Professional Documents
Culture Documents
Leverage ratio
2
2.1
Overview
Key principles
Capital requirements
2
2.3.1
3 IMPLEMENTATION
U.S. version of the Basel Liquidity Coverage
Ratio requirements
On 24 October 2013, the Federal Reserve Board of Governors approved an interagency proposal for the U.S.
version of the Basel Committee on Banking Supervision (BCBS)'s Liquidity Coverage Ratio (LCR). The ratio would apply to certain U.S. banking organizations and
other systemically important nancial institutions.[11] The
comment period for the proposal is scheduled to close by
31 January 2014
The United States LCR proposal came out signicantly tougher than BCBSs version, especially for larger
bank holding companies.[12] The proposal requires nancial institutions and FSOC designated nonbank nancial
companies[13] to have an adequate stock of high-quality
liquid assets (HQLA) that can be quickly liquidated to
meet liquidity needs over a short period of time.
The LCR consists of two parts: the numerator is the value
of HQLA, and the denominator consists of the total net
cash outows over a specied stress period (total expected
cash outows minus total expected cash inows).[14]
The Liquidity Coverage Ratio applies to U.S. banking operations with assets of more than $10 billion. The pro- The proposal requires that the LCR be at least equal to
or greater than 1.0 and includes a multiyear transition peposal would require:
riod that would require: 80% compliance starting 1 January 2015, 90% compliance starting 1 January 2016, and
Large Bank Holding Companies (BHC) those with 100% compliance starting 1 January 2017.[16]
over $250 billion in consolidated assets, or more in
on-balance sheet foreign exposure, and to systemi- Lastly, the proposal requires both sets of rms (large bank
cally important, non-bank nancial institutions;[13] holding companies and regional rms) subject to the LCR
to hold enough HQLA to cover 30 days of net cash requirements to submit remediation plans to U.S. regulaoutow. That amount would be determined based tors to address what actions would be taken if the LCR
on the peak cumulative amount within the 30-day falls below 100% for three or more consecutive days.
period.[11]
Regional rms (those with between $50 and $250 3 Implementation
billion in assets) would be subject to a modied
LCR at the (BHC) level only. The modied LCR
requires the regional rms to hold enough HQLA 3.1 Summary of originally (2010) proto cover 21 days of net cash outow. The net cash
posed changes in Basel Committee lanoutow parameters are 70% of those applicable to
guage
the larger institutions and do not include the requirement to calculate the peak cumulative outows[14]
First, the quality, consistency, and transparency of
the capital base will be raised.
Smaller BHCs, those under $50 billion, would remain subject to the prevailing qualitative supervi Tier 1 capital: the predominant form of Tier
sory framework.[15]
1 capital must be common shares and retained
earnings
The U.S. proposal divides qualifying HQLAs into three
Tier 2 capital: supplementary capital, howspecic categories (Level 1, Level 2A, and Level 2B).
ever, the instruments will be harmonised
Across the categories the combination of Level 2A and
Tier 3 capital will be eliminated.[17]
2B assets cannot exceed 40% HQLA with 2B assets limited to a maximum of 15% of HQLA.[14]
Second, the risk coverage of the capital framework
will be strengthened.
Level 1 represents assets that are highly liquid (gen Promote more integrated management of marerally those risk-weighted at 0% under the Basel
ket and counterparty credit risk
III standardized approach for capital) and receive
3.2
U.S. implementation
Add the credit valuation adjustmentrisk due
to deterioration in counterpartys credit rating
Strengthen the capital requirements for counterparty credit exposures arising from banks
derivatives, repo and securities nancing transactions
Improved calibration of the risk functions, which convert loss estimates into
regulatory capital requirements.
Banks must conduct stress tests that include widening credit spreads in recessionary scenarios.
On 15 April, the Basel Committee on Banking Supervision (BCBS) released the nal version of its Supervisory
Fourth, a series of measures is introduced to pro- Framework for Measuring and Controlling Large Expomote the buildup of capital buers in good times sures (SFLE) that builds on longstanding BCBS guidthat can be drawn upon in periods of stress (Re- ance on credit exposure concentrations.[21]
ducing procyclicality and promoting countercyclical
On 3 September 2014, the U.S. banking agencies (Fedbuers).
eral Reserve, Oce of the Comptroller of the Currency,
and Federal Deposit Insurance Corporation) issued their
Measures to address procyclicality:
nal rule implementing the Liquidity Coverage Ratio
Dampen excess cyclicality of the mini(LCR).[22] The LCR is a short-term liquidity measure inmum capital requirement;
tended to ensure that banking organizations maintain a
Promote more forward looking provi- sucient pool of liquid assets to cover net cash outows
sions;
over a 30-day stress period.
