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March 2011
Table of contents
What is Basel III
23
Implementation considerations
32
40
Why Deloitte?
A leader in bank capital
45
Americas contacts
51
As used in this document, Deloitte means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a
detailed description of the legal structure of Deloitte LLP and its subsidiaries.
Jul09 Dec09
Apr10
Jul10
Sep10
Nov10 Dec10
QIS Results
International
LRM framework
Strengthening the
resilience of the
banking sector
Regulators
consensus July 26,
2010
Capital calibration
September 12, 2010
Leverage ratio
Liquidity risk
2011
2012
2013
Regulatory adjustments to
common equity
2014
2015
2016
2017
2018
2019
20%
40%
60%
80%
100%
100%
0.625%
1.25%
1.875%
2.50%
3.5%
(3.5%)
4.0%
(4.0%)
4.5%
(4.5%)
4.5%
(5.125%)
4.5%
(5.75%)
4.5%
(6.375%)
4.5% (7.0%)
4.5%
(4.5%)
5.5%
(5.5%)
6.0%
(6.0%)
6.0%
(6.625%)
6.0%
(7.25%)
6.0%
(7.875%)
6.0% (8.5%)
8.0%
(8.0%)
8.0%
(8.0%)
8.0%
(8.0%)
8.0%
(8.625%)
8.0%
(9.125%)
8.0%
(9.875%)
8.0% (10.5%)
3%
(Parallel
run)
3%
3%
(Disclosure
starts)
3%
Leverage ratio
Supervisory monitoring
Observation
period
Start
Observation
period
Start
Start
1Amount
Start
Initial implementation date for target minimum capital and leverage ratio
Final level of capital ratios including conservation buffer
3% (reMigration to
calibration)
Pillar 1
Capital
More Capital
Stronger
capital
Buffer for
stress
conditions
Macro
prudential
overlays for
system risk
Counter
cyclical buffer
Increases minimum capital ratios for Tier 1 and Tier 1 common, while Tier 2 remains same.
Losses were borne by the common equity holders, and not other Tier 1 and Tier 2 components.
Basel III is designed to require that common equity is the dominant component of capital, other regulatory
capital instruments are converted into equity, if a bank is deemed non-viable.
Regulators can impose restrictions on banks ability to distribute earnings, i.e., dividends, share
buybacks, when capital levels fall below buffer.
Supervisors may impose time limits on a bank to exit the buffer range.
Additional macro-prudential overlay to address Systemic risk: risk of financial system disruptions
that can impact the broader economy.
A capital overlay of 0 2.5% can be imposed to dampen excessive credit growth.
Buffer would build up during periods of excessive credit growth, and can be released during a down cycle.
Applied to largest financial firms that are interconnected due to common exposures, and pose
disproportionate level of systemic risk.
SIFI surcharge
10
Capital
Capital
12
Capital
Investments in financial
institutions
Mortgage servicing
rights (MSR)
Nonfinancial equity
investments
Insurance subsidiaries
13
Leverage
ratio
=
Gross exposure
14
Credit and
market risk
Higher asset value correlation multiplier for exposure to large, or unregulated, financial
firms.
Credit risk refinements
15
Credit and
market risk
16
Credit and
market risk
The 2005 changes were implemented in Europe as part of Basel II, but not
in the U.S.
U.S. Regulators issued market risk Notice for Proposed Rulemaking in December 2010,
which consolidates the 2005 BCBS rules with the 2009 revisions.
17
Credit and
market risk
Capital
charge
Current formula
Multiplication
factors may be
different
3 mb
m3
VaR
Multiplication
factor mb
Current
Stressed VaR
Multiplication
factor m
Newly
introduced
capital charge
VaR
Multiplication
factor mb
Revised
18
Credit and
market risk
Securitizations
Must perform credit analysis of securitization exposures instead of solely relying on rating agency conclusions.
Banks must have continuous access to up-to-date performance information for all underlying pools of their securitization
exposures, both in banking or trading book.
Very conservative treatment for securitization liquidity facilities.
Eliminates favorable treatment for market disruption liquidity facilities.
Inputs for counterparty credit risk (CCR) capital to be based on stressed inputs, so EPE calculations to include data
reflecting periods of stress.
Improve exposure at default (EAD) calculation to promote more robust collateral management practices.
Counterparty
credit risk
Higher asset value correlation for exposures to large (>$100Bn), or unregulated, financial firms.
Extend margin period of risk for transactions to large netting sets
Includes capital add-on charge for potential mark-to-market losses, i.e., credit valuation adjustments (CVA).
Include an explicit capital-charge under Pillar 1 for specific wrong-way risk.
Increase incentives for firms to use clearinghouse counterparties, which get a nominal RWA.
