1. Basel Accords
Daren Warner
Chief Financial Officer

2. Basel – Setting the scene
Accords
Capital Adequacy
Regulation and Supervision
Market Discipline

3. Basel – Setting the scene
Basel l
Mainly focused on capital requirements for banks.
Basel ll
Adds supervision & market discipline through the "Three Pillar" concept
Basel lll
To be fully implemented by 2015 as it came to life after the financial crisis

4. Basel History

5. The story behind Basel- The liquidation of Herstatt Bank
Basel History
The story behind Basel- The liquidation of Herstatt Bank
The release of Deutsche Marks to Herstatt in Frankfurt in exchange for US Dollars to be delivered to New York
Because of the time-zone differences, counterparty bank did not receive their payment as the Herstatt Bank ceased its operation
From 1965 to 1981 there were about eight bank failures (or bankruptcies) in the United States. Bank failures were particularly prominent during the '80s, a time which is usually referred to as the "savings and loan crisis." Banks throughout the world were lending extensively, while countries' external indebtedness was growing at an unsustainable rate.

6. Basel l

7. Establishment of Basel l
1988 Basel Accord- the Basel Committee published a set of minimal capital requirements for banks
Mainly focused on capital requirements for banks
Focused primarily on Credit Risk, market risk was an afterthought
By 1992, Basel l was enforced by law in the G-10 [Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, UK, and the USA]
In 1988, the Basel I Capital Accord was created. The general purpose was to: 1. Strengthen the stability of international banking system Set up a fair and a consistent international banking system in order to decrease competitive inequality among international banks. The basic achievement of Basel I has been to define bank capital and the so-called bank capital ratio. In order to set up a minimum risk-based capital adequacy applying to all banks and governments in the world, a general definition of capital was required. Indeed, before this international agreement, there was no single definition of bank capital. The first step of the agreement was thus to define it.

8. Min. 8% Basel l Capital Required RWA
Establishment of Basel l – Illustration of measuring capital required:
The Accord required banks to hold minimum capital equal to 8% of their Risk-Weighted Assets (RWA)
Capital Required RWA
Home Country Sovereign Debt
Corporate Debt
Credit Assessment
AAA to AA-
A+ to A-
BBB+ to BBB-
BB+ to B-
Below B-
Unrated
Risk Weights 0%
20%
50%
100%
150%
Min. 8%
Asset class
Risk Weights

9. Required that half of this 8% consists of Tier 1 Capital (4%)
Basel l
Establishment of Basel l – Illustration of measuring capital required:
Tier One Capital + Tier Two Capital
Risk Weighted Assets
Capital Adequacy Ratio (CAR)
(Min 8%)
Shareholder Equity & Reserves
Supplementary Capital
Required that half of this 8% consists of Tier 1 Capital (4%)
Tier 1 (Core Capital): Tier 1 capital includes stock issues (or share holders equity) and declared reserves, such as loan loss reserves set aside to cushion future losses or for smoothing out income variations Tier 2 (Supplementary Capital): Tier 2 capital includes all other capital such as gains on investment assets, long-term debt with maturity greater than five years and hidden reserves (i.e. excess allowance for losses on loans and leases). However, short-term unsecured debts (or debts without guarantees), are not included in the definition of capital.

10. Bank “X ”Assets (100 units):
Basel l
Example
Bank “X ”Assets (100 units):
Cash: 10 units
Government bonds: 15 units
Mortgage loans: 20 units
Other loans: 50 units
Other assets: 5 units
Bank “X” Debts:
95 units of Deposits
Bank “X” Equity: 5 units
Tier 1 = 3
Tier 2 = 2

11. Then the CAR for Bank “X” is 8%
Basel l
Example
Bank “X ” RWA =
Cash = 10 * 0% = 0
Government bonds = 15 * 0% = 0
Mortgage loans = 20 * 50% = 10
Other loans = 50 * 100% = 50
Other assets = 5 * 100% = 5
Bank “X” Debts:
95 units of Deposits
Bank “X” Equity: 5 units
Tier 1 = 3
Tier 2 = 2
CAR= 5 / 65 = 7.7% < min 8%
Then the CAR for Bank “X” is 8%
Total RWA= 65

