverage capital requirements for SLHCs, phaseout certain capital instrumentsover a three-year period, and establish newminimum generallyapplicablecapital requirements.In addition, pursuant to section 939Aof theact, theNPRs removereferencesto, or requirementsof relianceon, credit ratingsin theBoardscapital rulesand replacethem withalternativestandardsofcreditworthiness.Question 4: What are the main changesto the minimum capitalrequirements?Theproposal includesa new common equity tier 1minimum capitalrequirement of 4.5percent of risk-weightedassetsand a common equitytier 1capital conservation buffer of 2.5 percent of risk-weightedassets.Theproposal alsoincreasesthe minimum tier 1capital requirement from4to 6 percent of risk-weightedassets.Theminimum total riskbasedcapital requirement would remainunchanged at 8 percent.Theproposal introducesa supplementaryleverageratiothat incorporatesa broader set of exposuresin thedenominatormeasure of theratioforbankingorganizationssubject tothe advanced approachescapital rule.This supplementaryleverageratiois based on the international leverageratio in BaselIII.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 9. 9Question 5: What arethe main changesrelated to the definitionof capital being proposed?Capital instrumentsissuedbybanking organizationswouldbe subject toa set of strict eligibilitycriteria that wouldprohibit, for example, theinclusionin tier 1capital of instrumentsthat are not perpetual or thatpermit the accumulationof unpaid dividendsor interest.Trust preferred securities,for example, wouldbe excluded from tier 1capital, consistent withboth Basel III and the Dodd-Frank Act.Under the Basel III NPR, banking organizationswould be subject togenerally stricter regulatory capital deductions (the majority of whichwouldbe taken from common equitytier 1capital).For example, deductionsrelatedtomortgageservicingassets, deferredtax assets,and certain investmentsin thecapital of unconsolidatedfinancial institutionswouldgenerallybe more stringent than thoseunderthecurrent rules.Question 6: What is the capital conservation buffer and howwould it work?In order toavoid limitationson capital distributions(includingdividendpayments, discretionarypaymentson tier 1instruments,and sharebuybacks) and certain discretionarybonuspayments, under the proposalbankingorganizationswouldneed to hold a specific amount of commonequitytier 1capital in excessof their minimum risk based capital ratios.Thefullyphased-inbuffer amount wouldbe equal to 2.5percent ofrisk-weightedassets.Question 7: Will the new capital requirements and capitalconservation buffer be imposed immediately or will there be atransition period?Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 10. 10TheBasel III NPR containstransition provisionsdesigned togive ampletimeto adjust to thenew capital requirements, consistent with theagreement in Basel.Thenew minimum regulatory capital ratiosand changesto thecalculationof risk weightedassetswouldbe fullyimplementedJanuary1,2015.Thecapital conservation buffer framework wouldphase-in between2016and 2018,withfull implementationJanuary 1,2019.Question 8: What is common equity tier 1capital and whyareyou proposing a new common equity tier 1requirement?Common equitytier 1capital is a new regulatory capital component thatis predominantlymade up of retained earningsand common stockinstruments(that complywitha seriesof strict eligibilitycriteria), net oftreasury stock, and net of a series of regulatory capital deductionsandadjustments.Common equitytier 1capital may alsoincludelimitedamountsofcommon stock issued by consolidatedsubsidiariesto third parties(minorityinterest). Common equitytier 1capital is the highestqualityform of regulatory capital because of its superior ability toabsorblossesin timesof market and economic stress.Question 9: What are the main elements of the StandardizedApproach NPR?It wouldincreasethe risk sensitivityof the Boardsgeneral risk-basedcapital requirementsfor determiningrisk-weightedassets(that is, thecalculationof thedenominator of a banking organizationsrisk-basedcapital ratios) by proposingrevised methodologiesfor determiningrisk-weightedassetsfor:- Residential mortgageexposuresby applying a more risk-sensitivetreatment that wouldrisk-weight an exposurebased on certain loancharacteristicsand itsloan-tovalueratio;Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 11. 