basel in banking sector

8/2/2019 Basel in Banking Sector

1/12

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 minimizingcredit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of

capital based on a percent of risk-weighted assets. Investopedia explains '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 capital of at

least $8 million.

How Basel 1 Affected Banks

From 1965 to 1981 there were about eight bank failures (or bankruptcies) in the United States. Bank

failures were particularly prominent during the '80s, a time which is usually referred to as the "savings

and loan crisis." Banks throughout the world were lending extensively, while countries' external

indebtedness was growing at an unsustainable rate. (For related reading, seeAnalyzing A Bank's

Financial Statements.)

As a result, the potential for the bankruptcy of the major international banks because grew as a result

of low security. In order to prevent this risk, theBasel Committee on Banking Supervision, comprised

of central banks and supervisory authorities of 10 countries, met in 1987 in Basel, Switzerland.

The committee drafted a first document to set up an international 'minimum' amount of capital thatbanks should hold. This minimum is a percentage of the total capital of a bank, which is also called the

minimum risk-based capital adequacy. In 1988, theBasel I Capital Accord(agreement) was created.

TheBasel II Capital Accordfollows as an extension of the former, and was implemented in 2007. In

this article, we'll take a look at Basel I and how it impacted the banking industry.
http://www.investopedia.com/terms/s/sl-crisis.asphttp://www.investopedia.com/terms/s/sl-crisis.asphttp://www.investopedia.com/terms/s/sl-crisis.asphttp://www.investopedia.com/terms/s/sl-crisis.asphttp://www.investopedia.com/articles/stocks/07/bankfinancials.asphttp://www.investopedia.com/articles/stocks/07/bankfinancials.asphttp://www.investopedia.com/articles/stocks/07/bankfinancials.asphttp://www.investopedia.com/articles/stocks/07/bankfinancials.asphttp://www.investopedia.com/terms/b/baselcommittee.asphttp://www.investopedia.com/terms/b/baselcommittee.asphttp://www.investopedia.com/terms/b/baselcommittee.asphttp://www.investopedia.com/terms/b/basel_I.asphttp://www.investopedia.com/terms/b/basel_I.asphttp://www.investopedia.com/terms/b/basel_I.asphttp://www.investopedia.com/terms/b/baselii.asphttp://www.investopedia.com/terms/b/baselii.asphttp://www.investopedia.com/terms/b/baselii.asphttp://www.investopedia.com/terms/b/baselii.asphttp://www.investopedia.com/terms/b/basel_I.asphttp://www.investopedia.com/terms/b/baselcommittee.asphttp://www.investopedia.com/articles/stocks/07/bankfinancials.asphttp://www.investopedia.com/articles/stocks/07/bankfinancials.asphttp://www.investopedia.com/terms/s/sl-crisis.asphttp://www.investopedia.com/terms/s/sl-crisis.asp


2/12

The Purpose of Basel I

In 1988, the Basel I Capital Accord was created. The general purpose was to:

1. Strengthen the stability of international banking system.

2. Set up a fair and a consistent international banking system in order to decrease competitive

inequality among international banks.

The basic achievement of Basel I has been to define bank capital and the so-called bankcapital ratio.

In order to set up a minimum risk-based capital adequacy applying to all banks and governments in

the world, a general definition of capital was required. Indeed, before this international agreement,

there was no single definition of bank capital. The first step of the agreement was thus to define it.

Two-Tiered Capital

Basil I defines capital based on two tiers:

1. Tier 1 (Core Capital):Tier 1 capitalincludes stock issues (or share holders equity) and declared

reserves, such asloan loss reservesset aside to cushion future losses or for smoothing out income

variations.

2. Tier 2 (Supplementary Capital):Tier 2 capitalincludes all other capital such as gains on investment

assets, long-term debt with maturity greater than five years and hidden reserves (i.e. excess

allowance for losses on loans and leases). However, short-term unsecured debts (or debts without

guarantees), are not included in the definition of capital.

Credit Risk is defined as therisk weighted asset(RWA) of the bank, which are banks assets weighted

in relation to their relativecredit risklevels. According to Basel I, the total capital should represent at

least 8% of the bank's credit risk (RWA). In addition, the Basel agreement identifies three types of

credit risks:

The on-balance sheet risk (see Figure 1 for example).

The tradingoff-balance sheetrisk. These arederivatives, namely interest rates,foreign exchange,

equity derivatives andcommodities.

