1 final basel iii will be incremental and is expected to reach the final level on 1 january 2019....

Certified Basel iii Professional (CBiiiPro)

Official Prep CoursePart A

Basel iii Compliance Professionals Association (BiiiCPA)

The largest association of Basel iii Professionals in the world

Introduction

� The Basel iii Compliance Professionals Association (BiiiCPA) is the largest association of Basel III professionals in the world

� www.basel-iii-association.com

� A business unit of the Basel ii Compliance Professionals Association (BCPA), the largest association of Basel II professionals in the world

� www.basel-ii-association.com

Introduction

� The association develops and maintains a compendium of Basel iii related risk and compliance topics

� Subject matter experts review and update this body of knowledge

Introduction

� Basel iii certificates:

� Certified Basel iii Professional (CBiiiPro)

� Certified Pillar 2 Expert - Basel 3 (CP2E-B3)

� Certified Pillar 3 Expert - Basel 3 (CP3E-B3)

� Certified Stress Testing Expert - Basel 3 (CSTE-B3)

� (The CP2E-B3, CP3E-B3, CSTE-B3 are under development)

Introduction

� Certified Basel iii Professional (CBiiiPro): The exam is online

� To find more:

� www.basel-iii-association.com/Questions_About_The_Certification_And_The_Exams_1.pdf

� www.basel-iii-association.com/Certification_Steps_CBiiiPro.pdf

Agenda

� What is Basel iii?

� The Basel III papers

� Was Basel II responsible for the market crisis?

� Introduction to the Basel III Amendments

� The Financial Stability Board (FSB), the G20 and the Basel III framework

Agenda

� “Principles for enhancing corporate governance”

� BIS, October 2010

� The key areas where the Basel Committee believes the greatest focus is necessary:

� 1. Board practices

� 2. Senior management

� 3. Risk management and internal controls

Agenda

� 4. Compensation

� 5. Complex or opaque corporate structures

� 6. Disclosure and transparency

� The role of supervisors

� “Sound Practices for the Management and Supervision of Operational Risk”

� BIS, December 2010

� The 9 principles

Agenda

� The Basel III Framework: Important Amendments

� Firm Specific Changes

� System-Wide Systemic Risk-Based Framework

� The Quality of Capital

� The Risk Weighted Assets

� The Capital Ratio

� Global Liquidity Standards

Agenda

� Capital Conservation

� Leverage Ratio

� Countercyclical Capital Buffer

� Systemically Important Financial Institutions (SIFIs)

� Systemically Important Markets and Infrastructures (SIMIs)

� Risk Modelling, Stress Testing and Scenario Analysis

Agenda

� Pillar 2 Amendments

� “Principles for sound stress testing practices and supervision”

� Use of stress testing and integration in risk governance

� Stress testing methodologies

� Scenario selection

� Principles for sound stress testing practices and supervision

Agenda

� Firm-wide stress testing

� 15 stress testing principles for banks

� 6 stress testing principles for supervisors

� “Recognising the risk-mitigating impact of insurance in operational risk modelling” BIS, October 2010

� Insurance industry supervision

� Banking supervisors’ assessment processes

� Approval of insurance contracts

Agenda

� Revoking approval for recognising insurance mitigation in capital

� Maximum 20% operational risk capital charge reduction

� Modelling methodology

� Traditional and proposed insurance policies

� Criteria for recognising insurance mitigation

� Partial insurance modelling

Agenda

� Understanding Supervisory Colleges

� “Good practice principles on supervisory colleges”

BIS, October 2010

� Principles for both home and host supervisors

� Principle 1: College objectives

� Principle 2: College structures

� Home supervisors, Host supervisors

� Principle 3: Information sharing

� Principle 4: Communication channels

Agenda

� Principle 5: Collaborative work

� Principle 6: Interaction with the institution

� Principle 7: Crisis management

� Principle 8: Macroprudential work

� Case Study: Committee of European Banking Supervisors, Guidelines for the Operational Functioning of Supervisory Colleges: Joint decision on model validation

Agenda

� Dodd-Frank Act and Basel III

� The Capital Requirements Directives (II, III, IV) and Basel III

� Solvency II and Basel III

� Investment Banking, Retail Banking, Corporate Banking after Basel III

� The impact of Basel III

� Closing remarks

17

Why the dots … are used?� We often use dots … why?