11- Certaincommercial real estatecredit facilitiesthat financetheacquisition, development, or construction of real property byassigninga higher riskweight;- Exposuresthat aremore than 90days past due or on nonaccrual(excludingsovereignand residential mortgage exposures) byassigninga higher riskweight;and- Exposurestoforeign sovereigns,foreign banks, and foreign publicsectorentitiesbybasingtherisk weight for each exposuretype onthecountry riskclassificationof the sovereignentity.TheNPR wouldalsoreplacetheuseof credit ratingsfor securitizationexposureswitha formula-based approach.Additionally, theNPR wouldprovidegreater recognitionof collateralandguarantees.However,for most exposures,no changesare beingproposed in theNPR.Morespecifically, the treatment of exposurestothe U.S.government, government-sponsoredentities,U.S. statesandmunicipalities,most corporations,and most consumer loanswouldremainunchanged.It would introduce disclosure requirements that would apply to bankingorganizations domiciled in the United States with $50 billion or more intotal assets, includingdisclosuresrelatedto regulatory capital.Thechangesin theStandardizedApproach NPR areproposed to takeeffect January 1,2015.Bankingorganizationsmay choosetocomplywiththe proposedrequirementsprior tothat date.Question 10:What are the primary objectives of theAdvancedApproachesand Market Risk NPR?It wouldrevisethe advanced approachesrisk-basedcapital rule in amanner consistent withthe Dodd-Frank Act by removingreferencestoBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 12. 12credit ratingsfrom the securitizationframework, requiring an enhancedset of quantitativeand qualitativedisclosures(especiallyin regard todefinitionof capital and securitization exposures), implement a highercounterpartycredit risk capital requirement toaccount for creditvaluation adjustments,and proposecapital requirementsfor clearedtransactionswithcentral counterparties.TheNPR wouldincorporate the market risk capital rulesintotheintegratedregulatory capital frameworkand proposeitsapplicationtosavingsand loan holdingcompanies that meet the tradingthresholds.Question 11:How will the Prompt Corrective Action (PCA)framework change asa result of the proposed rulemakings?Under the proposal, the capital thresholdsfor thedifferent PCAcategorieswouldbe updatedtoreflectthe proposed changesto thedefinitionof capital and the regulatorycapital minimum ratios.Likewise,the proposal wouldaugment the PCAcapital categories byincorporatinga common equitytier 1capital measure.In addition, theproposal wouldincludein the PCAframework theproposed supplementaryleverageratio for advanced approachesbankingorganizations.Note thatthenewPCAframeworkwouldtakeeffectstartingonJanuary1,2015,consistent withthefull transition of theminimum capitalrequirementsand theStandardizedApproach for the calculation of riskweightedassets.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 13. 13Basel Committeeon BankingSupervisionReport to G20 Leaders on Basel IIIimplementationJune2012Introduction and summaryAt their 2010summit in Seoul, the G20LeadersendorsedtheBasel III regulatoryframeworkasfollows:Weendorsed thelandmark agreementreached bytheBCBSonthenewbankcapital and liquidityframework,whichincreasestheresilience oftheglobal bankingsystem byraising thequality, quantityandinternational consistency ofbank capital andliquidity, constrainsthebuild-up of leverage andmaturitymismatches,and introducescapital buffers abovetheminimumrequirementsthat canbedrawnuponin bad times.In November 2011, the Leaders,at their summit in Cannes,emphasisedtheimportanceof implementingBaselIII:Wearecommitted toimprovebanks resiliencetofinancial andeconomicshocks. Buildingonprogressmadeto date, wecall onjurisdictionsto meet their commitment toimplement fullyandconsistentlytheBasel II risk-based framework aswell astheBasel IIadditional requirementsonmarket activitiesand securitisation byend2011andtheBasel III capital and liquiditystandards, whilerespectingobservation periodsand review clauses, startingin 2013and completingfull implementation by1January 2019.This interim report details the progressthemembersof theBaselCommitteeon BankingSupervision havemade todate in implementingtheBasel III regulatory framework(includingBaselII and Basel 2.5,whichnow form integral parts of BaselIII).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 14. 