Conserve capital to build buers at individual banks and the banking sector that
3.2 U.S. implementation
can be used in stress; and
Achieve the broader macroprudential goal of
The U.S. Federal Reserve announced in December 2011
protecting the banking sector from periods of
that it would implement substantially all of the Basel III
excess credit growth.
rules.[23] It summarized them as follows, and made clear
Requirement to use long-term data hori- they would apply not only to banks but also to all instituzons to estimate probabilities of default, tions with more than US$50 billion in assets:
downturn loss-given-default estimates,
Risk-based capital and leverage requirements inrecommended in Basel II, to become
cluding rst annual capital plans, conduct stress
mandatory
impact
4.2 Criticism
Think tanks such as the World Pensions Council have argued that Basel III merely builds on and further expands
the existing Basel II regulatory base without fundamentally questioning its core tenets, notably the ever-growing
reliance on standardized assessments of credit risk marketed by two private sector agencies- Moodys and S&P,
As of January 2014, the United States has been on track thus using public policy to strengthen anti-competitive
to implement many of the Basel III rules, despite dier- duopolistic practices.[30][31] The conicted and unreliable
ences in ratio requirements and calculations.[25]
credit ratings of these agencies is generally seen as a major contributor to the US housing bubble.
3.3
Europe implementation
Opaque treatment of all derivatives contracts is also criticized. While institutions have many legitimate (hedging, insurance) risk reduction reasons to deal in derivatives, the Basel III accords:
do not require organizations to investigate correlations of all internal risks they own
5
do not tax or charge institutions for the systematic or frequently as Basel III remains under development.
aggressive externalization or conicted marketing of
risk - other than requiring an orderly unravelling of
derivatives in a crisis and stricter record keeping
5 See also
Since derivatives present major unknowns in a crisis these
are seen as major failings by some critics [32] causing several to claim that the too big to fail status remains with
respect to major derivatives dealers who aggressively took
on risk of an event they did not believe would happen but did. As Basel III does not absolutely require extreme
scenarios that management atly rejects to be included
in stress testing this remains a vulnerability. Standardized external auditing and modelling is an issue proposed
to be addressed in Basel 4 however.
A few critics argue that capitalization regulation is inherently fruitless due to these and similar problems and - despite an opposite ideological view of regulation - agree
that too big to fail persists.[33]
Basel I
Basel II
Basel 4
Systemically important nancial institution
Operational risk
Operational risk management
6 References
[1] Group of Governors and Heads of Supervision an-
Others have argued that Basel III did not go far enough to [11] http://www.federalreserve.gov/FR_notice_lcr_
20131024.pdf
regulate banks as inadequate regulation was a cause of the
nancial crisis.[41] On 6 January 2013 the global banking
[12] Fed Liquidity Proposal Seen Trading Safety for Costlier
sector won a signicant easing of Basel III Rules, when
Credit. Bloomberg.
the Basel Committee on Banking Supervision extended
not only the implementation schedule to 2019, but broad- [13] Nonbank SIFIs: FSOC proposes initial designations
more names to follow. http://www.pwc.com/en_US/us/
ened the denition of liquid assets.[42]
financial-services/regulatory-services/publications/assets/
fs-reg-brief-nonbank-sifi.pdf, June 2013.
4.3
Further studies
In addition to articles used for references (see References), this section lists links to publicly available highquality studies on Basel III. This section may be updated
EXTERNAL LINKS
[15] http://www.federalreserve.gov/newsevents/press/bcreg/
20131024a.htm
[32] http://scholar.harvard.edu/files/vstavrak/files/
derivregntr_article.pdf
[16] http://www.ft.com/cms/s/0/
9f61345c-3cb1-11e3-a8c4-00144feab7de.html#
axzz2jWZZfSmH
[33] http://www.heritage.org/research/reports/2014/04/
basel-iii-capital-standards-do-not-reduce-the-too-big-to-fail-problem
7 External links
Basel III capital rules
Basel III liquidity rules
Bank Management and Control, Springer Management for Professionals, 2014
U.S. Implementation of the Basel Capital Regulatory Framework Congressional Research Service
- Basel III in India
How Basel III Aects SME Borrowing Capacity
8.1
Text
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8.2
Images
8.3
Content license