Other changes cover Pillar II and III and include items such as more rigorous stress testing and validation standards,
more active monitoring of concentration risks, and inclusion of any incremental securitization risks in Pillar II,
increased disclosure requirements related to sponsorship of off balance sheet vehicles, and conduit programs.
19
Liquidity risk
Public disclosure
20
Liquidity risk
Stock of high-quality
liquid assets
LCR defines level of liquidity buffer to be held to cover short-term funding gaps
under severe, but plausible, stressed conditions.
Assets considered for inclusion are high-quality liquid assets with haircuts for
each category.
Net cash outflow is calculated using supervisor-defined haircuts that are applied
to each category of liabilities, contingent liabilities, and receivables.
A categorization scheme is provided
Liabilities (stable deposits, less stable deposits,
unsecured wholesale funding, etc.).
Receivables (retail inflows, wholesale inflows,
repos/reverse repos inflows, etc.).
21
Liquidity risk
Available amount of
stable funding
Required amount of
stable funding
22
Financial services
industry impacts
Key areas of impact
BCBS QIS summary
Basel III international comparisons
Expected industry trends in
response to Basel III
Basel II
impacts
Some potential implications from the evolving bank capital regulatory standards
are shown below:
Return on equity
cost of capital
Simpler capital
structure
TB and BB
securitizations
Wholesale short-term
funding costs
Clearinghouse
settlement volumes
OTC, CDOs,
repos, PB, and
correlation trading
Collateral and
margin
Financial cross
holdings/ownership
Inter-bank
transactions
Large
banking
mergers
Fee-based businesses
Basel III
impacts
Basel III rules applied on a pro-forma basis assuming full implementation based
on December 31, 2009, data.
25
Basel III
impacts
26
Basel III
impacts
Current*
Sample
average (as of
Dec 31, 2009)
Minimum
requirement
Common equity
Tier 1
11.1%
5.7%
7.0%
Tier 1 capital
10.5%
6.3%
8.5%
Total capital
14.0%
8.4%
10.5%
2.8%
3.0%
83%
100%
1.73 tln
Liquidity**-NSFR
93%
100%
2.08 tln
RWA
+23%
Leverage ratio*
Liquidity**-LCR
Key drivers
Goodwill, intangibles, financial cross holdings, and
15% limit on DTA/MSR/Investments
577bln^
8%
7%
6%
5%
4%
3%
2%
1%
0%
Definition of
Capital
27
Estimated
shortfall
(Euros)
Basel III
impacts
Regional banks
Current
Basel impact*
Current
Basel impact*
U.S.
10.3%
7.4%
9.6%
7.8%
Europe
9.2%
7.1%
8.3%
8.0%
Asia
12.5%
10.5%
11.0%
Total
10.0%
7.6%
9.4%
7.9%
Results are directionally consistent with Bank for International Settlements study.
While global institutions have higher capital ratios than regional banks, their
decline in CET1 ratio is much higher than that for regional banks
(240 bps vs. 150 bps).
Source: CLSA (Credit Lyonais Securities Asia) U.S. banks sector outlook, Nov 5, 2010,Basel III International comparisons used with permission
28
Basel III
impacts
Source: CLSA (Credit Lyonais Securities Asia) U.S. banks sector outlook, Nov 5, 2010,Basel III International comparisons used with permission
29
Basel III
impacts
Banks will likely be less inclined to use various forms of off balance sheet
financing and investment vehicles due to implications for capital, leverage, and
liquidity.
It is conceivable that some of these volumes are directed to unregulated segments of
the financial services industry.
With stronger capital and liquidity measures,
large global banks can be expected to have
more stable and predictable earnings
stream, and may be less prone to
boom and bust cycles.
30
Basel III
impacts
31
Implementation
considerations
Program management
Risk management
Corporate treasury
External reporting
Change to
Program
management
Risk management (especially risk functions supporting capital markets and structured finance)
Corporate treasury
External reporting
Institutions may be well served to remember the lessons from Basel II implementation, where costs and complexity
significantly exceeded expectations resulting in huge budget over-runs and above-plan spend.
Our Basel II observations
Program management
Critical to consider establishing a top down, end-to-end view of the program for all
stakeholders (business, risk, treasury, reporting).
Program management
Excessive focus on some narrow areas left large components without focus and
plans till late in the game
Data quality
Traceability of requirements
Risk exposure to general ledger reconciliation
Sustainability model
33
Risk
management
34
Risk
management
35
Corporate
treasury
36
Corporate
treasury
37
External
reporting
38
External
reporting
Existing bank processes relating to interest rate risk management and liquidity
management may be able to support Basel III reporting and disclosure
requirements, with some enhancements.
While the BCBS leverage ratio requirement has some differences to the current
U.S. definition, information on incremental items (such as credit card lines, EPE,
etc.) can be obtained from Basel II sources.
