1. Basel III

2. What is "Basel III" A global regulatory standard
on bank capital adequacy
stress testing
and market liquidity risk
With a set of reform measures to improve
regulation
supervision
and risk management

3. Aim
To minimize the probability of recurrence of crises to greater extent
To improve the banking sector's ability to absorb shocks arising from financial and economic stress
To improve risk management and governance
To strengthen banks' transparency and disclosures

4. Target
Bank-level, or micro prudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress .
Macro prudential, system wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time .

5. Micro- prudential elements
To minimize the risk contained with individual institutions
The elements are:
Definition of capital
Enhancing risk
Coverage of capital leverage ratio
International liquidity framework

6. Macro- prudential elements
To take care of the issues relating to the systemic risk
The elements are:
Leverage ratio
Capital conservation buffer
Countercyclical capital buffer
Addressing the procyclicality of provisioning requirements

8. Definition of the three pillars - Pillar 1
Pillar 1- Minimum Capital Requirements
Calculate required capital
Required capital based on
Market risk
Credit risk
Operational risk
Used to monitor funding concentration

9. Definition of the three pillars - Pillar 2
Pillar 2- Supervisory Review Process Bank
Should have strong internal process
Adequacy of capital based on risk evaluation

10. Definition of the three pillars - Pillar 3
Pillar 3 – Enhanced Disclosure
Provide market discipline
Intends to provide information about banks exposure to risk

11. The relationship among the three
Second pillar - supervisory review process to ensure the first pillar
- intended to ensure that the banks have adequate capital
Third pillar compliments first and second pillar
- a discipline followed by the bank such as disclosing capital structure, tier- i and tier-ii capital and approaches to assess the capital adequacy i.e. assessment of the first pillar
Model of commercial banks interpret first pillar as a closure threshold rather than bank’s asset allocation

12. Significant Methods of Measurement
The pillar is divided in three types of risk for which capital should be held.
Credit Risk
Operational risk
Market risk

13. Credit Risk
Credit risk is the risk that those who owe you money will not pay you back. Historically credit risk is the larger risk banks run.
BIS II proposes three approaches by which a bank may calculate its required capital for credit risk.
Standardized approach
Internal rating based (IRB) advanced
Internal rating based (IRB) foundation

14. Operational risk
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
Comparable to credit risk, BIS II proposes three methods for measuring operational risk.
Basic indicator approach
Standardized approach
Advanced measurement approach (AMA)

15. Market Risk
Market risk is the risk of losses due to changes in the market price of an asset.
Market risk will only have to be calculated for assets in the trading book.
Foreign exchange rate risk and commodities risk are part of the market risk. Two methods may be used:
Standardized measurement method
Internal models approach

16. Challenges in implementation of Basel III norms
The new and stricter regulations of the basel3 like higher capital requirements, the new liquidity standard, the increased risk coverage, the new leverage ratio or a combination of the different requirements will be difficult to adopt by the banks
Banks have to take a number of actions to meet the various new regulatory ratios, restoring of data
Banks must be able to calculate and report the new ratios. Which requires the huge implementation effort.
Banks usually have 3 types of challenges
Functional challenges
Technical challenges
Organizational challenges

17. Functional challenges
Developing specifications for the new regulatory requirements, such as the mapping of positions (assets and liabilities) to the new liquidity and funding categories in the LCR and NSFR calculations. The specification of the new requirements for trading book positions and within the CCR framework (e.g. CVA) as well as adjustments of the limit systems with regard to the new capital and liquidity ratios . Crucial is the integration of new regulatory requirements into existing capital and risk management as some measures to improve new ratios (e.g. liquidity ratios) might have a negative effect on existing figures .

18. Technical challenges
The technical challenges includes the availability of data, data completeness, and data quality and data consistency to calculate the new ratios . The financial reporting system with regard to the new ratios and the creation of effective interfaces with the existing risk management systems .

19. Operational challenges
The operational challenges includes stricter capital definition lowers banks’ available capital. At the same time the risk weighted assets (RWA) for securitizations, trading book positions and certain counterparty credit risk exposures are significantly increased. The stricter capital requirements, the introduction of the LCR and NSFR will force banks to rethink their liquidity position, and potentially require banks to increase their stock of high-quality liquid assets and to use more stable sources of funding .