The non-trading off-balance sheet risk. These include general guarantees, such as forward purchase of

assets or transaction-related debt assets.
http://www.investopedia.com/terms/c/capitaladequacyratio.asphttp://www.investopedia.com/terms/c/capitaladequacyratio.asphttp://www.investopedia.com/terms/c/capitaladequacyratio.asphttp://www.investopedia.com/terms/t/tier1capital.asphttp://www.investopedia.com/terms/t/tier1capital.asphttp://www.investopedia.com/terms/t/tier1capital.asphttp://www.investopedia.com/terms/l/loanlossprovision.asphttp://www.investopedia.com/terms/l/loanlossprovision.asphttp://www.investopedia.com/terms/l/loanlossprovision.asphttp://www.investopedia.com/terms/t/tier2capital.asphttp://www.investopedia.com/terms/t/tier2capital.asphttp://www.investopedia.com/terms/t/tier2capital.asphttp://www.investopedia.com/terms/r/riskweightedassets.asphttp://www.investopedia.com/terms/r/riskweightedassets.asphttp://www.investopedia.com/terms/r/riskweightedassets.asphttp://www.investopedia.com/terms/c/creditrisk.asphttp://www.investopedia.com/terms/c/creditrisk.asphttp://www.investopedia.com/terms/c/creditrisk.asphttp://www.investopedia.com/terms/o/obsf.asphttp://www.investopedia.com/terms/o/obsf.asphttp://www.investopedia.com/terms/o/obsf.asphttp://www.investopedia.com/terms/d/derivative.asphttp://www.investopedia.com/terms/d/derivative.asphttp://www.investopedia.com/terms/d/derivative.asphttp://www.investopedia.com/terms/f/forex.asphttp://www.investopedia.com/terms/f/forex.asphttp://www.investopedia.com/terms/f/forex.asphttp://www.investopedia.com/terms/c/commodity.asphttp://www.investopedia.com/terms/c/commodity.asphttp://www.investopedia.com/terms/c/commodity.asphttp://www.investopedia.com/terms/c/commodity.asphttp://www.investopedia.com/terms/f/forex.asphttp://www.investopedia.com/terms/d/derivative.asphttp://www.investopedia.com/terms/o/obsf.asphttp://www.investopedia.com/terms/c/creditrisk.asphttp://www.investopedia.com/terms/r/riskweightedassets.asphttp://www.investopedia.com/terms/t/tier2capital.asphttp://www.investopedia.com/terms/l/loanlossprovision.asphttp://www.investopedia.com/terms/t/tier1capital.asphttp://www.investopedia.com/terms/c/capitaladequacyratio.asp


3/12

RBCC - Breakout Gains!

Let's take a look at some calculations related to RWA and capital requirement. Figure 1 displays

predefined categories of on-balance sheet exposures, such as vulnerability to loss from an unexpected

event, weighted according to four relative risk categories.

Figure 1: Basel's Classification of risk weights of on-balance sheet assets

As shown in Figure 2, there is anunsecured loanof $1,000 to a non-bank, which requires a risk

weight of 100%. The RWA is therefore calculated as RWA=$1,000 100%=$1,000. By using Formula

2, a minimum 8% capital requirement gives 8% RWA=8% $1,000=$80. In other words, the total

capital holding of the firm must be $80 related to the unsecured loan of $1,000. Calculation under

different risk weights for different types of assets are also presented in Table 2.

Figure 2: Calculation of RWA and capital requirement on-balance sheet assets

Market riskincludes general market risk and specific risk. The general market risk refers to changes in

the market values due to large market movements. Specific risk refers to changes in the value of an

individual asset due to factors related to the issuer of the security. There are four types of economic

variables that generate market risk. These are interest rates, foreign exchanges, equities and

commodities. The market risk can be calculated in two different manners: either with the

standardized Basel model or with internalvalue at risk(VaR) models of the banks. These internal
http://links.industrybrains.com/click?sid=361&rqctid=4195&pos=1&lid=722211&cid=156369&pr=2&tstamp=20120214114839&iip=115.241.204.66&ltype=JSCR&lname=5&url=http://bestmicrocapstock.com%3futm_source%3dMarchex%26utm_medium%3dCPC%26utm_term%3dOpinion%26utm_content%3dWeek2%26utm_campaign%3dRBCChttp://links.industrybrains.com/click?sid=361&rqctid=4195&pos=1&lid=722211&cid=156369&pr=2&tstamp=20120214114839&iip=115.241.204.66&ltype=JSCR&lname=5&url=http://bestmicrocapstock.com%3futm_source%3dMarchex%26utm_medium%3dCPC%26utm_term%3dOpinion%26utm_content%3dWeek2%26utm_campaign%3dRBCChttp://www.investopedia.com/terms/u/unsecuredloan.asphttp://www.investopedia.com/terms/u/unsecuredloan.asphttp://www.investopedia.com/terms/u/unsecuredloan.asphttp://www.investopedia.com/terms/m/marketrisk.asphttp://www.investopedia.com/terms/m/marketrisk.asphttp://www.investopedia.com/terms/v/var.asphttp://www.investopedia.com/terms/v/var.asphttp://www.investopedia.com/terms/v/var.asphttp://www.investopedia.com/terms/v/var.asphttp://www.investopedia.com/terms/m/marketrisk.asphttp://www.investopedia.com/terms/u/unsecuredloan.asphttp://links.industrybrains.com/click?sid=361&rqctid=4195&pos=1&lid=722211&cid=156369&pr=2&tstamp=20120214114839&iip=115.241.204.66&ltype=JSCR&lname=5&url=http://bestmicrocapstock.com%3futm_source%3dMarchex%26utm_medium%3dCPC%26utm_term%3dOpinion%26utm_content%3dWeek2%26utm_campaign%3dRBCC


4/12

models can only be used by the largest banks that satisfy qualitative and quantitative standards

imposed by the Basel agreement. Moreover, the 1996 revision also adds the possibility of a third tier

for the total capital, which includes short-term unsecured debts. This is at the discretion of thecentral

banks. (For related reading, seeGet To Know The Central BanksandWhat Are Central Banks?)