14The report also describes various implementation issues identifiedthrough the comprehensive process the Committee has adopted tomonitor membersimplementationof BaselIII.Compared to the statusat end-September 2011and end-March 2012, whenthe Committee published previous reports, significant progress has beenobserved.However,there are jurisdictionswhichhavemissedthe globally-agreedimplementationdatesfor Basel II and 2.5.There are also jurisdictions that have not made enough progress to dateon Basel III and thus pose concern as to their ability to meet the agreedBasel III implementationdate.As of end-May 2012,21of 27Basel member countrieshave implementedBasel II, whichhad been due tocome intoforce from end-2006.In addition, Indonesia and Russiahave implemented BaselIIsPillar 1(minimum capital requirements).Argentina, China, Turkey and theUnited Statesare in theprocessofimplementingBaselII.With regard toBasel 2.5, whichwasdue tobe implementedfrom end2011, 20 member countrieshave final rulesthat are in force.Argentina, Indonesia,Mexico,Russia,TurkeyandtheUnitedStateshavenot issued final regulations.Russiaand theUnitedStateshaveissueddraft regulationswhichpartiallycover Basel 2.5.SaudiArabia hasissuedfinal regulationsbut thesehavenot yet comeintoforce.Among the 29 global systemically important banks (G-SIBs) identified inNovember 2011, nine are headquartered in jurisdictions that have not yetfullyimplementedBasel II and/ or Basel 2.5.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 15. 15Draft Basel III regulationshavenot yet been issuedby seven BaselCommitteemember jurisdictions:Argentina, Hong KongSAR, Indonesia, Korea, Russia, Turkeyand theUnited States.Themajorityof thesejurisdictionsbelievetheycan issuefinal regulationsin time toimplement by the deadlineof 1January 2013.However,for others, dependingon their domesticrule-makingprocess,meetingthedeadlinecould be a significant challenge.In additiontomonitoring whetheritsmembershaveissuedregulationstoimplement theBaselIII rules,the BaselCommittee hasestablished aprocessto review thecontent of the new rules.This second level of review is meant to ensure that thenationaladaptationsof Basel III are consistent withthe minimum standardsagreedto under Basel III.TheBasel Committeehasinitiatedpeer reviewsof the domesticregulationsof theEuropean Union, Japanand theUnited Statestoassesstheir consistencywiththe globallyagreed standards.Thefindingsof these reviewsarepreliminarysincetheformulation ofnational standardsis still ongoing and the analysisis not yet completed.Nevertheless, there isa possibilitythat national implementation will beweakerthan theglobally-agreedstandardsin some key areas.TheBasel CommitteeurgesG20 Leadersto call on jurisdictionstomeettheir commitmentsmadein Cannestoimplement Basel III fully andconsistently, and within the agreedtimetable.AthirdlevelofimplementationreviewconductedbytheBaselCommitteeexamineswhetherthere areunjustifiableinconsistenciesin riskmeasurement approachesacrossbanksand jurisdictionsand theimplicationsthesemight have for the calculationof regulatorycapital.This review of banks risk-weightingpracticesincludestheuse of testportfolio exercises,horizontal reviewsof practicesacrossbanksandjurisdictions,andjoint on-sitevisitstolarge, internationally-activebanks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 16. 16TheBasel Committeefirmly believesthat full, timely and consistentimplementationof Basel III amongitsmembersis essential for restoringconfidencein theregulatory frameworkfor banks and to help ensure asafeand stableglobal banking system.TheCommitteewill providean updated progressreport toG20FinanceMinistersand central bank governors at their meetingin November 2012.That report will provide(i)An updateon Basel Committee membersdomestic rule-making,(ii)Thefinal outcome of the regulatoryconsistencyassessment of theEuropean Union, Japan and the UnitedStates,and(iii)Preliminaryfindingsfrom theCommitteesdeeperanalysisonbanksrisk measurement approachesand regulatorycapital calculations.This interim report isbased on the informationthat wasavailableto theBasel Committeeon 31May2012.Subsequent tothisdate, furtherinformation hasbecomeavailablein boththeEU and USbut there hasbeen insufficient time toassesswhethertheselatestdevelopmentsare compliant withthe Baseltext for thisinterim report.Basel standardsIn June 2004, a package of reformsknown asBasel II introducedmorerisk-sensitiveminimum capital requirementsfor banks, includinganenhancedmeasurement of credit risk, and captureof operational risk.Basel II alsoreinforcedthe requirementsby settingout principlesforbankstoassesstheadequacyof their capitalandfor supervisorstoreviewsuch assessmentsto ensure bankshave the necessarycapital to supporttheir risks.It alsostrengthenedmarket disciplineby enhancingtransparencyinbanksfinancial reporting.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 17. 