BASEL III – A basis for discussion Podkladový materiál k BASEL III – pracovní verze

21 May 2010page 2 Core aspects of Basel III Aims:  Increase quantity capital as a means to absorb losses  Increase quality of capital  Improve liquidity of capital  Reduce potential for leverage of capital  A framework setup for counter-cyclical capital buffers Validity:  Will replace BII from 2013  Valid for banks in G20 countries  Financial Standards Board will classify some banks as Systematically Important Financial Institutions (SIFI) or banks too big to fail in 2011  Not valid for non-bank Financial Institutions which provide majority of consumer credit

21 May 2010page 3 New requirements under BIII – Capital and Leverage MeasurePotential Impact on Bank XXX CAPITAL New capital conservation buffer of 2.5% introduced Banks will be able to choose whether to use the capital conservation buffer during periods of stress Total common equity requirements increased from 2.0% to 7.0% Minimum total capital (Tier 1 and 2) increased from 8.0% to 10.5% (including capital conservation buffer) Banks will have to review pricing and lending levels in order to balance increased capital requirements Counter-cyclical capital buffer is being developed which will increase to the capital conservation buffer during periods of excessive credit growth LEVERAGE The leverage limit is set as 3%, i.e. total assets should not be more than 33 times bank capital (risks are not risk-adjusted) The introduction of the leverage ratio could lead to reduced lending and is a clear incentive to banks to strengthen their capital position,

21 May 2010page 4 New requirements under BIII - Liquidity MeasurePotential Impact on Bank XXX LIQUIDITY A Liquidity Coverage Ratio (LCR) To be implemented in 2015 Banks must hold enough cash or easy-to-sell assets to cover a month's worth of liabilities Assets get a ‘liquidity’ based weighting varying from 100% for government bonds and cash to weightings of 0%-50% for corporate bonds

21 May 2010page 5 BII vs BIII MeasureBasel IIBasel III Tier 1 CapitalTier 1 capital ratio = 4% Core Tier 1 capital ratio = 2% Tier 1 Capital Ratio = 6% Core Tier 1 Capital Ratio (Common Equity after deductions) = 4.5% The value of this ratio will be: 2% before 2013, 3,5% in 2013, 4% 2014, 5,5% 2015 Capital Conservation Buffer NoneBanks 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. The value of this buffer will be: 0% before 2016, 0,625% in 2016, 1,25% 2017, 1,875% 2018, 2,5% from 2019 (all dates start 1st January) The purpose of the conservation buffer is 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. Countercyclical Capital Buffer NoneA 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 value of this buffer will be: 0% before 2016, 0,625% in 2016, 1,25% 2017, 1,875% 2018, 2,5% from 2019 (all dates start 1st January) Capital for Systemically Important Banks only NoneSystemically important banks should have loss absorbing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel Committee work streams. The Basel Committee and the FSB are developing a well integrated approach to systemically important financial institutions which could include combinations of capital surcharges, contingent capital and bail-in debt.

21 May 2010page 6 Capital requirements harmonogram COMMON EQUITY CAPITAL NON CORE TIER 1 CAPITAL TIER 2 CAPITAL TIER 3 CAPITAL 2% 1% 4% 3% % 5% 8% 7% 10% 9% 12% 11% BASEL II COMMON EQUITY CAPITAL NON CORE TIER 1 TIER 2 CAPITAL BASEL III CAPITAL BUFFER 2,5% COUNTER- CYCLICAL BUFFER (0-2,5%) % 1% 4% 3% 6% 5% 8% 7% 10% 9% 12% 11% 13% COMMON EQUITY CAPITAL 4,5% NON CORE TIER 1 (incl. CCB) 1,5 - 4% TIER 2 CAPITAL CAPITAL BUFFER 2,5% SIFI EXTRA? COMMON EQUITY CAPITAL NON CORE TIER 1 TIER 2 CAPITAL CAPITAL BUFFER 2,5% COMMON EQUITY CAPITAL NON CORE TIER 1 TIER 2 CAPITAL

21 May 2010page 7 New Basel III ratios  Leverage ratio  Minimum leverage ratio set at 3%, which is significantly less than what some banks at the moment hold. Tier 1 capital ≥ 3% Average total consolidated assets  Liquidity Coverage Ratio (LCR)  The LCR requires banks to maintain a stock of "high-quality liquid assets" that is sufficient to cover net cash outflows for a 30-day period under a stress scenario Stock of high quality liquid assets ≥ 100% Net cash outflows over a 30-day time period  Net Stable Funding Ratio  The NSRF requires a minimum level of stable funding over a 12 month period based on liquidity risk factors assigned to assets and off-balance sheet liquidity exposures. The NSF ratio is intended to promote longer-term structural funding of banks’ balance sheets, off-balance sheet exposures and capital markets activities. Available amount of stable funding ≥ 100% Required amount of stable funding

21 May 2010page 8 Implementation timetable  BIII rules finalized at G20 in Seoul in Nov 2010  Rules text published in December 2010  Banks will have until the end of 2012 to implement framework  Phased implementation (transition period, observation period etc) designed not to impact lending and economic recovery  Banks will have to have capital buffer of 4,5% to be in place by 2015 with further 2,5% by 2019  New rules for leverage ratios would be implemented in the first half of 2017 Pillar 1 treatment on 1 January Reporting templates to be developed in 2011

21 May 2010page 9 Issues to consider  Capital Management  Scenario planning and impact assessments for capital mgt strategy  Review business structure/model in light BIII requirements  Incentivize local management to create successful capital management strategy  Create capital monitoring and reporting mechanisms across the business  Timely responses to changes in counter-cyclical buffer depending on economic climate  How to dispose of any excess capital?  Liquidity Management  Assess current liquidity levels against BIII levels and implementation timetable  Review impact of increased liquidity requirements into pricing and processes  Incentivize local management to create successful liquidity management strategy  Create a series of liquidity „stress-tests“ to ensure correct liquidity modelling

21 May 2010page 10 BASEL III in numbers Capital requirementBasel II % Basel III % By Minumum Common Equity ratio (Tier 1) 24,52015 Capital conservation buffer (additional common stock) -2,52019 Minimum Tier 1 capital ratio6% Minimum total capital requirements8% Counter-cyclical buffer* up to 2,5% * ČNB yet to decide on implementation of counter-cyclical buffer

21 May 2010page 11 CAPITAL TIER DEFINITIONS  Tier 1 capital (strongest capital eg common stock, retained earnings)  Tier II capital (some types of debt, accounting reserves, lower quality stock)  Value of asset x risk weighting (0-5% for government bond, cash, mortgage loans 30-50%)  Risk categories (i.e mortgages), VAR for assets, usage of credit rating for risk weighting and internal risk modeling.  If a bank must hold capital 10% of Risk Weighted Assets:  (1,000,000kč asset with 50% risk weighting = 500,000kč) x 10% = 50,000kč