� An opportunity to understand the importance of certain words and phrases

� Example:

� While it is helpful to draw on extreme values from historicalperiods of stress …

� … sensitivity analysis ***should also include hypothetical*** extreme values …

� … to ensure that a wide range of possibilities is included

� There are ***no words that are omitted*** when we use dots

What is Basel III?

� According to Jaime Caruana, General Manager, Bank for International Settlements …

� … Basel III is defined as the enhanced Basel II capital framework and …

� … the new global micro- and macroprudential banking standards

� Basel III is marrying the microprudential and the macroprudential approaches to supervision

There is no single “Basel III Paper”


� “What could more broadly be referred to as Basel III began with the issuance of the revised securitisation and trading book rules in July 2009…

� … and then the consultative document in December 2009

� The trading book rules will be implemented at the end of 2011 and the new definition of capital and capital requirements in Basel III over a six-year period beginning in January 2013”

Hervé Hannoun, Deputy General Manager, Bank for International Settlements, 22 November 2010

Basel III: A global regulatory framework for more resilient banks and banking systems

� “Basel III: A global regulatory framework for more resilient banks and banking systems”

Bank of International Settlements, December 2010

� This document, together with the document …

� … “Basel III: International framework for liquidity risk measurement, standards and monitoring”…

� … presents the Basel Committee’s reforms to strengthen global capital and liquidity rules …

� … with the goal of promoting a more resilient banking sector


� The ***objective*** of the reforms is to improve the banking sector’s ability to absorb shocks …

� … arising from financial and economic stress, whatever the source …

� … thus reducing the risk of spillover from the financial sector to the real economy


� Also, to improve risk management and governance …

� … as well as strengthen banks’ transparency and disclosures…

� … and to strengthen the resolution of systemically significant cross-border banks

� The Basel Committee strengthens the regulatory capital framework …

� … building on the three pillars of the Basel II framework


� Basel III in Europe includes the revisions to the European Union’s Capital Requirements Directive (CRD)

� 1. CRD II (higher-quality capital)

� 2. CRD III (amendments to market-risk and securitization)

� 3. CRD IV (capital rules, liquidity, leverage, single European rulebook in banking)

Was Basel II responsible for the market crisis?

� “Forgive me for being very blunt, but I do NOT believe that Basel II contributed to the recent crisis for two reasons

� First, the crisis manifested itself in 2007 on the basis of imbalances that had built up prior to the implementation of Basel II

� Second, many countries that have adopted Basel II did so in 2008 or later. The crisis came too soon for Basel II to be credibly held responsible”

Jaime Caruana, General Manager, Bank for International Settlements

Was Basel II responsible for the market crisis?

� “When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing”

--Chuck Prince, Citigroup CEO, 10 July 2007

� November 2008: Citigroup bailed out by US government

Basel III – When?

� National implementation for Basel Committee member countries will begin on 1 January 2013

� It will be incremental and is expected to reach the final level on 1 January 2019

Basel 2

� Basel II implementation

� At the Pittsburgh Summit, the G20 Leaders reaffirmed their commitment to adopt the Basel II framework…

� … with all major G20 financial centres to adopt Basel II by 2011 and the other G20 countries progressing toward adoption

Basel 2

� Most countries have already fully adopted Basel II…

� … and the remaining countries are still in the process

� The effects of the financial crisis became manifest in 2007 and built-up prior to the implementation of Basel II

Introduction to the Basel III Amendment

A really important question

� Can I learn today what is going to happen tomorrow in the financial sector?

� Answer: Yes

� You must monitor the recommendations from the Financial Stability Board (FSB) …

� … that will be endorsed by the G-20 …

� … and then become part of the Basel iii framework and other laws and regulations

A really important question

� The Basel Committee on Banking Supervision (BCBS) has translated the FSB’s recommendations into …

� … a new regulatory capital and liquidity regime

� The FSB was established in April 2009 as the successor to the Financial Stability Forum (FSF)

� The FSF was founded in 1999 by the G7 Finance Ministers and Central Bank Governors

The Financial Stability Board (FSB)

� G7 had commissioned Dr Tietmeyer (President of the Deutsche Bundesbank) to recommend new structures for enhancing cooperation …