17Thedeadlinefor implementation of theBasel II frameworkby memberjurisdictionswastheend of 2006.In July2009, enhancementsto themeasurement of risks relatedtosecuritisationand tradingbook exposureswereagreed in responsetoearlylessonsfrom the2007/ 08crisis.An implementationdeadlineof theend of 2011wasset for thesereforms,referredto asBasel 2.5.In December 2010,the BaselCommitteepublished Basel III, acomprehensiveset of reforms toraisetheresilienceof banks. Basel IIIaddressesboth firm-specific and broader, systemic risksby:- Raisingthequalityof capital, withafocusoncommon equity, andthequantitytoensure banksarebetter ableto absorblosses;- Enhancingthe coverage of risk, in particular for capital marketactivities;- Introducingadditional capital buffers for the mostsystemicallyimportant institutionsto addresstheissueof toobig tofail;- Introducingan internationallyharmonised leverageratiotoserve asabackstop to the risk-basedcapital measure and tocontain thebuild-upof excessiveleveragein the system;- Stronger standardsfor supervision (Pillar 2), public disclosures (Pillar3), and risk management;- Introducingminimum global liquiditystandardstoimprove banksresiliencetoacuteshort term stressand toimprove longer termfunding;and- Introducingcapital bufferswhichshould be built up in good timessothat theycan be drawndown during periodsof stress.Theimplementationperiod startsfrom 1January 2013and includestransitional arrangementsuntil 1January 2019.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 18. 18Thetransitional arrangementsare availableto give bankstime to meetthehigher standards, whilestill supportinglendingto the economy. Theliquidityrequirements,leverageratio and systemic surchargescome intoforceon a phasedapproach startingfrom 2015and will, therefore,beassessed later and are not covered in this report.Design of the Committees Basel III Implementation ReviewProgrammeIn January 2012, the Group of Central Bank Governors and HeadsofSupervision(GHOS), theBasel Committeesoversight body, endorsedthecomprehensiveprocessproposedby theCommitteetomonitormembersimplementationof Basel III.Theprocessconsistsof the followingthree levelsof review:- Level 1: ensuring thetimely adoption of Basel III;- Level 2: ensuringregulatory consistencywithBaselIII; and- Level 3: ensuringconsistencyof outcomes(initiallyfocusingonrisk-weightedassets).TheBaselCommitteehaspublished twoLevel 1 progressreports. Ithasagreed on a detailed Level 2 assessment processand startedreviewsof the European Union, Japan and theUnited States.Its Level 3 reviewsanalyse existingdata on risk measuredby banksmodelsand are designingprocessesfor deeper analysis.TheBasel Committeehasworked in closecollaboration withtheFinancial Stability Board (FSB) given theFSBs role in coordinatingthemonitoring of implementationof regulatoryreforms.TheCommitteedesigned itsprogrammeto be consistent withtheFSBsCoordination Frameworkfor MonitoringtheImplementationofFinancial Reforms(CFIM) agreed by the G20.Theobjectivesand the processof each of the three levelsof review are asfollows.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 19. 19Level 1:Timely adoption of Basel IIITheobjectiveof theLevel 1assessment is to ensure that BaselIII istransformedintodomestic regulationsaccordingto the agreedinternational timelines.It does not include the review of the content or substance of the domesticrules. Each Basel Committee member jurisdictions statusis reported in asimpletable.Separately, theFinancial Stability Institute(FSI) of the Bank forInternational Settlementsissurveying non-Basel Committeemembercountries.Theoutcome of this workwill be publishedby the FSI in thecomingmonths.Level 2: Regulatory consistencyTheobjectiveof theLevel 2 assessmentsis toensurecomplianceofdomesticregulationswiththeinternational minimum requirements.Delays or failures toadopt domesticregulationsidentifiedby the Level 1review will feed intothe Level 2 assessment.All Level 2 assessmentswill be summarised usingthe followingfour-gradescale:compliant, largely compliant, materiallynon-compliantandnon-compliant.TheCommitteeintendsto produce an overall assessment, aswell asassessmentsof themain componentsof Basel III.All Basel Committeemember countrieswill be assessed over time.TheCommitteedecidedtoprioritiseitsreviews, focusing first on thehomejurisdictionsof global systemicallyimportant banks (G-SIBs).Thefirstreviewscommencedin February 2012withtheEuropeanUnion, Japan and the United States.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 20. 