Introduction to Basel Norms
• BCBS –Committee of Central bankers from across the
world
• Tier 1 Capital and Tier 2 capital
• Risk Weighted Assets
Basel I  Basel II
• Minimum capital requirement of 8%
• Assets were risk-weighted according to the identity of the
borrower
• Basel II - Risk-weighted according to the credit ratings
Basel II  Basel III
• No change in overall capital requirement
• TIER 1 Capital – 4 % to 6 %
• Common Equity - 2 % to 4.5%
• Capital conservation buffer – 2.5 %
Key Basel III components
Areas
Capital ratios and
targets
Main Basel III components
1 Capital definition
2 Countercyclical buffers
3 Leverage ratio
4 Minimum capital standards
5 Systemic risk
RWA requirements
6 Counterparty risk
7 Trading book and securitisation (also known as Basel II.5)
Liquidity standards
8 Liquidity coverage ratio
9 Net stable funding ratio
The approach to buffers
11.Volatility buffer
10. Impact of future accounting changes
9. Management buffer
8. Market buffer
7.Economic growth buffer
6. Systemic buffer (tbc)
Target
CT1
ratio
5. Countercyclical buffer (0.0% - 2.5%)
4.Conservation buffer (2.5%)
3. Definition change
Basel III
2. Basel III RWAs
1.TTC adjustments.
Basel III
minimum
(4.5%)
Basel II
minimum
(2.0%)
Basel III and other
regulatory changes
Additional
considerations in setting
target CT1 ratio
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Capital buffers - Capital Conservation Buffer
• Purpose - 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.
• Capital Conservation Buffer of 2.5 percent, on top of Tier 1 capital, will be met with
common equity, after the application of deductions.
• 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.
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Capital buffers - 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.
• Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts
of dividends, share buybacks and bonuses.
• The buffer will be phased in from January 2016 and will be fully effective in January
2019.
• Countercyclical Capital Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st
January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%
7
Regulatory Capital Ratio
• Total Regulatory Capital Ratio = [Tier 1 Capital
Ratio] + [Capital Conservation Buffer] +
[Countercyclical Capital Buffer] + [Capital for
Systemically Important Banks]
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Why so much importance for more capital???
• To sustain any losses incurred by the bank
• To manage any financially stressful situation when the
bank loses its credibility.
• Above all, as a response to the economics of moral hazard
- discourages banks from involving in riskier activities like
issuing CDS/Mortgage backed loans to unworthy borrowers, which
happened in case of sub-prime crisis.
9
Leverage ratio
Issues
Basel III proposals
• Pre-crisis build up of excessive leverage
in the banking system
• Constrain build-up of leverage in the
banking sector
• Crisis market pressure to reduce
leverage, amplified downward pressure
on asset prices
• Mitigate destabilising deleveraging
which damages financial system and
economy
• Capture Off-Balance Sheet (OBS) items
• Reinforce risk-based requirements with
a simple, non-risk-based backstop
measure based on gross exposure
• Limiting excessive credit growth
Observations during crisis situations
• Build up of excessive leverage – e.g. Current debt of European banks & nations
10
Liquidity Coverage Ratio (LCR)
• The ratio is intended to ensure that a bank maintains adequate levels
of unencumbered high quality assets to meet its liquidity needs.
• Measured as the ratio of the bank’s high quality liquid assets
(numerator), divided by its net cash outflows over a 30-day period
(denominator)
• The high quality assets included in the numerator include only
Cash, central bank reserves that can be accessed during times of stress,
marketable securities meeting certain criteria, and government or
central bank debt
• The denominator will be calculated by taking into account certain
“run-off factors”
High-quality liquid assets
LCR
=
Net Cash Outflow (30 days)
11
Net Stable Funding Ratio (NSFR)
• To promote medium to long term structural funding of assets and
activities
• “Stable funding” – 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 under conditions of extended stress
• Defined as Available amount of stable funding / Required
amount of stable funding > 100%
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Basel III : Transitional Arrangements
1
2
3
13
Impact on Indian Banks
Regulatory Capital Adequacy Levels
Proposed
Basel
III Norm
Existing
RBI
Norm
Common equity (after deductions)
4.5%
3.6% (9.2%)
Conservation Buffer
2.5%
Nil
Countercyclical Buffer
0-2.5%
Nil
Common equity + Conservation buffer +
Countercyclical buffer
7-9.5%
3.6% (9.2%)
Tier I(including the buffer)
8.5-11%
6% (10%)
Total capital (including the buffers)
10.5-13%
9% (14.5%)
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Basel III impact on Public Sector Banks
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