� … among the various national and international supervisory bodies and international financial institutions …

� … to promote stability in the international financial system

� He called for the creation of a Financial Stability Forum


� G7 Ministers and Governors endorsed the creation of the FSF at a meeting in Bonn in February 1999

� The FSF would bring together:

� 1. National authorities responsible for financial stability in significant international financial centres …

� … namely treasuries, central banks, and supervisory agencies


� 2. Sector-specific international groupings of regulators and supervisors …

� … engaged in developing standards and codes of good practice

� International financial institutions …

� … charged with surveillance of domestic and international financial systems …

� … and monitoring and fostering implementation of standard


� 3. Committees of central bank experts concerned with market infrastructure and functioning

� In November 2008 the Leaders of the G20 countries called for a ***larger membership of the FSF***

� A broad consensus emerged in the following months towards placing the FSF on stronger institutional ground with an expanded membership


� Expanded membership can strengthen the effectiveness of the FSB as a mechanism …

� … for national authorities, standard setting bodies and international financial institutions …

� … to address vulnerabilities and …

� … to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability


� As announced in the G20 Leaders Summit of April 2009…

� … the expanded FSF was re-established as the Financial Stability Board (FSB) with …

� … a broadened mandate to promote financial stability

FSB Charter

� Objectives of the Financial Stability Board

� The Financial Stability Board (FSB) is established to coordinate at the international level …

� … the work of national financial authorities and international standard setting bodies (SSBs) in order…

� … to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies

FSB Charter

� Mandate and tasks of the FSB

� (1) As part of its mandate, the FSB will:

� (a) Assess vulnerabilities affecting the global financial system …

� … and identify and review on a timely and ongoing basis the regulatory, supervisory and related actions needed to address them, and their outcomes

FSB Charter

� (b) Promote coordination and information exchange among authorities responsible for financial stability

� (c) Monitor and advise on market developments and their implications for regulatory policy

� (d) Advise on and monitor best practice in meeting regulatory standards

FSB Charter

� (e) Undertake joint strategic reviews of the policy development work of the international standard setting bodies …

� … to ensure their work is timely, coordinated, focused on priorities and addressing gaps

� (f) Set guidelines for and support the establishment of supervisory colleges

FSB Charter

� (g) Support contingency planning for cross-border crisis management …

� … particularly with respect to systemically important firms

� (h) Collaborate with the International Monetary Fund (IMF) to conduct Early Warning Exercises

� (i) Undertake any other tasks agreed by its Members in the course of its activities

FSB Charter

� (2) The FSB will promote and help coordinate the alignment of the activities of the SSBs …

� … to address any overlaps or gaps and …

� … clarify demarcations in light of changes in national and regional regulatory structures …

� … relating to prudential and systemic risk, market integrity and investor and consumer protection, infrastructure, as well as accounting and auditing

List of FSB Members� A. Member Jurisdictions

� Argentina

� � Central Bank of Argentina

� Australia

� � Department of the Treasury

� � Reserve Bank of Australia

� Brazil

� � Ministry of Finance

� � Central Bank of Brazil

� � Securities and Exchange Commission of Brazil

� Canada

� � Department of Finance

� � Bank of Canada

� � Office of the Superintendent of Financial Institutions (OSFI)

List of FSB Members� China


� � People’s Bank of China

� � China Banking Regulatory Commission

� France

� � Ministry of Economy, Industry and Employment

� � Bank of France

� � Autorité des Marchés Financiers (AMF)

� Germany


� � Deutsche Bundesbank

� � Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin)

� Hong Kong SAR

� � Hong Kong Monetary Authority

List of FSB Members� India


� � Reserve Bank of India

� � Securities and Exchange Board of India

� Indonesia

� � Bank Indonesia

� Italy

� � Ministry of the Economy and Finance

� � Bank of Italy

� � Commissione Nazionale per le Società e la Borsa (CONSOB)