12. Establishment of Basel l – Market Risk:
General Market Risk
Changes in market values due to market movements
Specific Market Risk
Changes in the value of an individual asset due to factors related to the issuer of the security
Interest Rates
Foreign Exchange
Market Risk
Equities
Commodities

13. Value At Risk (VAR) Basel l
Establishment of Basel l – Measurement of Market Risk:
Value At Risk (VAR)
A statistical measure of the potential loss for a position at a given confidence level and holding period.
VAR can increase (decrease) due to:
Changes in the positions which increase (decrease) the risk on the book; or
Greater (lower) market volatility
VaR is a statistical measure of the potential loss for a position at a given confidence level and holding period.
For internal reporting, SCB measures VaR at 97.5% confidence level, 1 day holding period.
This implies that on 39 trading days out of 40, the losses will be less than the VaR reported by Market Risk. No quantification is made as to the size of the potential loss on the 40th day.
GMR also monitor VaR at 99% confidence level, 10 day holding period as this is used for FSA reporting.
Value-at-Risk Approach
Expresses the maximum loss that can occur with a specified confidence over a specified period
Because there is uncertainty about how much could be lost over the specified time horizon, the VaR measure includes the level of confidence that the specified loss will not be exceeded

14. Basel l Benefits & & Basel l
Basel l achieved to define and increase bank capital and bank capital ratio
&
Relatively simple framework
Relatively simple framework
&
Widely adopted

15. Basel l Pitfalls Basel l Operational risk was NOT considered
Limited differentiation of Credit Risk
No recognition of the term structure or maturity of credit risk
Operational risk was NOT considered
Static measure of Default Risk
Simplified calculation of potential future Counterparty Risk
Lack of recognition of portfolio diversification effects
Limited differentiation of credit risk There are four broad risk weightings (0%, 20%, 50% and 100%), as shown in Figure1, based on an 8% minimum capital ratio.
Static measure of default risk The assumption that a minimum 8% capital ratio is sufficient to protect banks from failure does not take into account the changing nature of default risk.
No recognition of term-structure of credit risk The capital charges are set at the same level regardless of the maturity of a credit exposure.
Simplified calculation of potential future counterparty risk The current capital requirements ignore the different level of risks associated with different currencies and macroeconomic risk. In other words, it assumes a common market to all actors, which is not true in reality.
Lack of recognition of portfolio diversification effects In reality, the sum of individual risk exposures is not the same as the risk reduction through portfolio diversification. Therefore, summing all risks might provide incorrect judgment of risk. A remedy would be to create an internal credit risk model - for example, one similar to the model as developed by the bank to calculate market risk. This remark is also valid for all other weaknesses.

16. Impact of Basel l in the industry
Consequences
Emergence of Credit Derivatives First Credit Default Swap for Exxon Valdez by JP Morgan
Increased divergence between Regulatory Capital and Economic Capital
Sub-optimal lending behavior
Regulatory capital arbitrage through product innovation

17. Basel ll

18. Amount of Capital required
Basel ll
Establishment of Basel ll
2004,The committee published their Basel ll
Purpose: Creating international standards about how much capital banks need to guard against the financial and operational risks
November 2007, Implementation of Basel ll Accord
Risks bank exposed to
Amount of Capital required
The greater the risks to which the bank is exposed to, the greater the amount of capital required