Pitfalls of Basel I

Basel I Capital Accord has been criticized on several grounds. The main criticisms include the

following:

Limited differentiation of credit risk

There are four broad risk weightings (0%, 20%, 50% and 100%), as shown in Figure1, based on an

8% minimum capital ratio.

Static measure of default risk

The assumption that a minimum 8% capital ratio is sufficient to protect banks from failure does not

take into account the changing nature ofdefault risk.

No recognition of term-structure of credit risk

The capital charges are set at the same level regardless of the maturity of a credit exposure.

Simplified calculation of potential future counterparty risk

The current capital requirements ignore the different level of risks associated with different currencies

andmacroeconomicrisk. In other words, it assumes a common market to all actors, which is not true

in reality.

Lack of recognition of portfolio diversification effects

In reality, the sum of individual risk exposures is not the same as the risk reduction through

portfoliodiversification. Therefore, summing all risks might provide incorrect judgment of risk. A

remedy would be to create an internal credit risk model - for example, one similar to the model as

developed by the bank to calculate market risk. This remark is also valid for all other weaknesses.

Advertisment - Article continues below.

These listed criticisms have led to the creation of a new Basel Capital Accord, known as Basel II, which

added operational risk and also defined new calculations of credit risk. Operational risk is the risk of

loss arising from human error or management failure. Basel II Capital Accord was implemented in

2007.

Conclusion
http://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/articles/forex/06/CentralBanks.asphttp://www.investopedia.com/articles/forex/06/CentralBanks.asphttp://www.investopedia.com/articles/forex/06/CentralBanks.asphttp://www.investopedia.com/articles/03/050703.asphttp://www.investopedia.com/articles/03/050703.asphttp://www.investopedia.com/articles/03/050703.asphttp://www.investopedia.com/terms/d/defaultrisk.asphttp://www.investopedia.com/terms/d/defaultrisk.asphttp://www.investopedia.com/terms/d/defaultrisk.asphttp://www.investopedia.com/terms/m/macroeconomics.asphttp://www.investopedia.com/terms/m/macroeconomics.asphttp://www.investopedia.com/terms/m/macroeconomics.asphttp://www.investopedia.com/terms/d/diversification.asphttp://www.investopedia.com/terms/d/diversification.asphttp://www.investopedia.com/terms/d/diversification.asphttp://ops.investopedia.com/RealMedia/ads/click_lx.ads/investopedia.com/439530520/x32/default/empty.gif/632f484d516b38366a74494144566432?xhttp://www.investopedia.com/terms/d/diversification.asphttp://www.investopedia.com/terms/m/macroeconomics.asphttp://www.investopedia.com/terms/d/defaultrisk.asphttp://www.investopedia.com/articles/03/050703.asphttp://www.investopedia.com/articles/forex/06/CentralBanks.asphttp://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/terms/c/centralbank.asp


5/12

The Basel I Capital Accord aimed to assess capital in relation to credit risk, or the risk that a loss will

occur if a party does not fulfill its obligations. It launched the trend toward increasing risk modeling

research; however, its over-simplified calculations, and classifications have simultaneously called for

its disappearance, paving the way for the Basel II Capital Accord and further agreements as the

symbol of the continuous refinement of risk and capital. Nevertheless, Basel I, as the first

international instrument assessing the importance of risk in relation to capital, will remain a milestone

in the finance and banking history.

BASEL III is a global regulatory standard on bankcapital adequacy,stress testingandmarket

liquidityriskagreed upon by the members of theBasel Committee on Banking Supervisionin 2010-11.[1]

This, the third of theBasel Accords(seeBasel I,Basel II) was developed in response to the deficiencies

in financial regulation revealed by thelate-2000s financial crisis. Basel III strengthens bankcapital

requirementsand introduces new regulatory requirements onbank liquidityandbank leverage. For

instance, the change in the calculation of loan risk in Basel II which some consider a causal factor in the

credit bubble prior to the 2007-8 collapse: in Basel II one of the principal factors of financial risk

management was out-sourced to companies that were not subject to supervision: credit rating agencies.

Ratings of creditworthiness and of bonds, financial bundles and various other financial instruments were

conducted without supervision by official agencies, leading to AAA ratings onmortage-backed

securities,credit default swapsand other instruments that proved in practice to be extremely bad credit

risks. In Basel III a more formalscenario analysisis applied (three official scenarios from regulators, with

ratings agencies and firms urged to apply more extreme ones).

TheOECDestimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to

0.15 percentage point.[2][3]

. Outside the banking industry itself, criticism was muted. Bank directors would

be required to knowmarket liquidityconditions for major asset holdings, to strengthen accountability for

any major losses.

