B Basel III l III Response to the Response to the crisis - PowerPoint PPT Presentation

B Basel III – l III Response to the Response to the crisis Governor Stefan Ingves, Chairman of the Basel Committee on Banking Supervision Chairman of the Basel Committee on Banking Supervision São Paulo

Overview 1. Lessons of the financial crises 2. Basel III – the regulatory response 3. Basel topical issues 4. Rules are only part of the game

Financial crises have significant costs Financial crises have significant costs US Japan UK Korea Mexico Sweden Source: BIS

Some key drivers of reform Some key drivers of reform Too low quality T Too high leverage hi h l and quantity d tit of capital No liquidity framework Too big to fail Interconnectedness Interconnectedness P Poor risk management i k t

The Basel Committee reacted quickly with a focus on its most important standards Basel III Core Principles for Effective Banking Supervision Core Principles for Effective Banking Supervision

Basel III – the regulatory response Basel III – the regulatory response Objective: reduce the probability and severity of banking crises in the future j p y y g Capital requirements for systemically important banks Strengthened Strengthened capital requirements New Cap on bank Cap on bank requirements requirements leverage on bank liquidity

Basel III Basel III - more and better capital more and better capital Basel III Basel II 2 % 1.5 % 9.5 % Countercyclical capital buffer 8 % 7 % 2.5 % Capital conservation buffer 4 % 4 % 2 % Minimum Requirements 4.5 % 2 % 2 % 2 % Common Common Tier 2 Additional Tier 2 Additional Equity Equity Equity Tier 1 Tier 1 Tier 1 Tier 1 Tier 1 Tier 1

Basel III sets quantitative q requirements on liquidity Short term liquidity Long term funding Net Stable Funding Net Stable Funding Ratio g Ratio Liquidity Liquidity Coverage Ratio q q y y Coverage Ratio g High quality liquid assets Available stable funding ≥ 100 % ≥ 100 % ≥ 100 % ≥ 100 % Net cash outflows over a 30 day period Required stable funding

Leverage ratio: backstop to the risk- based capital measure Leverage Ratio Leverage Ratio g Tier 1 capital ≥ 3 % ≥ 3 % Total assets and most off-balance sheet assets

Systemically important banks need y y p special regulation Indicators of Indicators of 28 global systemically important  Systemic importance Systemic importance banks (G-SIBs) identified ( ) • Cross jurisdictional activity Cross-jurisdictional activity • Package for more resilience Size  Recovery and resolution plans  • Interconnectedness Higher capital requirements  More intense supervision  • Substitutability Substitutability Data aggregation  • Complexity In addition – Domestic I dditi D ti  systemically important banks (D-SIBs)

Swedish banks’ progress towards the p g new regulatory requirements Note: the indicated positions in the diagram shows the average Basel III ratios for the major Swedish banks. For CET 1 Sweden has currently a higher requirement at 12 % CET 1. the Basel requirement is 9.5% if the contra cyclical buffer and capital conservation buffer are included. Source: The Riksbank

Implementation of Basel III is underway Number of jurisdiction which have implemented or are in the process of implementation of Basel III* process of implementation of Basel III* Total Total BCBS BCBS Others Others 27 27 19 32 2012 51 27 45 2013 72 * Methodology similar to that of the Basel Committee (BCBS) “Level 1” surveys. Information on BCBS and EU members available from BCBS publications. ** A jurisdiction that has implemented at least one subsection of Basel III is deemed to be in the process of implementation. Source: FSI 2013 survey on Basel II and III implementation, http://www.bis.org/fsi/fsiop2013.pdf

Implementation – three levels of p assessments . Assessments of Assessments of European Union Japan Analysis of Analysis of United States United States comparability of risk- comparability of risk- bilit bilit f i k f i k Timely adoption of Timely adoption of weighted assets weighted assets Singapore Basel III Basel III Switzerland Trading Book g China Banking Book Australia Brazil

Key achievements mid 2013 The regulatory The regulatory Analysis of risk-weighted Analysis of risk-weighted Analysis of risk weighted Analysis of risk weighted framework: balancing framework: balancing framework: balancing framework: balancing assets for credit risk in assets for credit risk in risk sensitivity, risk sensitivity, the banking book the banking book simplicity and simplicity and comparability comparability bilit bilit

What more is on at the Basel Committee . OTC derivatives Large exposures Trading book review S Securitisations iti ti Review of the standardised approaches pp Interest rate risk in the banking book

More than Basel III More than Basel III… OTC-derivative OTC derivative market reforms Bail-in capital Strengthened capital capital requirements - Higher for large banks New New Cap on bank requirements leverage on bank Framework for liquidity liquidity d dealing li with failing banks Accounting topics

Rules are only part of the game Strong supervision is of equal  A few areas of importance importance importance • Adequate resources The Core Principles are essential  • Cross-border cooperation in this respect p • Addressing bank-specific circumstances • Political independence from p and support for supervisors

Concluding remark  Successful crisis management is all about restoring and preserving confidence  Long run - Regulatory and supervisory reform is needed  Consistent implementation of rules is vital!  Short run – Go get the lemons, and squeeze them! them!

Extra Extra

Development in the Euro area versus p US

Banking union Common Single Single Deposit Deposit S Supervisory i R Resolution l ti Guarantee Mechanism Mechanism Scheme

FSI 2013 survey on Basel II and III implementation* i l t ti * Oth Others Total T t l BCBS BCBS Responses/ 2012 27 88 115 information from from 2013 27 93 120 jurisdictions Basel II ** 2012 27 64 91 Implemented/in the process of 2013 27 73 100 implementation 27 Basel III ** 2012 19 32 51 Implemented/in p / the process of 2013 27 45 72 implementation * M * Methodology similar to that of the Basel Committee (BCBS) “Level 1” surveys. Information on BCBS and EU members available from BCBS publications. h d l i il h f h B l C i (BCBS) “L l 1” I f i BCBS d EU b il bl f BCBS bli i ** A jurisdiction that has implemented at least one subsection of Basel III is deemed to be in the process of implementation. Source: FSI 2013 survey on Basel II and III implementation, http://www.bis.org/fsi/fsiop2013.pdf 22