19. Basel ll Basel ll – 3 Pillars Pillar 1 Pillar 2 Pillar 3
Minimum Capital Requirement
Pillar 2
Supervisory Review
Pillar 3
Disclosure and Market Discipline
Credit Risk
Market Risk
Operational Risk
Assesses Bank’s Capital Level Sufficiency
Sets out Requirements for Banks’ Capital Adequacy
Enhances Market Discipline through Transparency Framework
Pillar1- Minimum Capital Requirement
Credit Risk
Standardised Approach [SA] International Rating Based Approach [IRB]
Advanced Rating Based Approach
Market Risk
For internal reporting, SCB measures VAR at 97.5% confidence level, 1 day holding period. Banks must seek permission to use CAD2
Operational Risk
Pillar 2- Supervisory review
Ensures that the Bank’s capital level is sufficient to cover its overall risk
Sets out requirements for banks to Assess Capital Adequacy positions relative to the overall risk
Pillar 3- Disclosure and market discipline
Enhanced Market discipline through transparency framework
Market disclosure of capital structure, risk management policies and practices, risk profile and capital adequacy
Discusses the role of materiality of information, frequency of disclosures and the issue of proprietary or confidential information

20. Fundamental changes to the calculation of Regulatory Capital
Basel ll
Fundamental changes to the calculation of Regulatory Capital
Regulatory Capital Calculation
Unchanged
Unchanged
Capital =
Capital Adequacy Ratio
Credit Risk +
Market Risk +
Operational Risk
Changed
Substantially
New
Unchanged
3 Alternative
Approaches
3 Alternative
Approaches

21. Basel ll
Pillar 1

22. Measuring Capital Requirement Credit Risk
Basel ll – Pillar 1
Measuring Capital Requirement Credit Risk
Standardised Approach
Limited recognition;
supervisory treatment of collateral and guarantees
Credit Risk Mitigation
External ratings
Foundation IRB
Internal models for PD*
Externally provided EAD* and LGD*
Limited recognition; Supervisory treatment of collateral and guarantees
Advanced IRB
Internal models for PD, EAD and LGD
Internal estimation; including guarantees, collateral, credit derivatives
Increasing complexity and data requirement
for calculating the capital requirements for Credit Risk:
Under the Standardised Approach (SA), banks use a risk-weighting schedule for measuring the credit risk of bank assets. The risk weightings are linked to ratings given to sovereigns, financial institutions and corporations by external credit rating agencies.
The Internal Ratings Based Approach (IRB) allows banks to use their own internal ratings of counterparties and exposures, which permits a finer differentiation of risk for various exposures and hence delivers capital requirements that are better aligned to the degree of risk.
*PD = Probability of Default *LGD = Loss Given Default *EAD = Exposure At Default

23. Measuring Capital Requirement Market Risk
Basel ll – Pillar 1
Measuring Capital Requirement Market Risk
Basel ll does not materially change the market risk capital charge
Capital Adequacy Directive - CAD 2; Internal model to calculate market risk capital
Banks must seek permission to use CAD2
for calculating the capital requirements for Market Risk:
The original Basel rules were amended in the 1990s to incorporate a choice of standardised and internal measurement approaches for Market Risk. Therefore Basel II does not materially change the market risk capital charge.
Unrelated to Basel II efforts, we have developed internal models to calculate market risk capital (called CAD2). There is an implicit expectation that we must use the advanced approach for market risk in order to be allowed to use the advanced approach for credit risk.
As with all advanced methodologies, banks must seek permission to use CAD2

24. Basel ll – Pillar 1 Measuring Capital Requirement Operational Risk
Operational Risk is the risk of direct or indirect loss resulting from inadequate for failed internal processes, people and systems or from external events
Operational Risk Approaches
Advanced Measurement Approaches
The Standardised Approach (TSA)
for calculating the capital requirements for Operational Risk:
It is the risk of direct or indirect loss resulting from inadequate for failed internal processes, people and systems or from external events.
Three approaches to setting capital charges for operational risk:
Basic Indicator Approach (BIA) – Based on a percentage of the firm’s annual revenue; Requires a bank to hold a fixed percentage of its gross income as operational risk capital
The fixed percentage is set by the Basel Committee at a level of 15%
The standardised Approach (TSA) – based on the risk weighted annual revenue of the firm’s individual business lines
It splits a firm’s gross income between defined business lines and then multiplies this by a factor (called ‘beta’) specific to each business line to produce the amount required to be held as operational risk capital for that particular business
The standardised approach relies on indicators and factors set by the regulators
Advanced Measurement Approach (AMA) – based on the firm’s own internally-developed risk measurement framework
It allows banks to use their own measurement system and loss data as a basis for calculating the capital charge
Basic Indicator Approach (BIA)