Contents

[hide]

1 Overview

2 Summary of proposed changes

o 2.1 US implementation

3 Macroeconomic Impact of Basel III
http://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/wiki/Bank_stress_testshttp://en.wikipedia.org/wiki/Bank_stress_testshttp://en.wikipedia.org/wiki/Bank_stress_testshttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Liquidity_riskhttp://en.wikipedia.org/wiki/Liquidity_riskhttp://en.wikipedia.org/wiki/Liquidity_riskhttp://en.wikipedia.org/wiki/Basel_Committee_on_Banking_Supervisionhttp://en.wikipedia.org/wiki/Basel_Committee_on_Banking_Supervisionhttp://en.wikipedia.org/wiki/Basel_Committee_on_Banking_Supervisionhttp://en.wikipedia.org/wiki/Basel_III#cite_note-0http://en.wikipedia.org/wiki/Basel_III#cite_note-0http://en.wikipedia.org/wiki/Basel_III#cite_note-0http://en.wikipedia.org/wiki/Basel_Accordshttp://en.wikipedia.org/wiki/Basel_Accordshttp://en.wikipedia.org/wiki/Basel_Accordshttp://en.wikipedia.org/wiki/Basel_Ihttp://en.wikipedia.org/wiki/Basel_Ihttp://en.wikipedia.org/wiki/Basel_Ihttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Capital_requirementhttp://en.wikipedia.org/wiki/Capital_requirementhttp://en.wikipedia.org/wiki/Capital_requirementhttp://en.wikipedia.org/wiki/Capital_requirementhttp://en.wikipedia.org/w/index.php?title=Bank_liquidity&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_liquidity&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_liquidity&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_leverage&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_leverage&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_leverage&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Mortage-backed_securities&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Mortage-backed_securities&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Mortage-backed_securities&action=edit&redlink=1http://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Basel_IIIhttp://en.wikipedia.org/wiki/Basel_IIIhttp://en.wikipedia.org/wiki/Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Overviewhttp://en.wikipedia.org/wiki/Basel_III#Overviewhttp://en.wikipedia.org/wiki/Basel_III#Summary_of_proposed_changeshttp://en.wikipedia.org/wiki/Basel_III#Summary_of_proposed_changeshttp://en.wikipedia.org/wiki/Basel_III#US_implementationhttp://en.wikipedia.org/wiki/Basel_III#US_implementationhttp://en.wikipedia.org/wiki/Basel_III#Macroeconomic_Impact_of_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Macroeconomic_Impact_of_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Macroeconomic_Impact_of_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#US_implementationhttp://en.wikipedia.org/wiki/Basel_III#Summary_of_proposed_changeshttp://en.wikipedia.org/wiki/Basel_III#Overviewhttp://en.wikipedia.org/wiki/Basel_IIIhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/w/index.php?title=Mortage-backed_securities&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Mortage-backed_securities&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_leverage&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Bank_liquidity&action=edit&redlink=1http://en.wikipedia.org/wiki/Capital_requirementhttp://en.wikipedia.org/wiki/Capital_requirementhttp://en.wikipedia.org/wiki/Late-2000s_financial_crisishttp://en.wikipedia.org/wiki/Basel_IIhttp://en.wikipedia.org/wiki/Basel_Ihttp://en.wikipedia.org/wiki/Basel_Accordshttp://en.wikipedia.org/wiki/Basel_III#cite_note-0http://en.wikipedia.org/wiki/Basel_Committee_on_Banking_Supervisionhttp://en.wikipedia.org/wiki/Liquidity_riskhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Bank_stress_testshttp://en.wikipedia.org/wiki/Capital_adequacy


6/12

4 Key dates

o 4.1 Capital Requirements

o 4.2 Leverage Ratio

o

4.3 Liquidity Requirements5 Studies on Basel III

6 See also

7 References

8 External links

[edit]Overview

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. In addition, 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 outflows 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.[4]

[edit]Summary of proposed changes

First, the quality, consistency, and transparency of the capital base will be raised.

Tier 1 capital: the predominant form of Tier 1 capital must be common shares and retained

earnings

Tier 2 capitalinstruments will be harmonised

Tier 3 capital will be eliminated.[5]

Second, the risk coverage of the capital framework will be strengthened.

Promote more integrated management of market and counterparty credit risk

Add the CVA (credit valuation adjustment)-risk due to deterioration in counterparty's credit rating

Strengthen the capital requirements for counterpartycredit exposures arising from banks

derivatives, repo andsecurities financingtransactions

Raise the capital buffers backing these exposures

Reduceprocyclicalityand

Provide additional incentives to moveOTC derivative contractsto central counterparties