20Asummary of the processfor the Level 2reviewsis included in appendix2of thisreport.Level 3: Risk-weighted assets consistencyTheobjectiveof theLevel 3 assessmentsistoensurethat theoutcomesof the new rulesare consistent in practiceacrossbanksand jurisdictions.It extendsthe findingsof Levels1and 2, both of whichfocuson nationalrules and regulations,tosupervisoryimplementation at the bank level.TheCommitteehasestablishedtwoexpert groups, one on the bankingbook and the other on the tradingbook.Thesegroupswill identify areasof material inconsistenciesin thecalculationof risk-weightedassets(RWAs, or the denominator of theBasel capital ratio).Depending on the outcome, thework may result in policyrecommendationstoaddressidentified inconsistencies.Preliminary findingsLevel 1Thetablesin appendix 1show member countriesimplementationstatusasof end-May 2012.The tablesusethe followingnumber codes:- 1 for draft regulationnot published,- 2 for draft regulationpublished,- 3 for final rule published, and- 4 for final rule in force.Summaryinformationabout thenext stepsandtheimplementationplansbeingconsidered by membersare alsoprovided for each jurisdiction.Separatetablesare produced for each of Basel II, Basel 2.5 and Basel III.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 21. 21For Basel II and 2.5, whichshould be implementedalreadyaccordingtotheagreed timetable, countries that havefullyimplementedare showningreen;thosein the processof implementingare shownin yellow;andthosethat have not yet issued draft regulationsare shown in red.Compared to the statusat end-September 2011and end-March 2012, whenthe Committee published previous reports, significant progress has beenobserved.However,there are jurisdictionswhichhave missedtheglobally-agreedimplementationdatesfor Basel II and2.5. There arealsojurisdictionsthat havenot madeenough progresstodate on Basel III and thuspose concern asto their abilityto meet theagreedBaselIII implementation date.Basel IIThree-quartersof member countries have implementedtheBasel IIrequirements.Of the remainingsix countries, Indonesiaand Russiahave implementedPillar 1(minimum capital requirements) but not Pillar 2 (supervisoryreview process) or Pillar 3 (disclosureand market discipline).Turkeyexpectsto be fullycompliant by July2012.Chinahasissuedfinalregulationsand iscurrentlyassessingapplicationsfor advancedapproachessubmittedby largebanks.TheUnited Statesis in parallelrun (ie runningboth Basel I and BaselII calculationfor itslargest banks), although Basel I rules remain thelegal minimum.Argentina implementedruleson operational risk in April 2012.Basel 2.5Again, a majorityof Basel Committeemember countries (20out of 27Basel Committeemembers) have implemented therequirements, but aBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 22. 22significant minorityare either still in theprocessof implementationorhavenot started theprocessfor implementation.Russiaand the United Stateshave issued draft regulationscoveringthemarket riskelementsof the enhancements.TheUS regulationsweremodified in December 2011to incorporaterestrictionson theuseof credit ratingsasset forth in theDodd-Frankregulatoryreform legislation.Other member countries whichhavenot implemented Basel 2.5 areArgentina, Indonesia, Mexico, Saudi Arabia and Turkey.Basel IIIThree countries India, Japan and SaudiArabia havepublishedfinalregulationsnecessaryfor implementingthe BaselIII packagefrom 1January 2013.Full application startsin Japan at the end of March2013to matchJapanesebanksfiscal year end.TheEuropean Union haspublishedseveral roundsof draft directivesandregulations(CRD4/ CRR) and is expectingto have final rulesby the endof June.TheEU level regulationsimplement most elementsof the BaselIIIpackagedirectly.This meansthereis noneed for national regulationstotransposetheregulationsintotheir domesticlegislation.Thefollowingseven member jurisdictionshave not issued draftregulations:Argentina, Hong KongSAR, Indonesia, Korea,Russia, Turkey and the UnitedStates.Themajorityof these countriesbelieve theycan finaliseregulationsintimefor the agreed start dateof 1January 2013.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 23. 