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Basel III and Liquidity Standard Status Quo and Next Steps
Dr. Georg von Pfstl
PRMIA Frankfurt Chapter, Sept. 2011
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Agenda
Basel III Status Quo
Basel III Liquidity Standard
Basel III Implications & Implementation Challenges
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Key topics of Basel III will be implemented through anEU Regulation no further translation into national
law required
From Basel II to Basel III
Basel 2.5 Basel III
Legal basis (EU)
CRD (2009/111/EC)published in the OfficialJournal (Nov. 2009)(CRD II)
CRD (2010/76/EU)published in theOfficial Journal (Dec.2010) (CRD III)
CRD IV (package of two legal instruments: Directiveand Regulation)
Status European/national imple-mentation and
transposed intonational law
partially transposedinto national law
Basel III published by the BCBS in Dec. 2010 (rev.version of capital framework June 2011)
Proposals of Directive and Regulation published by the
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uropean omm ss on n u y
Directive: to be translated into national law till 31 Dec.2012; Regulation: no national translation required
Coming into force 31 Dec., 2010 31 Dec. 2011 01 Jan. 2013 (with transition periods till 2019)
Topics large exposures
securitization
hybrid capitalinstruments
liquidity riskmanagement
cross bordersupervision
re-securitization
disclosuresecuritization risks
trading book
Remunerationpolicies
Regulation
definition of capital
liquidity risk
leverage ratio counterparty credit risk
single rule book (through Regulation)
Directive
capital buffers
enhanced governance
sanctions
enhanced supervision
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Accenture estimated impact of Basel III (1/2)
Topic Brief description Potential impact for banks*
Impact Explanation/remarksDefinition ofcapital
New definition of capital toincrease quality, consistencyand transparency of thecapital base
High New definition of capital leads to a significantreduction of the capital ratios build up of capital(quantitative/qualitative), e.g. by issuing capitalinstruments or retaining earnings
The new liquidity ratios are the key challenge for mostbanks as they influence liquidity and funding strategy,
pricing and the business model
everage ra o ew everage ra o as a
supplementary measure tothe risk-based Basel IIframework
e um everage a o es gn: er cap a o a
exposure; gross ratio calibration: 3%) mightnarrow the scope of action for banks given theexisting capital
Liquiditystandards
Introduction of a short-termLCR and a longer-termNSFR
High Ratios require increase of high quality liquid assetsand change of funding mix which leads to higherliquidity costs. Further banks are expected toadhere to the sound principles of liquidity riskmanagement
Counterpartycredit risk(CCR)
Higher capital requirementsfor CCR arising fromderivatives, repos andsecurities financing activities
Medium toHigh**
Enhanced risk coverage (CCR; CVA; wrong wayrisk; asset value correlation for large financialinstitutions; CCP) leads to an increase of capitalrequirements for the trading book and complexsecuritization exposures
* Rough assessment; impact depends on bank specifics** Depending on trading book and investment bank activities
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Accenture estimated impact of Basel III (2/2)
Topic Brief description Potential impact for banks*
Impact Explanation/remarksCounter-cyclicalmeasures
Introduction of capital con-servation and countercyclicalcapital bufferIn discussion: EL-approachfor provisioning; TTC**
Medium When capital levels fall into conservation rangeconstraints on capital distribution are imposed.Countercyclical buffer extends capital conservationbuffer. Pressure from the market to fulfill ratiosbefore regulatory deadline
The discussed measures for SIFIs might have a materialimpact on those institutions. The definition of SIFIs is
currently in discussion
parameters
Systemicallyimportantfinancialinstitutions
Approach could includecombinations of capitalsurcharges, contingentcapital and bail-in debt (indiscussion)Capital surcharge of 1-2.5%is proposed (CET1 capital)
High Different measures currently in discussion; capitalsurcharge of 1-2.5% of RWA (depending onbucket) is proposed (CET 1 capital); definition ofSIFIs currently in discussion ( Indicator-basedmeasurement approach)
Single rulebook (entireregulation)
Creation of consistent rules removal of nationaldiscretions
Low Regulation harmonizes divergent nationalsupervisory approaches by removing options anddiscretions
* Rough assessment; impact depends on bank specifics** through the cycle
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Accenture estimated implementation effort of Basel III
Topic Implementation effort*
Functional Technical Organizational
Definition capital High Medium Medium
Leverage Ratio Low Low Low
The liquidity standards will have a high functional,technical as well as organizational implementation
effort
