Basel lll Summary

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Basel lll Summary
Making Great Ideas Become Reality

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Basel lll
BASEL III is a global regulatory standard on bank
capital adequacy, stress testing and market
liquidity risk agreed upon by the members of the
Basel Committee on Banking Supervisoion in
2010-11. This, the third of the Basel Accords
which was developed in response to the
deficiencies in financial regulation revealed by
the late-2000s financial crisis Basel III
strengthens bank capital requirements and
introduces new regulatory requirements on bank
liquidity and bank leverage For instance, the
change in the calculation of loan risk in Basel
II which some consider a causal factor in the
credit bubble prior to the 2007-8 collapse in
Basel II one of the principal factors of
financial risk management was out-sourced to
companies that were not subject to supervision
credit rating agencies. Ratings of
creditworthiness and of bonds, financial bundles
and various other financial instruments were
conducted without supervision by official
agencies, leading to AAA ratings on
mortgage-backed securities, credit default swaps
and other instruments that proved in practice to
be extremely bad credit risks. In Basel III a
more formal scenario analysis is applied (three
official scenarios from regulators, with ratings
agencies and firms urged to apply more extreme
ones).
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Basel lll (cont)
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Overview
Basel III will require banks to hold 4.5 of
common equity (up from 2 in Basel II) and 6 of
Tier I capital (up from 4 in Basel II) of
risk-weighted assets (RWA). Basel III also
introduces additional capital buffers, (i) a
mandatory capital conservation buffer of 2.5
and (ii) a discretionary countercyclical buffer,
which allows national regulators to require up
to another 2.5 of capital during periods of
high credit growth. In addition, Basel III
introduces a minimum 3 leverage ratio and
two required liquidity ratios. The Liquidity
Coverage Ratio requires a bank to hold sufficient
high-quality liquid assets to cover its total
net cash outflows over 30 days the Net Stable
Funding Ratio requires the available amount of
stable funding to exceed the required amount of
stable funding over a one-year period of extended
stress
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Basel lll (cont)

• Basel lll Main Features
• - Better quality capital, specifically
  common equity
• More capital (e.g. 4.5 common equity, 6 tier 1
  capital)
• More risk coverage wrt capital computation
• Countercyclical capital buffers
• Stronger regulation and supervision
• Strengthened pillar 2 requirements Risk
  governance and management
• Enhanced Pillar 3 disclosure
• Leverage ratio
• Enhanced liquidity requirements
• Adjusted market risk framework
• Macroprudential overlay
• Procyclicality measures
• Interlinkages and common exposures
  consideration of entire system
• Phased in over 5 years from 2013

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Concerns Addressed in Basel lll
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• Increased focus on trading book and
  securitizations
• Focus on Counterparty Credit Risk
• Increased Capital Buffers
• Liquidity Risk main theme
• Procyclicality addressed

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How CMA can Help

• At CMA we have some of the most experienced
  resources in the areas of risk,
• capital and liquidity management. Our risk and
  compliance resources bring with
• them their diverse background in industry
  regulation, consultancy, government
• and academia. We have undertaken major
  engagements for financial sector
• clients of all sizes and varieties across a broad
  spectrum of issues including
• impact analysis
• model development and validation
• capital and portfolio management
• liquidity planning
• governance, processes and frameworks
• valuations
• stress testing

Our integrated approach is aimed at providing a
tailored multi-dimensional service for
our clients that meet their specific needs.
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Services CMA can Provide

• In general, CMAs role as a facilitator in the
  implementation of the Basel lll
• framework could include (but is not restricted
  to)
• Documentation, including policies and
  procedures
• Migration Management
• - Incremental changes for additional
  regulatory requirements
• - Gap analysis
• Capital Attribution
• - Attribution of risk capital to business
  units and risk centers
• - Determining trading diversification
  benefits
• Capital Calculation
• - Market and credit risk capital for both
  Basel ll and Basel lll
• Model Validation
• - Validation of clients internal models for
  market risk
• - Testing inputs. theory, back testing,
  testing of hypothetical portfolios
• Data Aggregation
• - Incorporating relevant information from
  various systems into proper formats
• - Migration from manual Excel format to more
  reliable systems