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Basel III. The background of Basel The Committee was formed in response to the messy liquidation of a Cologne-based bank (Herstatt bank) in 1974. On 26.

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Presentation on theme: "Basel III. The background of Basel The Committee was formed in response to the messy liquidation of a Cologne-based bank (Herstatt bank) in 1974. On 26."— Presentation transcript:

1 Basel III

2 The background of Basel The Committee was formed in response to the messy liquidation of a Cologne-based bank (Herstatt bank) in On 26 June 1974, a number of banks had released Deutsch Mark(German Mark) to the Bank Herstatt in exchange for dollar payments deliverable in New York. On account of differences in the time zones, there was a lag in the dollar payment to the counter-party banks, and during this gap, and before the dollar payments could be effected in New York, the Bank Herstatt was liquidated by German regulators. This incident prompted the G-10 nations to form towards the end of 1974, the Basel Committee on Banking Supervision, under the auspices of the Bank of International Settlements Bank of International Settlements(BIS) located in Basel, Switzerland.

3 The Development of Basel I II and III Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee (BCBS) in Basel, Switzerland published a set of minimal capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in Basel I is now widely viewed as outmoded. Indeed, the world has changed as financial conglomerates, financial innovation and risk management have developed. Therefore, a more comprehensive set of guidelines, known as Basel II are in the process of implementation by several countries and new updates in response to the financial crisis commonly described as Basel III.

4 Brief Introduction of Basel III BASEL III is a new global regulatory standard on bank capital adequacy and liquidity agreed upon by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The OECD estimates that the implementation of Basel III will decrease annual GDP growth by 0.05 to 0.15 percentage point

5 Overview of Basel III Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) 6% of Tier I capital of risk-weighted (up from 4% in Basel II) Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. (iii)Basel III introduces a minimum 3% leverage ratio and two required liquidity ratios.

6 Transitional Arrangement of Basel III

7 Macroeconomic Impact of Basel III An OECD study 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 annum. 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. basel-iii_5kghwnhkkjs8-en

8 Opportunity as Well as Challenge 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. Implementation/~/media/Insight/Regulatory/Basel-III/Thought- Leadership/2011/ Implementing-Basel-III-Whitepaper.ashx

9 The influence for International bank Short-Run effect: the effect of Basel III is bigger for developed countries than developing countries, and also bigger for big bank than small bank, It may cause some bad effects for the Substantial Economy. Compare of international Big bank for New and Old Stander Common equity Tier 1Capital Adequacy Ratio Leverage Ratio Stander for now11.2%10.5%14% New Stander5.7%6.2%9.5%2.7% Changed rate-5.5%-4.3%-4.5% Common equity Tier 1Capital Adequacy Ratio Leverage Ratio Stander for now10.8%9.9%12.7% New Stander8.08.6%10.6%4.3% Changed rate-2.8%-1.3%-2.1% Compare of international Small bank for New and Old Stander

10 Basel III puts no significant pressure on domestic banks. China Banking Regulatory Commission requires the core capital and capital adequacy ratio currently on 7% and 10%( small banks) 11%(large banks). According to CBRC 2009 Annual Report, by the end of last year, the weighted average adequacy ratio of capital in commercial banks was 11.4%, and after this round of financing,16 listed banks are able to meet the regulatory requirements and develop its business within 2 -3 years. In addition, Basel, an international financial agreement, lacks administrative and legal authority. Actually, no implementation with Basel 2 taken by domestic banks, the first banks (including Industrial and Commercial Bank, Agriculture Bank, Bank of China, Construction Bank, Communication Bank and Merchant bank ) will implement Basel 2 in the end of this year according to the timetable. No obvious effects have been seen in the implementation of Basel 3 and the impact of Basel 2 implementation. The Influence of Basel III for Chinese Banks

11 In short-run, Small effect for Chinese banks Compare of Chinese Big bank for New and Old Stander Compare of Chinese Medium Bank for New and Old stander Common equity Tier 1Capital Adequacy Ratio Leverage Ratio Stander for now9.6%9.1%11.7% New Stander9.6%9.8%11.2%4.8% Changed rate0%0.7%-0.5% Common equity Tier 1Capital Adequacy Ratio Leverage Ratio Stander for now8.2%8.0%10.4% New Stander8.1% 9.7%4.0% Changed rate-0.1%0.1%-0.7%

12 In Long-run, there will be big influence for Chinese banks 1.With rapid developing expansion of business model, credit asset s are facing plenty of serious problems 2.Due to imperfect of the Supplementation Mechanism of the Capital that could lead to a further strengthen in capital constraint effect. 3.The business innovation especial for Off Balance Sheet businesses Multiple market businesses and Derivatives trading expansion could bring new ventures. The Influence of Basel III for Chinese Banks

13 The Meaning of Basel III Basel III greatly increase the requirements of core capital adequacy ratio of banks to effectively prevent the potential risks of bad loans causing by excessive lending in economic prosperity while help against loss in economic recession. Though this rule failed to reach a agreement, it shows bank regulators paying special attention to intensify buffer-stock saving in good times which point way for further revise of financial supervision. The adoption of Basel III marks significant changes in global banks as well as the financial supervision system. The healthy banking system and strong risk-resisting ability will significantly lower the risk of systemic financial crisis because of the unicity of financial system. Moreover it is also an indispensable condition to overcome the future financial crisis. In this respect, bankers gain long period of stable development with short-term loss, which is also the expectation of investors.

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