Liquidity standards High High High
Counterparty creditrisk (CCR)
High High Low
Countercyclicalmeasures
Medium Medium Low
SIFIs Medium Medium High (depending onregulation evolution)
Single rule book Low Low Low
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* Rough assessment; implementation effoert depends on bank specifics
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Basel III introduces two liquidity ratios to promotethe short-term and the longer-term resilience of the
liquidity risk profile of institutions
Global Liquidity Standard
100%
LCR
High quality liquid assets
Total net cash outflows-
> 100%
Available stable funding
Required stable funding
NSFR
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Institutions have to ensure that they havesufficient high quality liquid assets to survivean acute stress scenario lasting for 30 days
Institutions are required to fund theiractivities with more stable sources offunding on an ongoing structural basis
Frequency of calculation and reporting: Banks are expected to meet the requirements of the
standards continuously; first reporting to supervisors is expected by Jan 1, 2012 LCR: reported at least monthly, with the operational capacity to increase the frequency to weekly or even
daily in stressed situations; introduced on Jan 1, 2015
NSFR: calculated and reported at least quarterly; introduced on Jan 1, 2018
Scope of application: Level of individual institution (with legal personality)
Disclosure of LCR and NSFR under pillar 3
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The LCR aims to ensure that banks maintain anadequate level of high-quality liquid assets to survive
a severe liquidity stress scenario lasting for 30 days
LCR: High quality liquid assets
High quality liquid assets
Conditions high quality liquid assets (e.g.):
Not issued by the institution or parent/subsidiary
Eligibility as collateral in normal times for intradayliquidity needs and overnight liquidity facilities of a CB
Listed on a recognized exchange
LCR
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100%. .
Appropriate diversification Assets are legally and practically readily available at any
time during the next 30 days
Liquid assets are controlled by a liquidity managementfunction
High quality liquid assets items: Level 1 assets (cash; transferable assets of extremely
high liquidity and credit quality): min. 60% of liquidassets; market value; no haircut
Level 2 assets (transferable assets that are of highliquidity and credit quality): max. 40% of liquid assets;
market value; haircut of min. 15%
Total net liquidity outflowsover 30-day time period
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Total net cash outflows are defined as the totalexpected cash outflows minus total expected cash
inflows in the specified stress scenario
Net liquidity outflows =
Liquidity outflows Min {Liquidity inflows; 75% ofliquidity outflows)
Net liquidity outflows:
LCR: Net liquidity outflows
LCR
High quality liquid assets
Liquidity outflows minus liquidity inflows in the stress
scenario. The scenario includes firm-specific andsystemic factors
Calculation liquidity outflows:
Multiplication of the items with the respective run offfactor
Calculation liquidity inflows:
Multiplication of the items with the specified inflowfactor; inflows are capped with 75% of the outflows
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100%Total net liquidity outflows
over 30-day time period
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Liquidity Coverage Ratio
The definition of high quality liquid assets and thetreatment of interbank funding are key discussion
points
LCR
100%
Level 1 assets: cash; transferable assets of extremelyhigh liquidity and credit quality (min. 60% of liquid assets)
Level 2 assets: transferable assets that are of highliquidity and credit quality): max. 40% of liquid assets;market value; haircut of min. 15%
High quality liquid assets
10
Retail deposits (5-10%)
Other liabilites coming dueduring next 30 days (0-100%)
Collateral other than level 1assets (15-20%)
Credit and liquidity facilities (5-100%)
Monies due from non financial customer(50%)
Secured lending and capital marketdriven transactions (0%-100%)
Undrawn credit and liquidity facilities(0%)
Specified payables and receivablesexpected over the 30 day horizon (100%)
Liquid assets (0%)
New issuance of obligations (0%)
Liquidity outflows Liquidity inflows-
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The NSFR should ensure that long term assets arefunded with at least a minimum amount of stable
liabilities in relation to their liquidity risk profiles
NSFR: Available stable funding
Available stable funding
Available stable funding*
Items ASF factor**
Tier 1 & 2 capital Preferred stock not included in Tier 2 capital with
maturity 1 year Secured and unsecured borrowings and liabilities
with effective remaining maturities 1 year
100%
NSFR
* Stable funding is defined as the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon underconditions of extended stress.