� Japan


� � Bank of Japan

� � Financial Services Agency

List of FSB Members� Korea

� � Bank of Korea

� � Financial Services Commission

� Mexico

� � Ministry of Finance and Public Credit

� � Bank of Mexico

� Netherlands


� � Netherlands Bank

� Russia


� � Central Bank of the Russian Federation

� � Federal Financial Markets Service

List of FSB Members� Saudi Arabia

� � Saudi Arabian Monetary Agency

� Singapore

� � Monetary Authority of Singapore

� South Africa


� Spain

� � Ministry of Economy and Finance

� � Bank of Spain

� Switzerland

� � Swiss Federal Department of Finance

� � Swiss National Bank

� Turkey

� � Central Bank of the Republic of Turkey

List of FSB Members� United Kingdom

� � HM Treasury

� � Bank of England

� � Financial Services Authority

� United States

� � Department of the Treasury

� � Board of Governors of the Federal Reserve System

� � Securities and Exchange Commission

� European Central Bank

� European Commission

List of FSB Members� B. International Financial Institutions

� � Bank for International Settlements (BIS)

� � International Monetary Fund (IMF)

� � Organisation for Economic Co-operation and Development (OECD)

� � World Bank

� C. International Standard-Setting, Regulatory, Supervisory and Central Bank

� Bodies

� � Basel Committee on Banking Supervision (BCBS)

� � Committee on Payment and Settlement Systems (CPSS)

� � Committee on the Global Financial System (CGFS)

� � International Accounting Standards Board (IASB)

� � International Association of Insurance Supervisors (IAIS)

� � International Organization of Securities Commissions (IOSCO)

The G20

The G20

� The Group of Twenty is a group of Finance Ministers and Central Bank Governors from 20 economies:

� 19 countries plus the European Union…

� … which is represented by the President of the European Council and by the European Central Bank

The G20

� The G20 promotes open and constructive discussion among systemically important countries …

� … on key issues related to financial and economic policies

� The G20 leaders began meeting as a group only in the last few years…

� … but the G20 finance ministers have been meeting annually since 1999

The G20

� Those meetings had grown out of meetings coordinated by the G7…

� … (the US, Japan, United Kingdom, France, Germany, Canada and Italy) …

� … in the years following the 1974 oil shock

� By the end of the 1990s emerging markets played an increasingly important part in the global financial system…

� … and that needed to be reflected in international economic governance

The G20

� The G20 represents about two thirds of the world’s population …

� … and nearly 88% of the world’s economy

Basel III, the G20 and the FSB

� 12 November 2010, Seoul, Korea:

� At the Summit, the G20 Leaders endorsed the Basel Committee’s new bank capital and liquidity framework (Basel iii) …

� … and committed to adopt and fully implement the framework within the agreed time frame

� They also endorsed the FSB’s agreed policy framework for reducing the moral hazard posed by Systemically Important Financial Institutions (SIFIs)


� Financial institutions that are clearly systemic in a global context (G-SIFIs) should have …

� … ***higher loss-absorbency capacity than the minimum levels agreed in Basel III***

� These institutions must also be subject to more intensive co-ordinated supervision and resolution planning …

� … to reduce the probability and impact of their failure


� Since the onset of this crisis of 2007…

� … national authorities and international bodies, with the FSB as a central locus of coordination…

� … have advanced a major program of financial reforms, based on clear principles and timetables for implementation …

� … that seek to ensure that a crisis on this scale never happens again


� A key piece of the global reform agenda has been addressed with agreement on strengthened bank capital and liquidity standards by the Basel Committee on Banking Supervision (BCBS)…

� … and ***its governing body***…

� … the Group of Governors and Heads of Supervision (GHOS)

� The new standards will significantly improve the quality and quantity of bank capital and enhance the resilience of the banking system


� Basel III was approved at the GHOS meeting on 26 July 2010…

� … and the calibration of the new minimum requirements and capital buffers were approved at the GHOS meeting on 12 September 2010

� The implementation phase and transitional arrangements were also agreed at the September GHOS meeting


� Legislative and regulatory reforms have progressed in major jurisdictions

� These have also provided for the development of ***system-wide oversight*** arrangements…

� … such as the US Financial Stability Oversight Council (FSOC) …

� … and the EU European Systemic Risk Board (ESRB)


� With regulatory requirements on the banking system tightening …

� … the need intensifies for more systematic attention to activities in the ***shadow*** banking sector

� This sector continues to play an important role in credit intermediation and liquidity transformation …

� … outside the rigorous capital and liquidity regulatory framework that applies to banks

1 final basel iii will be incremental and is expected to reach the final level on 1 january 2019....

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