(probablyclearing houses)
http://en.wikipedia.org/wiki/Basel_III#Macroeconomic_Impact_of_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Key_dateshttp://en.wikipedia.org/wiki/Basel_III#Key_dateshttp://en.wikipedia.org/wiki/Basel_III#Capital_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Capital_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Leverage_Ratiohttp://en.wikipedia.org/wiki/Basel_III#Leverage_Ratiohttp://en.wikipedia.org/wiki/Basel_III#Liquidity_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Liquidity_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Studies_on_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Studies_on_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#See_alsohttp://en.wikipedia.org/wiki/Basel_III#See_alsohttp://en.wikipedia.org/wiki/Basel_III#Referenceshttp://en.wikipedia.org/wiki/Basel_III#Referenceshttp://en.wikipedia.org/wiki/Basel_III#External_linkshttp://en.wikipedia.org/wiki/Basel_III#External_linkshttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=1http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=1http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=1http://en.wikipedia.org/wiki/Basel_III#cite_note-3http://en.wikipedia.org/wiki/Basel_III#cite_note-3http://en.wikipedia.org/wiki/Basel_III#cite_note-3http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=2http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=2http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=2http://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/wiki/Tier_2_capitalhttp://en.wikipedia.org/wiki/Tier_2_capitalhttp://en.wikipedia.org/wiki/Basel_III#cite_note-4http://en.wikipedia.org/wiki/Basel_III#cite_note-4http://en.wikipedia.org/wiki/Basel_III#cite_note-4http://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Security_(finance)#Collateralhttp://en.wikipedia.org/wiki/Security_(finance)#Collateralhttp://en.wikipedia.org/wiki/Security_(finance)#Collateralhttp://en.wikipedia.org/wiki/Procyclicality#Meaning_in_policy_makinghttp://en.wikipedia.org/wiki/Procyclicality#Meaning_in_policy_makinghttp://en.wikipedia.org/wiki/Procyclicality#Meaning_in_policy_makinghttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Clearing_house_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Procyclicality#Meaning_in_policy_makinghttp://en.wikipedia.org/wiki/Security_(finance)#Collateralhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)#Counter-party_riskhttp://en.wikipedia.org/wiki/Basel_III#cite_note-4http://en.wikipedia.org/wiki/Tier_2_capitalhttp://en.wikipedia.org/wiki/Tier_1_capitalhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=2http://en.wikipedia.org/wiki/Basel_III#cite_note-3http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=1http://en.wikipedia.org/wiki/Basel_III#External_linkshttp://en.wikipedia.org/wiki/Basel_III#Referenceshttp://en.wikipedia.org/wiki/Basel_III#See_alsohttp://en.wikipedia.org/wiki/Basel_III#Studies_on_Basel_IIIhttp://en.wikipedia.org/wiki/Basel_III#Liquidity_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Leverage_Ratiohttp://en.wikipedia.org/wiki/Basel_III#Capital_Requirementshttp://en.wikipedia.org/wiki/Basel_III#Key_dates


7/12

Provide incentives to strengthen therisk managementof counterparty credit exposures

Raise counterparty credit risk management standards by including wrong-way risk

Third, the Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-

based framework.

The Committee therefore is introducing a leverage ratio requirement that is intended to achieve

the following objectives:

Put a floor under the build-up ofleveragein the banking sector

Introduce additional safeguards againstmodel riskandmeasurement errorby

supplementing the risk based measure with a simpler measure that is based on gross

exposures.

Fourth, the Committee is introducing a series of measures to promote the build up of capital buffers in

good times that can be drawn upon in periods of stress ("Reducing procyclicality and promoting

countercyclical buffers").

The Committee is introducing a series of measures to address procyclicality:

Dampen any excess cyclicality of the minimum capital requirement;

Promote more forward looking provisions;

Conserve capital to build buffers at individual banks and the banking sector that can be used

in stress; and

Achieve the broadermacroprudentialgoal of protecting the banking sector from periods of

excess credit growth.

Requirement to use long term data horizons to estimate probabilities of default,

downturn loss-given-defaultestimates, recommended in Basel II, to become mandatory

Improvedcalibration of the risk functions, which convert loss estimates into regulatory capital

requirements.

Banks must conductstress teststhat include wideningcredit spreadsin recessionary

scenarios.

Promoting stronger provisioning practices (forward looking provisioning):

Advocating a change in the accounting standards towards an expected loss (EL) approach

(usually, EL amount:=LGD*PD*EAD).[6]

Fifth, the Committee is introducing a global minimum liquidity standard for internationally active banks

that includes a 30-day liquidity coverage ratio requirement underpinned by a longer-term structural

liquidity ratio called theNet Stable Funding Ratio. (In January 2012, the oversight panel of the Basel

Committee on Banking Supervision issued a statement saying that regulators will allow banks to dip

below their required liquidity levels, the liquidity coverage ratio, during periods of stress.[7]