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> 100%
Required stable funding
"Stable" non-maturity (demand) deposits and/orterm deposits with residual maturity < 1 year 90%
"Less stable" non-maturity (demand) depositsand/or term deposits with residual maturities < 1year
80%
Unsecured wholesale funding, non-maturitydeposits and/or term deposits with a residual
maturity < 1 year, provided by non-financialcorporates, sovereigns, central banks, multilateraldevelopment banks and PSEs
50%
All other liabilities and equity categories notincluded in the above categories
0%
** The proposed EU Regulation does not include any ASF- or RSF factor. Neither at this point in time it is stated whether the NSFR should be > or 100%.
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Funding provided by financial institutions and loansto such firms are assigned with a low ASF and a high
RSF respectively
Required stable funding
Items RSFfactor*
Cash Short-term unsecured actively-traded instruments (< 1 yr) Securities with exactly offsetting reverse repo Securities with remaining maturity < 1 yr Non-renewable loans to FI with remaining maturity < 1 yr
0%
NSFR: Required stable funding
NSFR
Available stable funding
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Debt issued or guaranteed by sovereigns, CB, BIS, IMF, EC, non-
central government, MDB with a 0% STA risk weight
5%
Unencumbered non-financial senior unsecured corporate bonds andcovered bonds rated at least AA-, and debt that is issued bysovereigns, CB, and PSEs with a risk-weighting of 20%; maturity 1 yr
20%
Unencumbered listed equity securities or non-financial seniorunsecured corporate bonds (or covered bonds) rated from A+ to A-,maturity 1 yr
Gold
Loans to non-financial corporate clients, sovereigns, central banks, andPSEs with a maturity < 1 yr
50%
Unencumbered residential mortgages of any maturity and otherunencumbered loans, excluding loans to financial institutions with aremaining maturity of one year or greater that would qualify for the 35%or lower risk weight under Basel II standardised approach for credit risk
65%
Other loans to retail clients and small businesses having a maturity < 1yr
85%
All other assets 100%
> 100%
Required stable funding
* The proposed EU Regulation does not include any ASF- orRSF factor. Neither at this point in time it is stated whether the
NSFR should be > or 100%.
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Basel III introduces a common set of monitoring toolsthat should allow competent authorities to obtain a
comprehensive view of the liquidity profile of institutions
Contractual
maturitymismatch
Contractual cash and security inflows and outflows from all on- and off-balancesheet items, mapped to defined time bands based on their respective maturities
Monitoring Tools
Concentrationof funding
Different ratios/figures which should help to identify those sources of wholesalefunding that are of such significance that withdrawal of this funding could trigger
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Availableunencumberedassets
Available unencumbered assets that are marketable as collateral in secondarymarkets and/or eligible for central banks standing facilities
LCR by
significantcurrency
Foreign Currency LCR = Stock of high-quality liquid assets in each significant
currency / Total net cash outflows over a 30-day time period in each significantcurrency
Market-relatedmonitoringtools
Early warning indicators based on high frequency market data with little or no timelag (market wide information; information on the financial sector; bank-specificinformation)
The proposed EU Regulation does not include any concrete monitoring tools. Rather EBA shall develop draft implementing technical standards regarding liquidity monitoringmetrics that allow competent authorities to obtain a comprehensive view of the liquidity profile of institutions.
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