23However,for others, dependingon thedomestic rule-makingprocess,meetingthedeadlinecould be a significant challenge.Level 2Thefirst three BaselIII regulatory consistencyassessmentsare currentlyunder wayfor the European Union, Japan and the United States, whichare beingconductedin parallel.In the initial phaseof the Level 2 assessment process,the jurisdictionshavebeen askedtocompletea detailed self-assessment questionnaireandtoprovideall componentsoftheregulationsthat implement BaselIII atthedomesticlevel.After receivingthe completed questionnaires, peer review teamsofsupervisorshave reviewedthecompleted selfassessment and drafted aninitial list of preliminary findings.TheEuropean Union, Japan and theUnitedStatesare at different stagesof Basel III implementation.Given thesedifferences, the depth of thepreliminary Level 2findingsdiffers.The reviews are still work in progress and this interim report is basedsolely on preliminary findings that are subject to further review as theanalysisprogresses.Currently, thepeer review teamsarein the processof furtheranalysingthepreliminaryfindingsbasedon additional clarificationsthat werereceivedfrom the jurisdictionsconcerned.Thereview teamsare alsoworkingon theassessment of thepotentialmaterialityof their findings,usingquantitativebank-specific data thatwasprovided by the authorities.An important element in the second phaseof theassessment will be anon-sitevisit wherethe teamswill discusstheir findingswiththeBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 24. 24authoritiestofurther narrowdownthematerialityof thefindingstoarriveat a final assessment.Theon-site visits are tentativelyscheduledin June and July. The finalreport isexpected tobe submitted totheBasel Committeein September2012,and will be published shortlythereafter.Theabsenceof any item among the topicsmentionedabovedoesnotnecessarilymean that thereviewteamwill not add new itemstothelist ofissuesfor further investigationduring theprogresstowardsthe finalreport.European UnionThereview of the European Union (EU) rulesrelatedto Basel III hasbeen complicatedbytheabsenceof a stableEU text implementingBaselIII.As a pragmaticchoice,the review team selectedthe Third DanishPresidencyCompromiseproposalsfor the basisof thisinterim report.This choice does not imply any endorsement by the assessment team ofthese proposals, but simply responds to the need to use the most recentdraft such that the text remains stable for the time required to completetheinterim review.At the timethis interim report wasprepared, the final version ofCRD4/CRR therulesfor implementingBasel III in theEuropeanUnion werenot yet published.Thereforethe number and nature of thefindingsset out in theBaselCommitteesfinal report may changesubstantiallyfrom those containedin this interim report to the extent that the final CRD4/CRR rules differfrom theThird DanishCompromise proposals.BesidesthechangingnatureoftheEU proposals,theassessment hasalsobeen difficult due tothe particularitiesof theEU rule-makingprocess.Thismeant that theEuropean Commission(EC) wasunabletocompletetherequested self-assessment questionnaire, beyond mapping theBaselBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 25. 25frameworktotheJuly2011EC proposalsand providingexplanatorynoteson thecomplianceof key areasof theEU regulationwith Basel III.Unlike the other assessments,whichhave benefitedfrom countryself-assessments,theEU review team hasnot been able to draw on acomprehensiveself-assessment from which tobegin itsassessmentprocess.Despitethesedifficulties, thereview team conducteda detailedpreliminaryassessment of theEU framework.This assessment benefitedfrom face-to-facediscussionsbetweentheleaderofthereviewteamandEC staff aswellaswithrepresentativesfromtheEuropeanBankingAuthority, theEuropeanCentral Bank, theDanishPresidency, and thenineEU countrieswhicharealsoBCBSmembers.Preliminary findingsTheinitialassessment processhasidentifiedalargenumber offeaturesofthecurrent EU Basel III proposalsthat will require further investigation.Most of these issueswill probablyproveeither consistent with the Baselframework,or immaterial in practice.There seems to be a small number of issues, however, that are potentiallymaterial and will need to be subject toa detailed assessment by the reviewteam.TheEU frameworkhasbeen developed withtheprincipleof maximumharmonisation.This is designed with the aim of achieving a high level of harmonisationof banking rules and limiting divergence between the approaches takenbyindividual national authorities.While not a matter of direct relevancetothe assessment in the firstinstance,theability for an individual national regulator tocomply withBasel III where EU regulation is found tobe inconsistent will depend onthedegreeof maximum harmonisation at the EU level.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 26. 