BASEL III – A basis for discussion
Podkladový materiál k BASEL III – pracovní verze
Core aspects of Basel III
Aims:

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Increase quantity capital as a means to absorb losses
Increase quality of capital
Improve liquidity of capital
Reduce potential for leverage of capital
A framework setup for counter-cyclical capital buffers
Validity:
 Will replace BII from 2013
 Valid for banks in G20 countries
 Financial Standards Board will classify some banks as Systematically Important
Financial Institutions (SIFI) or banks too big to fail in 2011
 Not valid for non-bank Financial Institutions which provide majority of consumer
credit
21 May 2010
page 2
New requirements under BIII – Capital and
Leverage
Measure
Potential Impact on Bank XXX
CAPITAL
Banks will be able to choose whether to use the capital
conservation buffer during periods of stress
New capital conservation buffer of 2.5% introduced
Total common equity requirements increased from
2.0% to 7.0%
Minimum total capital (Tier 1 and 2) increased from
8.0% to 10.5% (including capital conservation buffer)
Banks will have to review pricing and lending levels in order to
balance increased capital requirements
Counter-cyclical capital buffer is being developed
which will increase to the capital conservation buffer
during periods of excessive credit growth
LEVERAGE
The leverage limit is set as 3%, i.e. total assets
should not be more than 33 times bank capital (risks
are not risk-adjusted)
21 May 2010
The introduction of the leverage ratio could lead to reduced
lending and is a clear incentive to banks to strengthen their
capital position,
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New requirements under BIII - Liquidity
Measure
Potential Impact on Bank XXX
LIQUIDITY
A Liquidity Coverage Ratio (LCR)
To be implemented in 2015
Banks must hold enough cash or easy-to-sell assets
to cover a month's worth of liabilities
Assets get a ‘liquidity’ based weighting varying from
100% for government bonds and cash to weightings
of 0%-50% for corporate bonds
21 May 2010
page 4
BII vs BIII
Measure
Basel II
Basel III
Tier 1 Capital
Tier 1 capital ratio
= 4%
Core Tier 1 capital
ratio = 2%
Tier 1 Capital Ratio = 6%
Core Tier 1 Capital Ratio (Common Equity after deductions) = 4.5%
The value of this ratio will be: 2% before 2013, 3,5% in 2013, 4% 2014, 5,5% 2015
Capital
Conservation
Buffer
None
Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress
bringing the total common equity requirements to 7%. Capital Conservation Buffer of 2.5 percent, on top of
Tier 1 capital, will be met with common equity, after the application of deductions.
The value of this buffer will be: 0% before 2016, 0,625% in 2016, 1,25% 2017, 1,875% 2018, 2,5% from
2019 (all dates start 1st January)
The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be
used to absorb losses during periods of financial and economic stress. While banks are allowed to draw
on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum
requirement, the greater the constraints on earnings distributions.
Countercyclical
Capital Buffer
None
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.
Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts of dividends, share
buybacks and bonuses.
The value of this buffer will be: 0% before 2016, 0,625% in 2016, 1,25% 2017, 1,875% 2018, 2,5% from
2019 (all dates start 1st January)
Capital for
Systemically
Important
Banks only
None
Systemically important banks should have loss absorbing capacity beyond the standards announced
today and work continues on this issue in the Financial Stability Board and relevant Basel Committee work
streams.
The Basel Committee and the FSB are developing a well integrated approach to systemically important
financial institutions which could include combinations of capital surcharges, contingent capital and bail-in
debt.
21 May 2010
page 5
Capital requirements harmonogram
SIFI EXTRA?
13%
COUNTERCYCLICAL
BUFFER
(0-2,5%)
12%
11%
10%
CAPITAL BUFFER
2,5%
9%
CAPITAL BUFFER
2,5%
8%
7%
TIER 2
CAPITAL
TIER 2
CAPITAL
NON CORE
TIER 1
(incl. CCB)
1,5 - 4%
COMMON
EQUITY
CAPITAL
2007- 2011
BASEL II
21 May 2010
9%
8%
TIER 2
CAPITAL
TIER 2
CAPITAL
TIER 2
CAPITAL
CAPITAL BUFFER
2,5%
6%
5%
4%
NON CORE
TIER 1
CAPITAL
2%
1%
10%
7%
4%
3%
12%
11%
TIER 3
CAPITAL
6%
5%
13%
NON CORE
TIER 1
NON CORE
TIER 1
NON CORE
TIER 1
COMMON
EQUITY
CAPITAL
COMMON
EQUITY
CAPITAL
COMMON
EQUITY
CAPITAL
2007- 2011
2014 - 2018
COMMON
EQUITY
CAPITAL
4,5%
3%
2%
1%
2019
BASEL III
page 6
New Basel III ratios
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Leverage ratio
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Liquidity Coverage Ratio (LCR)
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Minimum leverage ratio set at 3%, which is significantly less than what some banks at the
moment hold.
Tier 1 capital ≥ 3%
Average total consolidated assets
The LCR requires banks to maintain a stock of "high-quality liquid assets" that is sufficient to
cover net cash outflows for a 30-day period under a stress scenario
Stock of high quality liquid assets
≥ 100%
Net cash outflows over a 30-day time period
Net Stable Funding Ratio

