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 Supervision in 2010-11.[1]
The third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the late-2000s financial crisis. Basel III strengthe
ns
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)
Summary of proposed changes
First, the quality, consistency, and transparency of the capital base will be raised.
Tier 1 capital: the predominant form of Tier 1 capital must be common shares and retained earnings
Tier 2 capital instruments will be harmonised
Tier 3 capital will be eliminated.[5]
Second, the risk coverage of the capital framework will be strengthened.
Promote more integrated management of market and counterparty credit risk
Add the CVA (credit valuation adjustment)-risk due to deterioration in counterparty's credit rating
Strengthen the capital requirements for counterparty credit exposures arising from banks’ derivatives, repo and securities financing transactions
Raise the capital buffers backing these exposures
Reduce procyclicality and
Provide additional incentives to move OTC derivative contracts to central counterparties (probably clearing houses)
Provide incentives to strengthen the risk management of counterparty credit exposures
Raise counterparty credit risk management standards by including wrong-way risk
Third, the Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework.
The Committee therefore is introducing a leverage ratio requirement that is intended to achieve the following objectives:
Put a floor under the build-up of leverage in the banking sector
Introduce additional safeguards against model risk and measurement error by supplementing the risk based measure with a simpler measure that is based on gross exposures.
Fourth, the Committee is introducing a series of measures to promote the build up of capital buffers in good times that can be drawn upon in periods of stress ("Reducing procyclicality and promoting countercyclical buffers").
Summary of proposed changes
First, the quality, consistency, and transparency of the capital base will be raised.
Tier 1 capital: the predominant form of Tier 1 capital must be common shares and retained earnings
Tier 2 capital instruments will be harmonised
Tier 3 capital will be eliminated.[5]
Second, the risk coverage of the capital framework will be strengthened.
Promote more integrated management of market and counterparty credit risk
Add the CVA (credit valuation adjustment)-risk due to deterioration in counterparty's credit rating
Strengthen the capital requirements for counterparty credit exposures arising from banks’ derivatives, repo and securities financing transactions
Raise the capital buffers backing these exposures
Reduce procyclicality and
Provide additional incentives to move OTC derivative contracts to central counterparties (probably clearing houses)
Provide incentives to strengthen the risk management of counterparty credit exposures
Raise counterparty credit risk management standards by including wrong-way risk
Third, the Committee will introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework.
The Committee therefore is introducing a leverage ratio requirement that is intended to achieve the following objectives:
Put a floor under the build-up of leverage in the banking sector
Introduce additional safeguards against model risk and measurement error by supplementing the risk based measure with a simpler measure that is based on gross exposures.
Fourth, the Committee is introducing a series of measures to promote the build up of capital buffers in good times that can be drawn upon in periods of stress ("Reducing procyclicality and promoting countercyclical buffers").
0 comments:
Post a Comment