News For Basel 3 Implementation / News for Basel III

I have already dealt with the details of the Basel III recommendations as given by BCBS and the guidelines issued by RBI on 2nd May, 2012 in two separate articles. However, this being an important area for the banking sector. News for implementation have been appearing in newspapers on regular basis. Here we will try to give a brief of some of such News items since May 2012,

Basel 3 Means Stronger Banks : The Basel 3 Accord will take effect on January 1, 2013. It will gradually be phased through 2018.

There are basically 3 components of Basel 3. First, the reserve on risk capital requirements goes from 2.5% to 7%. . The second component of Basel 3 is to limit the size of bank balance sheets. In effect, this amounts to putting a cap on bank growth. Note that this component also puts restraints on a bank's return on equity. Basel 3's third and final component is the 30-day liquidity stress test.

European banks urge one-year delay for Basel III rules : (24th November, 2012) The European Banking Federation sent a letter on November 21 2012 to EU Internal Market Commissioner Michel Barnier, formally requesting a delay on the grounds that EU banks would be at a competitive disadvantage if they introduced the new rules before their U.S. counterparts

Basel III : The Norms are Not Suited for Emerging World Banking : An article under this heading has appeared in ET (24th September, 2012), where it is suggested that there is a fundamental difference between financial systems in advanced market economies (AMEs) and Emerging Market and Developing Economies (EMDEs). You can read full article by clicking on the link given on the headline of this news item itself.

Govt can lend equity Support of Rs 20K crore annually for PS Banks : (11th September, 2012)

MUMBAI: The government can easily provide an equity support of upto Rs 20,000 crore annually to state-run banks to meet stricter Basel-III capital norms, a senior official said here today, but warned that funding beyond that will be problematic. "Rs 15,000 to 20,000 crore (of capital infusion to banks) every year can be sustained without any issues. (But) if it goes beyond that, then we have a problem," Additional Secretary in the Department of Financial.

Indian Government To Push for Basel III Deferral; Plan to Take Up the Issue at G20 Meet : This news item appeared in ET on 12th September, 2012,

It is reported that Indian government will push for deferral of the stringent banking capital requirements under Basel III norms, if both the US and Europe fail to arrive at a consensus on the issue. The government is likely to save about Rs 90,000 crores over the next five years if the norms are deferred. According to RBI estimates, the government will be required to allocate the above referred amount to state-run banks over the next five years to meet the Basel III standards if it wants to retain its 58% shareholding.

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Basel III to benefit Indian banking system: Subbarao : This news item has appeared in The Hindu on 5th September, 2012,

RBI Governor, D. Subbarao, said that the Basel Committee was working on establishing a minimum set of principles for "Domestic Systemically Important Banks" (D-SIBs), including some large banks in India. This committee will also prescribe norms for "Higher Loss Absorbency (HLA) capital standards for them as also evolve a sound resolution mechanism for D-SIBs.... Basel III seeks to mitigate externality by identifying Global Systemically Important Banks (G-SIBs) and mandating them to

maintain a higher level of capital dependent on their level of systemic importance. The list of G-SIBs is to be reviewed annually. At present, no Indian bank appears in the list of G-SIBs.

Dr. Subbarao said that effective implementation of Basel III was going to make Indian banks stronger, more stable and sound so that they could deliver value to the real sectors of the economy. By far, the most important reform is that there should be a radical change in banks approach to risk management. Banks in India are currently operating on the Standardised Approaches of Basel II, said Dr. Subbarao. The larger banks needed to migrate to the Advanced Approaches, especially as they expanded their overseas presence. The adoption of advanced approaches to risk management would enable banks to manage their capital more efficiently and improve their profitability, he said.

SBI group requires Rs 1 lakh cr to meet Basel-III norms : This News item appeared in Business Line on 7th September, 2012 :

The State Bank of India and its associates and subsidiaries will require around Rs 1 lakh crore of capital over the next five years to meet Basel III norms (in addition to retained earnings). Diwakar Gupta, MD and CFO of SBI, told Business Line this was based on a 20 per cent growth rate, and a return on equity of between 18 and 20 per cent. He conceded that the estimate could vary since growth rates during the last year as well as current year are lower. The RBI estimates that Indian banks would need about Rs 5 lakh crore in the next five years to get ready for Basel-III norms that will be effective from 2018. The norms, developed in the backdrop of the global crisis in 2008, impose higher capital prescriptions on banks to cater to various risks.