)
http://en.wikipedia.org/wiki/Risk_management#Areas_of_risk_managementhttp://en.wikipedia.org/wiki/Risk_management#Areas_of_risk_managementhttp://en.wikipedia.org/wiki/Risk_management#Areas_of_risk_managementhttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Model_riskhttp://en.wikipedia.org/wiki/Model_riskhttp://en.wikipedia.org/wiki/Model_riskhttp://en.wikipedia.org/wiki/Sampling_errorhttp://en.wikipedia.org/wiki/Sampling_errorhttp://en.wikipedia.org/wiki/Sampling_errorhttp://en.wikipedia.org/wiki/Macroprudentialhttp://en.wikipedia.org/wiki/Macroprudentialhttp://en.wikipedia.org/wiki/Macroprudentialhttp://en.wikipedia.org/wiki/Loss_given_default#Downturn_LGDhttp://en.wikipedia.org/wiki/Loss_given_default#Downturn_LGDhttp://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis#Inconsistent_capital_requirements_and_risk_classificationhttp://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis#Inconsistent_capital_requirements_and_risk_classificationhttp://en.wikipedia.org/wiki/Stress_testing#Financial_sectorhttp://en.wikipedia.org/wiki/Stress_testing#Financial_sectorhttp://en.wikipedia.org/wiki/Stress_testing#Financial_sectorhttp://en.wikipedia.org/wiki/Credit_spread_(bond)http://en.wikipedia.org/wiki/Credit_spread_(bond)http://en.wikipedia.org/wiki/Credit_spread_(bond)http://en.wikipedia.org/wiki/Loss_given_defaulthttp://en.wikipedia.org/wiki/Loss_given_defaulthttp://en.wikipedia.org/wiki/Probability_of_defaulthttp://en.wikipedia.org/wiki/Probability_of_defaulthttp://en.wikipedia.org/wiki/Exposure_at_defaulthttp://en.wikipedia.org/wiki/Exposure_at_defaulthttp://en.wikipedia.org/wiki/Exposure_at_defaulthttp://en.wikipedia.org/wiki/Basel_III#cite_note-5http://en.wikipedia.org/wiki/Basel_III#cite_note-5http://en.wikipedia.org/wiki/Basel_III#cite_note-5http://en.wikipedia.org/wiki/Net_Stable_Funding_Ratiohttp://en.wikipedia.org/wiki/Net_Stable_Funding_Ratiohttp://en.wikipedia.org/wiki/Net_Stable_Funding_Ratiohttp://en.wikipedia.org/wiki/Basel_III#cite_note-6http://en.wikipedia.org/wiki/Basel_III#cite_note-6http://en.wikipedia.org/wiki/Basel_III#cite_note-6http://en.wikipedia.org/wiki/Basel_III#cite_note-6http://en.wikipedia.org/wiki/Net_Stable_Funding_Ratiohttp://en.wikipedia.org/wiki/Basel_III#cite_note-5http://en.wikipedia.org/wiki/Exposure_at_defaulthttp://en.wikipedia.org/wiki/Probability_of_defaulthttp://en.wikipedia.org/wiki/Loss_given_defaulthttp://en.wikipedia.org/wiki/Credit_spread_(bond)http://en.wikipedia.org/wiki/Stress_testing#Financial_sectorhttp://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis#Inconsistent_capital_requirements_and_risk_classificationhttp://en.wikipedia.org/wiki/Loss_given_default#Downturn_LGDhttp://en.wikipedia.org/wiki/Macroprudentialhttp://en.wikipedia.org/wiki/Sampling_errorhttp://en.wikipedia.org/wiki/Model_riskhttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Risk_management#Areas_of_risk_management


8/12

The Committee also is reviewing the need for additional capital, liquidity or other supervisory

measures to reduce theexternalitiescreated bysystemically importantinstitutions.

As on Sept 2010, Proposed Basel III norms ask for ratios as: 7-9.5%(4.5% +2.5%(conservation buffer) +

0-2.5%(seasonal buffer)) for Common equity and 8.5-11% for tier 1 cap and 10.5 to 13 for total

capital (Proposed Basel III Guidelines: A Credit Positive for Indian Banks)'

[edit]US implementation

The USFederal Reserveannounced in December 2011 that it would implement substantially all of the

Basel III rules.[1]. It summarized them as follows[2], and made clear they would apply not only to banks

but to all institutions with more than US$50 billion in assets:

"Risk-based capital and leverage requirements" including firstannual capital plans, conductstress

tests, andcapital adequacy"including a tier onecommon risk-based capital ratiogreater than 5

percent, under both expected and stressed conditions" - seescenario analysison this. Arisk-based

capital surcharge

Market liquidity, first based on the US's own "interagency liquidity risk-management guidanceissued

in March 2010" that requireliquidity stress testsand set internal quantitative limits, later moving to a

full Basel III regime - see below.

TheFederal Reserve Boarditself would conduct tests annually "using three economic and financial

market scenarios." Institutions would be encouraged to use at least five scenarios reflecting

improbable events, and especially those considered impossible by management, but no standards

apply yet to extreme scenarios. Only a summary of the three official Fed scenarios "includingcompany-specific information, would be made public" but one or more internal company-run stress

tests must be run each year with summaries published.

Single-counterparty credit limitsto cut "credit exposureof a covered financial firm to a single

counterparty as a percentage of the firm's regulatory capital. Credit exposure between the largest

financial companies would be subject to a tighter limit."