25. Measuring Capital Requirement Operational Risk
Basel ll – Pillar 1
Measuring Capital Requirement Operational Risk
Exposure
Scenarios
Insurance
KRI
Industry
loss
Loss experience
Basic
Standardised
Advanced
One simple calculation for all risk event types and all business lines
All risk event types for each Basel-defined business line
Internal Models ex. Operational Loss distribution and scenario based models
Fixed percentage (currently 15%) of gross income
Based upon gross income, but divided along Basel II-defined business lines and respective beta charges
Firms determine their own capital charge based upon internal model

26. Fundamental changes to the calculation of Regulatory Capital
Basel ll
Fundamental changes to the calculation of Regulatory Capital
Regulatory Capital Calculation
Unchanged
Unchanged
Capital =
Capital Adequacy Ratio
Credit Risk +
Market Risk +
Operational Risk
Changed
Substantially
New
Unchanged
3 Alternative
Approaches
3 Alternative
Approaches

27. Example - SCB Basel ll Capital Base 2011 $million 2010
Total Tier 1 Capital
37,012
34,295
Total Tier 2 Capital
10,499
10,770
Risk Weighted Assets
2011
$million
2010
Credit Risk
220,394
202,333
Operational Risk
28,762
26,972
Market Risk
21,354
15,772
Total RWA
270,510
245,077

28. Example - SCB Basel ll 2011 2010 CAR= 37,012+ 10,499 270,510 = 17.6%
= %
CAR= 34, ,770
245,077
= %
18.4% > minimum of 8%
17.6% > minimum of 8%

29. Basel ll
Pillar 2

30. Pillar 2- Supervisory Review
Basel ll – Pillar 2
Pillar 2- Supervisory Review
Aims to ensure that the banks assess the capital adequacy positions relative to their overall risks
Internal Capital Adequacy Assessment Process (ICAAP)
Using Economic Capital to determine the internal capital of the bank
Pillar 2: Supervisory Review: The supervisory review process aims to ensure that banks assess their capital adequacy positions relative to their overall risks, and that supervisors review and take appropriate actions in response to those assessments. The former is referred to as the Internal Capital Adequacy Assessment Process (ICAAP), and will be subject to a Supervisory Review and Evaluation Process (SREP).
SREP will be administered via the Arrow Review process, which until now has been a subjective interviewing process. SREP is much more quantitative, and is often referred to as 'Arrow with Numbers'.
As a result of the review, supervisors may require banks to hold capital in excess of minimum regulatory capital ratios or take other remedial measures such as strengthening risk management or other practices. If higher ratios are required, supervisors will intervene if capital falls below these levels.
Basel II requires that banks perform stress tests to estimate the extent to which their IRB capital requirements could increase during a stress scenario. The results of such tests should be used by banks and supervisors to ensure that banks hold sufficient capital buffers.
ICAAP is an internal process for assessing the level and quality of capital resources
required to support: current and projected risk profile of exposures, stress events and scenarios, strategic management buffer
ICAAP should be embedded into the bank’s
management process.

31. Basel ll – Pillar 2 Pillar 2
Internal Capital Adequacy Assessment Process
(ICAAP)
Supervisory Review & Evaluation Process
(SREP)
An internal process for assessing
the level and quality of capital resources
Required to support:
• current and projected risk profile of exposures
• stress events and scenarios
• strategic management buffer
ICAAP should be embedded into the bank’s management process
Under SREP, the regulator will review:
• exposures to all material risk
• adequacy of risk management
• adequacy of capital resources
• integration into business decisions
• management understanding of risk and capital
Under SREP, the regulator will review:
• exposures to all material risk
• adequacy of risk management
• adequacy of capital resources
• integration into business decisions
• management understanding of risk and
capital.
The SREP will inform the supervisory view
on the overall level of regulatory capital
which the bank needs to hold (over and
above the minimum 8%). It may then result
in capital guidance being issued to a bank
raising its regulatory capital requirement.
The regulatory capital guidance to a bank
is also referred to as “Individual Capital
Guidance (ICG)”.