The NSRF requires a minimum level of stable funding over a 12 month period based on liquidity
risk factors assigned to assets and off-balance sheet liquidity exposures. The NSF ratio is
intended to promote longer-term structural funding of banks’ balance sheets, off-balance sheet
exposures and capital markets activities.
Available amount of stable funding ≥ 100%
Required amount of stable funding
21 May 2010
page 7
Implementation timetable
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BIII rules finalized at G20 in Seoul in Nov 2010

Rules text published in December 2010
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Banks will have until the end of 2012 to implement framework
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Phased implementation (transition period, observation period etc) designed not to impact
lending and economic recovery

Banks will have to have capital buffer of 4,5% to be in place by 2015 with further 2,5% by
2019

New rules for leverage ratios would be implemented in the first half of 2017 Pillar 1
treatment on 1 January 2018. Reporting templates to be developed in 2011
21 May 2010
page 8
Issues to consider
 Capital Management
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Scenario planning and impact assessments for capital mgt strategy
Review business structure/model in light BIII requirements
Incentivize local management to create successful capital management strategy
Create capital monitoring and reporting mechanisms across the business
Timely responses to changes in counter-cyclical buffer depending on economic
climate
 How to dispose of any excess capital?
 Liquidity Management
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Assess current liquidity levels against BIII levels and implementation timetable
Review impact of increased liquidity requirements into pricing and processes
Incentivize local management to create successful liquidity management strategy
Create a series of liquidity „stress-tests“ to ensure correct liquidity modelling
21 May 2010
page 9
BASEL III in numbers
Capital requirement
Basel II
%
Basel III
%
By
Minumum Common Equity ratio
(Tier 1)
2
4,5
2015
Capital conservation buffer
(additional common stock)
-
2,5
2019
Minimum Tier 1 capital ratio
6%
Minimum total capital requirements
8%
Counter-cyclical buffer*
up to
2,5%
* ČNB yet to decide on implementation of counter-cyclical buffer
21 May 2010
page 10
CAPITAL TIER DEFINITIONS
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Tier 1 capital (strongest capital eg common stock, retained earnings)
Tier II capital (some types of debt, accounting reserves, lower quality stock)
Value of asset x risk weighting (0-5% for government bond, cash, mortgage loans 30-50%)
Risk categories (i.e mortgages), VAR for assets, usage of credit rating for risk weighting and internal
risk modeling.
If a bank must hold capital 10% of Risk Weighted Assets:
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21 May 2010
(1,000,000kč asset with 50% risk weighting = 500,000kč) x 10% = 50,000kč
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