"Early remediation requirements" to ensure that "financial weaknesses are addressed at an early

stage". One or more "triggers for remediation--such as capital levels, stress test results, and risk-

management weaknesses--in some cases calibrated to be forward-looking" would be proposed by

the Board in 2012. "Required actions would vary based on the severity of the situation, but could

include restrictions on growth, capital distributions, and executive compensation, as well as capital

raising or asset sales."
http://en.wikipedia.org/wiki/Externalitieshttp://en.wikipedia.org/wiki/Externalitieshttp://en.wikipedia.org/wiki/Externalitieshttp://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=3http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=3http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=3http://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Federal_Reservehttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htmhttp://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htmhttp://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htmhttp://en.wikipedia.org/w/index.php?title=Annual_capital_plan&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Annual_capital_plan&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Annual_capital_plan&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/w/index.php?title=Common_risk-based_capital_ratio&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Common_risk-based_capital_ratio&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Common_risk-based_capital_ratio&action=edit&redlink=1http://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/w/index.php?title=Interagency_liquidity_risk-management_guidance&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Interagency_liquidity_risk-management_guidance&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Interagency_liquidity_risk-management_guidance&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Liquidity_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Liquidity_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Liquidity_stress_test&action=edit&redlink=1http://en.wikipedia.org/wiki/Federal_Reserve_Boardhttp://en.wikipedia.org/wiki/Federal_Reserve_Boardhttp://en.wikipedia.org/wiki/Federal_Reserve_Boardhttp://en.wikipedia.org/w/index.php?title=Single-counterparty_credit_limit&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Single-counterparty_credit_limit&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Credit_exposure&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Credit_exposure&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Credit_exposure&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Credit_exposure&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Single-counterparty_credit_limit&action=edit&redlink=1http://en.wikipedia.org/wiki/Federal_Reserve_Boardhttp://en.wikipedia.org/w/index.php?title=Liquidity_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Interagency_liquidity_risk-management_guidance&action=edit&redlink=1http://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Risk-based_capital_surcharge&action=edit&redlink=1http://en.wikipedia.org/wiki/Scenario_analysishttp://en.wikipedia.org/w/index.php?title=Common_risk-based_capital_ratio&action=edit&redlink=1http://en.wikipedia.org/wiki/Capital_adequacyhttp://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_stress_test&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Annual_capital_plan&action=edit&redlink=1http://www.federalreserve.gov/newsevents/press/bcreg/20111220a.htmhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=3http://en.wikipedia.org/wiki/Systemic_riskhttp://en.wikipedia.org/wiki/Externalities


9/12

It was unclear as of December 2011 how these rules would apply toinsurance,hedge fundsand other

large financial players. The announced intent was "to limit the dangers of big financial firms being heavily

intertwined"[3].

[edit]Macroeconomic Impact of Basel III

AnOECDstudy[2]

released on 17 February 2011, estimates that the medium-term impact of Basel III

implementation on GDP growth is in the range of 0.05 to 0.15 percentage point per year. Economic

output is mainly affected by an increase in bank lending spreads as banks pass a rise in bank funding

costs, due to higher capital requirements, to their customers. To meet the capital requirements effective in

2015 (4.5% for the common equity ratio, 6% for the Tier 1 capital ratio), banks are estimated to increase

their lending spreads on average by about 15 basis points. The capital requirements effective as of 2019

(7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by

about 50 basis points. The estimated effects on GDP growth assume no active response from monetary

policy. To the extent that monetary policy will no longer be constrained by the zero lower bound, the

Basel III impact on economic output could be offset by a reduction (or delayed increase) in monetary

policy rates by about 30 to 80 basis points.[8]

Basel III is an opportunity as well as a challenge for banks. It can provide a solid foundation for the next

developments in the banking sector, and it can ensure that past excesses are avoided. Basel III is

changing the way that banks address the management of risk and finance. The new regime seeks much

greater integration of the finance and risk management functions. This will probably drive the

convergence of the responsibilities of CFOs and CROs in delivering the strategic objectives of the

business. However, the adoption of a more rigorous regulatory stance might be hampered by a reliance

on multiple data silos and by a separation of powers between those who are responsible for finance and

those who manage risk. The new emphasis on risk management that is inherent in Basel III requires the

introduction or evolution of a risk management framework that is as robust as the existing finance

management infrastructures. As well as being a regulatory regime, Basel III in many ways provides a

framework for true enterprise risk management, which involves covering all risks to the business.[9]

[edit]Key dates

[edit]Capital Requirements

Date Milestone: Capital Requirement

2013 Minimum capital requirements: Start of the gradual phasing-in of the higher minimum capital requirements.
http://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Hedge_fundhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=4http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=4http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=4http://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/Basel_III#cite_note-Abstract:_Macroeconomic_Impact_of_Basel_III-7http://en.wikipedia.org/wiki/Basel_III#cite_note-Abstract:_Macroeconomic_Impact_of_Basel_III-7http://en.wikipedia.org/wiki/Basel_III#cite_note-Abstract:_Macroeconomic_Impact_of_Basel_III-7http://en.wikipedia.org/wiki/Basel_III#cite_note-Implementing_Basel_III_:_Challenges.2C_Options_.26_Opportunities-8http://en.wikipedia.org/wiki/Basel_III#cite_note-Implementing_Basel_III_:_Challenges.2C_Options_.26_Opportunities-8http://en.wikipedia.org/wiki/Basel_III#cite_note-Implementing_Basel_III_:_Challenges.2C_Options_.26_Opportunities-8http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=5http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=5http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=5http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=6http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=6http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=6http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=6http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=5http://en.wikipedia.org/wiki/Basel_III#cite_note-Implementing_Basel_III_:_Challenges.2C_Options_.26_Opportunities-8http://en.wikipedia.org/wiki/Basel_III#cite_note-Abstract:_Macroeconomic_Impact_of_Basel_III-7http://en.wikipedia.org/wiki/Basel_III#cite_note-Macroeconomic_Impact_of_Basel_III-1http://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=4http://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.htmlhttp://en.wikipedia.org/wiki/Hedge_fundhttp://en.wikipedia.org/wiki/Insurance