26In this case, it may worktolimit theroom an individual regulator hastoadopt compliant regulationson itsown.The review team has identified the following specific areas of potentialdifference. These areas require further review and/ or an assessment oftheir potential materiality beforedefinitiveconclusionscan be drawn:Definition of CapitalThere arethree specific issuesthat warrant particular attention:TheBasel III rulesrequire bankstodeduct significant investmentsinunconsolidatedfinancial entities,includinginsuranceentities,from thehighestqualityform of capital (Common EquityTier 1 CET1).TheCRD IV/ CRR proposalsgivecompetent authoritiesthepossibilitytopermit banksnot to deduct insuranceholdingsunder certain conditions.Thereviewteam will need toassesswhethertheCRD IV/ CRR proposalsare consistent withtheBasel requirementsthat only permit approachesother than deduction whereit can be demonstrated that thesearemoreconservative (ie wouldproducehigher capital requirements) thanthededuction approach.TheBasel III rulesare explicit that for joint stock companies, onlycommon shares,whichcomplywitha list of substantivecriteria, can beincludedin CET1.However, the CRD IV/CRR proposals recognise any capitalinstrument, which satisfies a list of substantive criteria in line with BaselIII, aspart of CET1even if they might not be common shares.Thereview team will need toevaluatewhetherthisdeviationfrom BaselIII hasthepotential tounderminethequalityof capitalthat banksshouldhaveto absorb losses.BaselIII requiresthat all classesof capitalinstrumentsfullyabsorblossesat the point of non-viabilitybeforetaxpayers are exposed to loss.Thisrequirement hasbeenacknowledgedintheCRD IV/ CRR proposalsbut not reflectedaccordingtothe Basel rules.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 27. 27Going forward, the review team will closely monitor how thisrequirementis being reflected in the EU regulations, including within the forthcomingEU resolution and crisis management rules.Pillar 1:Credit Risk Internal Ratings-Based (IRB) ApproachUnder the Baselrules, a bank electingto usean internal model tocalculate itsregulatory capital requirementsfor credit risk (IRB Bank)may only permanentlyapply thestandardised approach for non -significant or immaterialbusinessunitsor asset classes(referredtoasthepartial useexemption).TheCRD IV/CRR framework allowsIRB banksto permanentlyusethestandardisedapproachfor some exposuresunder certain conditionsthatmight not appear tobe related tothe immaterialityor non-significancedescribedabove.In particular, an IRB Bank in the EU is ableto permanentlyapplya zerorisk weight toEU sovereign exposuresafter receivingthe permission ofthecompetent authorities.Thereview team will need tofurther analyse the consistencyof theCRDIV/ CRR framework with the Basel rulesregardingthepermanent partialuseavailabletoIRB Banks, with special focus on internationallyactivebankssovereignexposures.Next stepsThereview teams keyfocusgoingforwardwill be toresolveconsistencyissues,and assessthe materialityof any inconsistency.Thelatterwill be mainlybased on bank-specificdata.ThenineEU member countriesof theBasel Committeehaveundertakentoassist with securingthe data that will be neededfor thematerialityassessment.Response from the European CommissionTwopreliminarypointsneed tobe made. First, from thepoint of view ofbankingregulation, theEuropean Union (EU) is a singlejurisdiction:Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 28. 28lawsadoptedat EU level are agreed by, and applyto, all EU MemberStates.Second, theEU haschosentoapplytheBasel rules toall its banks(aswell to investment firms), not just large, internationallyactivebanks;thelawthereforeneedstoallownational authoritiestoexerciseacertainlevelof proportionalityin applying therules.Thefirst point is particularlyimportant with respect to the maximumharmonisation principlereferred to in the report.In this context, the assessment fails toprovidevalid argumentson whythedegreeof harmonisation pursuedin the EU could be consideredanissuefor any of thespecificareasof potential differencementionedin thereport.Thesecond point is relevant to all thespecific issueslistedin thereport.For example, thepossibility for IRB banks to permanentlyusethestandardisedapproachfor certain exposures wasnever meant to be usedforinternationallyactivebanksandsupervisorswere(andwillcontinuetobe) expected not toapprove it for thosebanks.Concerningthe specific issues,there are someadditional points.Firstly, the proposedapproachon significant investmentsin insurancereflectsthe existenceof strict and harmonised rulesfor insuranceandfinancial conglomeratesat EU level, takesintoaccount the recentlyrevisedJoint Forumsprinciplesfor financial conglomeratessupervision, providesappropriateincentivesfor insurancecompaniescapitalisationand preventsdoublecounting of capital.Theassessment should takethesefactsintoaccount.Secondly, theconcept of common sharesdoesnot exist in a largenumberof EU Member States, whichexplainsthe choiceof approach based onthecharacteristicsof capital instruments, rather than their form.Nevertheless, publiclylistedbanks are expectedtomeet their CET1requirement only withsharesmeetingthe 14 criteria.