32. What is Economic Capital?
Basel ll – Pillar 2
What is Economic Capital?
Prudent banking standards recommend that a bank hold enough capital to cushion against large losses that might bankrupt the firm
Economic Capital is an estimate of the level of capital that an entity requires to operate its business with a desired target solvency level
As risk is related to capital we need to find the optimum balance between risk, reward and equity
Worse  Quality  Better
Credit
Low  Leverage  High
Portfolio Risk
Economic Capital
Economic capital

33. Basel ll
Pillar 3

34. Pillar 3- Disclosure and Market Discipline
Basel ll – Pillar 3
Pillar 3- Disclosure and Market Discipline
Enhanced Market discipline through transparency framework
Market disclosure:
capital structure
risk management policies and practices
risk profile
capital adequacy
Discusses the role of materiality of information, frequency of disclosures and the issue of proprietary or confidential information
Pillar 3 constitutes market disclosure requirement
• SCB has developed its Pillar 3 disclosure policy and procedures
• Firms are exempt from disclosing information which is:
– Immaterial
– Proprietary: public sharing would undermine Group’s competitive position
– Confidential information: information where we have binding agreements to the effect with
customers/counterparties
• Pillar 3 disclosures will be published on the Group website and its location will be referenced
in the Annual Report and Accounts
PILLAR 3
4Disclosure Market Disclosure – Pillar 3
Disclosure

35. Pillar 3- Disclosure and Market Discipline
Basel ll – Pillar 3
Pillar 3- Disclosure and Market Discipline
Pillar 3 disclosures will be published on the Group website and its location will be referenced in the Annual Report and Accounts
Firms are exempt from disclosing information which is:
– Immaterial
– Proprietary; public sharing would undermine Group’s competitive position
– Confidential information; information where we have binding agreements to the effect with customers/counterparties
Pillar 3 constitutes market disclosure requirement
• SCB has developed its Pillar 3 disclosure policy and procedures
• Firms are exempt from disclosing information which is:
– Immaterial
– Proprietary: public sharing would undermine Group’s competitive position
– Confidential information: information where we have binding agreements to the effect with
customers/counterparties
• Pillar 3 disclosures will be published on the Group website and its location will be referenced
in the Annual Report and Accounts
PILLAR 3
4Disclosure Market Disclosure – Pillar 3
Disclosure

36. For SCB Group the Basel II regime started on 1 January 2008
Basel ll
SCB Position
For SCB Group the Basel II regime started on 1 January 2008

37. SCB Position Pillar 1 Credit Risk Market Risk Operational Risk IRB TSA
SCB have permission to use CAD2
SCB measures VAR at 97.5% confidence level, 1 day holding period
Operational Risk
TSA
&
AMA is Regularly reviewed
Pillar 1

38. SCB Position
SCB has used Economic Capital (EC) model widely and more rigorously
The Economic Capital model for the Bank was the ROARC
(Return on Allocated Risk Capital)
Economic Capital = Credit Risk Capital+ Market Risk Capital + Operational Risk Capital
Pillar 2

39. Quantitative and qualitative disclosures constitute
SCB Position
SC Group will publish Pillar 3 disclosures once a calendar year (at least) in tandem with the annual accounts cycle
Disclosures will be required for SC Group and its significant subsidiaries
Quantitative and qualitative disclosures constitute
Pillar 3
Market risk Capital
Operational risk Capital
Risk management objectives and policies
Credit and dilution Risk
Equities in the non-trading book
Interest rate risk in the non-trading book
Capital resources and capital assessment
Standardised credit risk
Securitisation
Credit risk mitigation
Counterparty credit risk
IRB credit risk

