Risk Management Challenge for Basel Ⅱ& Ⅲ
Chau-Jung Kuo
Professor, Department of Finance, NSYSU
2011.7.8.
The 19th Annual Conference on PBFEAM
The Significant Differences Between
Basel Ⅲ and Basel Ⅱ
Basel Ⅲ proposes many new capital, leverage and liquidity
standards to strengthen the regulation, supervision and risk
management of the banking sector.
The capital standards and new capital buffers will require banks
to hold more capital and higher quality of capital than under
current Basel Ⅱ rules.
The new leverage and liquidity ratios introduce a non-risk based
measure to supplement the risk-based minimum capital
requirements and measures to ensure that adequate funding is
maintained in case of crisis.
1
Basel Ⅱ
Basel Ⅲ
Pillar I
Pillar Ⅱ
Pillar Ⅲ
Minimum
Capital
Requirements
Enhanced
Minimum
Capital,
Leverage and
Liquidity
Requirement
Supervisory
Review
Process
Enhanced
Supervisory Review
Process for Firmwide Risk
Management and
Capital Planning
Disclosure &
Market
Discipline
Enhanced Risk
Disclosure &
Market
Discipline
2
Some Key Elements for The New Regulations
Regulatory Element
Proposed Requirement
1. Higher Minimum Tier
I Capital Requirement
Tier I Capital Ratio: increases from 4% to 6%.
(The ratio will be set at 4.5% from 1. Jan. 2013, 5.5% from 1.
Jan. 2014 and 6% from 1. Jan 2015.)
Predominance of common equity will be reached 82.35% of
Tier I capital inclusive of capital conservation buffer.
2. New Capital
Conservation Buffer
Banks will be required to hold a capital conservation buffer of
2.5% to withstand future periods of stress bringing the total
common equity requirement to 7%.
(4.5% common equity requirement and the 2.5% capital
conservation buffer)
Banks that do not maintain the capital conservation buffer will
face restrictions on payouts of dividends, share buybacks and
bonuses.
3. Countercyclical
Capital Buffer
A countercyclical buffer within a range of 0% ~ 2.5% of
common equity or other fully loss absorbing capital will be
implemented according to national circumstances.
When in affect, this is an extension to the conservation buffer.
Source: Bank for International Settlements, Basel Committee on Banking Supervision.
3
Some Key Elements for The New Regulations (Cont’)
Regulatory Element
Proposed Requirement
4. Higher Minimum Tier I
Common Equity
Requirement
Tier I Common Equity Requirement increase from 2% to
4.5%
(The Ratio will be set at 3.5% from 1. Jan. 2013, 4% from 1.
Jan. 2014 and 4.5% from 1. Jan. 2015.)
5. Liquidity Standard
Liquidity Coverage Ratio: to ensure that sufficient high
quality liquid resources are available for one month survival
in case of a stress scenario introduced 1. Jan. 2015.
Net Stable Funding Ratio: to promote resiliency over longerterm time horizons by creating additional incentives for banks
to fund their activities with more stable sources of funding on
an ongoing structural basis.
Additional liquidity monitoring metrics focused on maturity
mismatch concentration of funding and available
unencumbered assets.
Source: Bank for International Settlements, Basel Committee on Banking Supervision.
4
Some Key Elements for The New Regulations (Cont’)
Regulatory Element
Proposed Requirement
6. Leverage Ratio
A supplemental 3% non-risk based leverage ratio which
serves as a backstop to the measures outlined above.
(Parallel run between 2013 ~ 2017; migration to Pillar I
from 1. Jan. 2018.)
7. Minimum Total Capital
Ratio
Remains at 8%.
The additional of the capital conservation buffer increases
the total amount of capital a bank must hold to 10.5% of
risk-weighted assets, of which 8.5% must be Tier I capital.
Tier Ⅱ capital instruments will be harmonized, Tier Ⅲ
capital will be phased out.
Source: Bank for International Settlements, Basel Committee on Banking Supervision.
5
Capital Impact of New Definition of Capital
Change in Change in
CET 1
Tier 1
Group 1
Group 2
-41.3%
-24.7%
-30.2%
-14.1%
Change in
Total
Capital
-26.8%
-16.6%
Change in
RWA
+7.3%
+3.2%
Average Capital Ratios Impact from the New Regulations
CET 1
Tier 1
Total
Gross
Net
Current
New
Current
New
Group 1
11.1%
5.7%
10.5%
6.3%
14.0%
8.4%
Group 2
10.7%
7.8%
9.8%
8.1%
12.8%
10.3%
* “Gross CET 1” is the ratio of gross CET 1 (without deductions) relative
to current risk-weighted assets. “Net” columns show net CET 1 (with
deductions) relative to new risk-weighted assets.
Source: BIS, “Results of the Comprehensive Quantitative Impact Study”,
6
Basel Committee on Banking Supervision, Dec. 2010.