10/12

2015 Minimum capital requirements: Higher minimum capital requirements are fully implemented.

2016 Conservation buffer: Start of the gradual phasing-in of the conservation buffer.

2019 Conservation buffer: The conservation buffer is fully implemented.

[edit]Leverage Ratio

Date Milestone: Leverage Ratio

2011 Supervisory monitoring: Developing templates to track the leverage ratio and the underlying components.

2013Parallel run I: The leverage ratio and its components will be tracked by supervisors but not disclosed and not

mandatory.

2015 Parallel run II: The leverage ratio and its components will be tracked and disclosed but not mandatory.

2017Final adjustments: Based on the results of the parallel run period, any final adjustments to the leverage

ratio.

2018 Mandatory requirement: The leverage ratio will become a mandatory part of Basel III requirements.

[edit]Liquidity Requirements

Date Milestone: Liquidity Requirements

2011 Observation period: Developing templates and supervisory monitoring of the liquidity ratios.

2015 Introduction of the LCR: Introduction of the Liquidity Coverage Ratio (LCR).

2018 Introduction of the NSFR: Introduction of the Net Stable Funding Ratio (NSFR).
http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=7http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=7http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=7http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=8http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=8http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=8http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=8http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=7


11/12

[edit]Studies on Basel III

In addition to articles used for references (see References), this section lists links to recent high-quality

publicly-available studies on Basel III. This section may be updated frequently as Basel III is currently

under development.

Date Source Article Title / Link Comments

Dec

2011

OECD: Economics

Department

Systemically Important

Banks

OECD analysis on the failure of bank regulation and markets

to discipline systemically important banks.

Jun

2011

BNP Paribas:

Economic Research

Department

Basel III: no Achilles'

spear

BNP Paribas' Economic Research Department study on Basel

III.

Feb

2011

OECD: Economics

Department

Macroeconomic Impact

of Basel III OECD analysis on the macroeconomic impact of Basel III.

Jan

2011Moody's Analytics

Basel III New Capital and

Liquidity Standards

FAQs

Basel III standards, key elements of new regulations,

framework, and key implementation dates.

May

2010

OECD Journal:

Financial Market

Trends

Thinking Beyond Basel

IIIOECD study on Basel I, Basel II and III.

May

2010

Bloomberg

BusinessWeek

FDICs Bair Says Europe

Should Make Banks Hold

More Capital

Bair said regulators around the world need to work together

on the next round of capital standards for banks ... the next

round of international standards, known as Basel III, which

Bair said must meet very aggressive goals.

May

2010Reuters

FACTBOX-G20 progress

on financial regulation

Finance ministers from the G20 group of industrial and

emerging countries meet in Busan, Korea, on June 45 to

review pledges made in 2009 to strengthen regulation and

learn lessons from the financial crisis.
http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=9http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=9http://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=9http://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://en.wikipedia.org/wiki/Moody%27s_Analyticshttp://en.wikipedia.org/wiki/Moody%27s_Analyticshttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://www.webcitation.org/5q4GU5WGwhttp://www.webcitation.org/5q4GU5WGwhttp://www.webcitation.org/5q4GU5WGwhttp://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5q2JSEJlPhttp://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5pylqZc12http://www.webcitation.org/5q4GU5WGwhttp://www.webcitation.org/5q4GU5WGwhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://moodysanalytics.com/~/media/Insight/Regulatory/Basel-III/Thought-Leadership/2011/11-01-03-MA-Basel-III-FAQs.pdfhttp://en.wikipedia.org/wiki/Moody%27s_Analyticshttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://dx.doi.org/10.1787/5kghwnhkkjs8-enhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://economic-research.bnpparibas.com/applis/www/RechEco.nsf/ConjonctureByDateEN/81391A165B85FB54C12578C00042E75A/$File/C1105_06_A1.pdf?OpenElementhttp://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://dx.doi.org/10.1787/5kg0ps8cq8q6-enhttp://en.wikipedia.org/w/index.php?title=Basel_III&action=edit&section=9


12/12

May

2010The Economist

The banks battle back

A behind-the-scenes

brawl over new capital

and liquidity rules

"The most important bit of reform is the international set of

rules known as Basel 3, which will govern the capital and

liquidity buffers banks carry. It is here that the most vicious

and least public skirmish between banks and their regulators

is taking place."
http://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPxhttp://www.webcitation.org/5q2g8umPx

basel in banking sector

Documents