40. The impact of the financial crisis on Basel ll
The recent global financial crisis has revealed weaknesses in the whole approach to risk management that has been developed through the Basel II process
Basel II did not adequately anticipate some risks such as a collapse in market liquidity as investor confidence disappeared and deep losses in the market value of securities held by banks 
What impact has the financial crisis had on Basel II?
The recent global financial crisis has revealed weaknesses in the whole approach to risk management that has been developed through the Basel II process. Risks have come from sources that Basel II did not adequately anticipate such as a collapse in market liquidity as investor confidence disappeared and deep losses in the market value of securities held by banks. 
Assumptions about the liquidity of financial instruments such as mortgage backed securities (MBS) that were based on past performance have proven to be unfounded as has the reliability of credit ratings on many of these MBS.
The financial crisis has also shown that at times of severe stress the inter linkages amongst banks and between banks and other financial institutions have the potential to create a domino effect whereby seemingly safe lenders can be put at risk by exposures to counterparties that turned out to be less safe than thought.
As a result of the above, policymakers are proposing and implementing changes to Basel II. These changes are being considered by both the Basel Committee and at an EU level, where the CRD, which implements Basel II, is being updated through a range of changes embodied in legislative revisions known as CRD2, 3 and 4.

41.  Notes Basel ll Basel ll Synopsis Is much more complex than Basel I
Relies on high quality, accurate data
Makes regulatory capital closer to economic capital
Emphasizes risk quality
Will make RWA and capital much more volatile
Needs a definite change in the risk culture
 Notes
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42. Basel lll

43. Basel lll
Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector
Aims to improve and strengthen banking sector’s :
Ability to absorb shocks arising from financial and economic stress
Risk management and governance
Transparency and disclosures

44. Basel lll
Basel lll – attempts to encourage banks to hold larger percentages of Government Bonds to provide a riskless safety net should they run into liquidity problems
Does Holding large percentage of Government Bonds REALLY save the bank from Bankruptcy ?
Example: Holding of Italian debt (20% risk-weighting) bankrupted MF Global in the space of a week!

45. Differences between Basel II and Basel IIl

46. Differences between Basel II and Basel IIl
Basel lll – Capital Ratio
Upward adjustments to the Tier 1 Capital Ratio (4% to 6%)
Stages of implementation:
1 Jan 2013: 4.5%
1 Jan 2014: 5.5%
1 Jan 2015: 6%

47. Differences between Basel II and Basel IIl
Basel lll – Minimum Common Equity Requirement
Increase in the minimum Tier 1 Common Equity requirement (2% to 4.5%):
Stages of implementation:
1 Jan 2013: 3.5%
1 Jan 2014: 4%
1 Jan 2015: 4.5%

48. Differences between Basel II and Basel lll
Basel lll – Capital Buffers
Create capital buffers in good times that can absorb losses during periods of financial and economic stress
To absorb banking sector losses exclusively with common equity
2.5% added to the minimum ratios
Capital Conservation Buffer
To extends capital conversion range during periods of excess credit growth
Up to 2.5% added to the minimum ratios
Countercyclical Buffer
Capital Conservation Buffer: Should be available to absorb banking
sector losses conditional on a plausible severe stressed financial and economic
environment
Countercyclical Buffer: Extends capital conservation range during
periods of excess credit growth or other indicators deemed appropriate by
supervisors for their national contexts.

49. Differences between Basel II and Basel IIl
Basel lll – Leverage Ratio
Tier 1 Capital
Exposure ≥ 3%
Common Equity & Reserves
Balance sheet exposures excluding derivatives, net of specific provisions
and valuation adjustments
To prevent the build-up of excessive on and off-balance sheet leverage in the banking system
A ‘simple’, non-risk based, ‘backstop’ measure
To be calculated as an average over the quarter
Banks will be required to disclose in January 2015
To prevent the build-up of excessive on and off-balance sheet leverage in the banking system.

50. Differences between Basel II and Basel IIl
Basel lll – Liquidity Ratios – Liquidity Coverage Ratio (LCR)
Stock of High Quality Liquid Assets
Net Cash Outflows over the next 30 calendar days ≥
100%
Cash/ Central Bank Reserves/ Sovereign & Supra-national bonds/ Corporate and Covered Bonds rated AA-
Ensure that a bank has sufficient high quality unencumbered liquid assets to enable it to survive a short term (30 calendar day) period of significantly severe stress
To be introduced in 1 January 2015
To promote the short-term resiliency of the liquidity risk profile of institutions by ensuring that they have sufficient high quality liquid resources to survive an acute stress scenario lasting for one month.