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 29. 29Furthermore,specificmonitoring powershave been conferredupon theEuropean BankingAuthority in order toidentify any misuseof thisapproachby banks.Lastly, the European Commission expectstoadopt legislationimplementingthe point-of-non-viabilityrequirement before summer ofthisyear.JapanBy end March2012,theJapaneseauthoritiespublished final rulesimplementingBaselIII withrespect to the definitionof capital and risk-weightedassets(RWA), whilethe BaselII and Basel 2.5regulationhadalreadybeen transposed intodomestic rules previously.The documents for the Japan Level 2 review include notices, supervisoryguidelines, inspection manualsand Qs and As issued by the FSA to spellout thedetailed interpretation, all of which are binding.Where applicable, the Japanese authorities have provided data for 16internationally active banks, which account for more than 50% of theJapanesebanking assets.Japan hasissued final Basel III regulations.This means that the review of Japan is more detailed than the reviewsofthe European Union and United States where the assessments are basedon drafts.Thereview isbasedontheEnglishtranslationof theJapaneserules, mostof which havebeen translatedintoEnglish.In specificcases,thereviewteamcomparedtheEnglishtranslationof thedocumentswiththe original Japanesetext toverify the translation.Afinal judgment of thepotential discrepanciesin thetranslation will besubjecttofurther analysis.TheJapaneseauthoritiesalsohaveprovidedsupplemental informationrequestedby theteam.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 30. 30Preliminary findingsOverall, the preliminaryanalysisof JapansBasel II/ III frameworksuggestsbroad consistencywith themajorityof the sectionsof the Baselrules.Theanalysis, however, revealed certaindifferencesthat will be the focusof further review by the assessment team:(I)TheBasel III capital rulesare not fullyimplemented (additionalguidanceisunder preparation) and deviatein specific areas,while therulesfor capital buffersareplanned tobepublishedonlyin 2015,oneyearaheadof the Basel III schedulefor the implementation;(II) MostPillar 2 rulesare not in place; and(III)There are a number of issues in certain aspects of riskmeasurement, both in terms of Pillar 1 and 2, for which the review teamwill seek further clarification.Definition of Capital and Capital BuffersWhile theJapaneseauthoritieshavealreadyfinalisedtherulesconcerningthedefinition of capital and RWA, more detailed guidanceto ensureconsistencywiththeBasel III text isnot yet established.This is particularlyrelevant in theareasconcerningthe recognitionofstockacquisitionrightsascommon equity Tier 1capital and thededuction of deferred tax assets.Theimplementationteam hasalsoidentified potential deviationsin theareasof the recognition criteria for additional Tier 1instrumentsaswell aswithrespect to the cut-off datefor thegrandfatheringof state aidinstruments,whichneed tobeinvestigatedfurther in order tounderstandthepotential impact.For thecapital buffers(capital conservation, countercyclical), thedomesticrulesare not yet in place.TheJapaneseauthoritiesplantoissuethe rulesby2015,ie, one yearaheadof the international schedulefor implementation(2016).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com 31. 31Lossabsorbencyat the point of non-viability (PON) is partiallyimplemented, suchastheresolutionschemein Japansdeposit insurancelaw.Theauthoritiesare currentlyanalysing how to organise thelinkagebetweenPON requirementsand the domestic resolution schemeandplanto finalisethe details of theframework by theend of 2012.Pillar 1- Minimum Capital RequirementFor securitisation, several areasof deviation havebeen identified, suchasin termsof re-securitisation, forABCP exposuresunder theStandardisedApproach and specific aspectsin termsof the InternalAssessmentApproach (IAA) and theSupervisory FormulaApproach (SFA).Other areasof credit risk will alsobe subject to further analysis. Intermsof counterparty credit riskand cross-product netting, theInternal Model Method(IMM) is not yet implemented.While in practicenobank hasadopted theIMM, implementationintodomesticregulation is still desirable.Concerningmarket risk, theteam hasidentified areasof non-compliancewith respect to thetreatment of smallertradingbooks(