51. Differences between Basel II and Basel IIl
Basel lll – Liquidity Ratios – Net Stable Funding Ratio
(NSFR)
Available Amount of Stable funding
Required Amount of Stable funding ≥
100%
To promote resiliency over longer-term time horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis. The Net Stable Funding Ratio has been developed to capture structural issues related to funding choices
To be introduced in 1 January 2015

52. Basel lll – Target Capital Ratios by 1/1/2018)
Common Equity (after deductions)
Tier 1 Capital
Total Capital
Minimum
4.5% 6% 8%
Capital Conservation Buffer
2.5%
Minimum Plus Conservation Buffer 7%
8.5%
10.5%
Countercyclical capital buffer
0% - 2.5%
0 – 2.5%
Upper end of minimum capital
9.5%
11%
13%
Same as Basel ll

53. Basel lll – IFRS Vs FASB
Difficulty in comparing between capital requirement for US Banks and Non-US Banks;
A significant amount of assets ($4 Trillion) does not appear on the balance sheet of USD banks due to netting off derivatives transactions that is allowed as per the US accounting rules
Due to differences in reporting standard in US and IAS; its difficult to compare the financials of US and non-US banks particularly pertaining to netting off derivatives and reporting of mortgage backed securities
US Banks will have lower capital requirement than Non-US Banks

54.  Notes Basel lll Basel lll Summary Hold more capital
Better quality capital
Carry more liquid assets
Limit bank’s leverage
Build up capital buffers
Emphasis on Liquidity
 Notes
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Regulation, Regulation & Regulation

55.  Notes Regulation Examples
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56. Basel l, ll, lll

57. Differences between Basel l, ll, lll
Considers only Market and Credit Risk
Minimum level of capital is based on a single risk weight for each of a limited number of asset classes
Basel ll
Considers Market, Credit, Operational Risks
3 Pillars:
Minimum Capital Requirement
Supervisory Review Process
Disclosure and Market Discipline
Basel lll
Enhancement of the 3 Pillars of Basel ll
Liquidity & leverage Management:
Liquidity Coverage Ratio (LCR)
Net Stable Funding Ratio (NSFR)
Leverage Ratio
Basel I required lenders to calculate a minimum level of capital based on a single risk weight for each of a limited number of asset classes, eg, mortgages, consumer lending, corporate loans, exposures to sovereigns. Basel II goes well beyond this, allowing some lenders to use their own risk measurement models to calculate required regulatory capital whilst seeking to ensure that lenders establish a culture with risk management at the heart of the organisation up to the highest managerial level.
The 3 Pillars of Basel II enshrine the key principles of the new regime.
Pillar 1 covers the calculation of risk weights to determine a basic minimum capital figure. The Accord provides for a choice of ways to calculate required capital. The simplest is the standardised approach, which provides set risk weights for some asset classes and requires the weight on others to be determined by the public credit rating assigned to the particular asset by the rating agencies. Lenders are able to choose the more sophisticated 'internal ratings based' (IRB) approach, either foundation, advanced or retail. These allow lenders to use their own risk models to determine appropriate minimum capital. Pillar 1 also requires lenders to assess their market and operational risk and provide capital to cover such risk.
Under Pillar 2, lenders are required to assess risks to their business not captured in Pillar 1, for which additional capital may be required (for example the risk caused by interest rate mismatches between assets and liabilities).
Finally, Pillar 3 requires lenders to publish information on their approach to risk management and is designed to raise standards through greater transparency.

58. Summary
Basel I increased the overall level of capital in financial markets
Basel II aims to redistribute capital with the overall capital maintained at the same level on an average, but with a more efficient allocation of capital
Basel lll has a target to increase the government bond share in the banks capital and solve their liquidity problems

59. Q & A