39
Assessment
and analysis
Assessment
and analysis
42
Assessment
and analysis
Detailed pro-forma assessment of capital, liquidity, and leverage ratio impacts from BCBS rules
(December 16, 2010) [Update BCBS QIS from 2009 may be used].
Projections of capital and liquidity measures, along with market-based scenario analysis.
Identification of significant issues and shortfall drivers for Basel III items.
Results analysis, issue identification, and strategic assessment of choices/options.
Catalog and prioritization of actions for the short, medium and long term.
Basel III
business and
capital strategy
Define protocols for interactions with key stakeholders (e.g., board, steering committee, business
executives, internal audit, regulators, etc.).
Establish work threads with clear accountability, and define approach to manage requirements with
coverage across data, process, technology and business.
Develop a high-level program roadmap and develop materials for stakeholder/senior management
education, support, and buy-in.
Program road
map and highlevel design
Data requirements and source map Assessment and analysis of potential sources for broad
sets of data requirements.
Develop top down end -o-end logical design for Basel III liquidity framework solution, and identify
leverage points of integration with Basel II infrastructure.
43
Strategic
implications
Basel III requirements require careful consideration of several factors, and banks may be advised to develop detailed action plans in line with
organizational strategy goals and objectives.
Integration of business strategy with capital plans along with consistent funding approach can be critical as shown below.
Clients may be advised to pay attention to related Dodd-Frank provisions and evolving accounting standards.
Business strategy
Business
strategy
Basel III
Funding
and
liquidity
Capital
Dodd-Frank provisions
Collins amendment
Capital planning and optimization
Accounting considerations
44
Derivatives clearing
Bureau of consumer protection
Volcker rule
Why Deloitte?
A leader in bank capital
Global footprint
End-to-end service capabilities
Marketplace eminence and
thought leadership
Global
footprint
heading
Americas
Asia Pacific
People: 53,000
People: 26,000
Source: Kennedy; Public Sector Consulting Marketplace 2009-2012; BNA Subsidiaries, LLC; used with permission
46
End-to-end
service
capabilities
Risk
management
Treasury and
capital markets
Tax
Regulatory
Corporate
finance
advisory
Strategy &
operations
Accounting
Technology
47
PMO
Implementation
and testing
Marketplace
eminence and
thought leadership
Knowledge Congress Webinar Tougher Laws Woven into Basel, February 18, 2010
Nancy Hunt, Acting Associate Director of the Capital Markets Branch, Policy Section, Division of Supervision and
Consumer Protection, Federal Deposit Insurance Corp (FDIC)
11th Annual Risk Conference New York (February 9, 2010); Keynote panel discussion Global Regulatory Reform
48
Presentation, Basel III Guidance,: Overview and Implications, Alok Sinha, Principal, Deloitte & Touche LLP
Freddie Mac 2010 Executive Forum Future State of Mortgage Industry: Panel Discussion, September 1, 2010
Alok Sinha, Principal, Deloitte & Touche LLP ( Basel III Implications for Mortgage Industry)
Mark Willis, Furman Center for Real Estate & Urban Policy
CLSA Luncheon Speaker Series Topic, New York, (October 13, 2010), Capital at U.S. Banks How high is
enough?
Marketplace
eminence and
thought leadership
Knowledge Congress Live Webcast Basel 3: Important Updates, January 25, 2011
49
Nancy Hunt, Acting Associate Director of the Capital Markets Branch, Policy Section, Division of Supervision and
Consumer Protection, Federal Deposit Insurance Corp (FDIC)
Bobby Bean, Chief, Capital Markets Policy Section, Federal Deposit Insurance Corp (FDIC)
Michael Stevens, SVP & Director of Regulatory Affairs, Conference of State Bank Supervisors (CSBS)
In summary
Basel III rules have been recently finalized by the BCBS Supervision, and
implementation timeframe extends through 2019.
Bank capital landscape will evolve with the largest, global banks holding more capital,
stronger capital instruments, and capital buffers to protect from systemic risk.
Basel III introduces a global framework for liquidity for the first time and a leverage ratio
measure.
Banks will likely need to have much closer alignment between business strategy,
capital, and liquidity planning and funding decisions.
Enhancements will be necessary for infrastructure supporting corporate treasury,
risk management, capital markets, and external reporting functions.
U.S. rule-making process for Basel III should incorporate related Dodd-Frank
provisions.
Costs of implementation may be be significant, but likely not as high as Basel II
for well structured and executed programs.
50
Americas contacts
Alok Sinha
Principal, Deloitte & Touche LLP
Leader Banking & Securities Sector
San Francisco, CA
Phone: +1 415 783 5203
E-mail: asinha@deloitte.com
Andrea di Giovanni
New York, NY
New York, NY
E-mail: andigiovanni@deloitte.com
E-mail: lbalachander@deloitte.com
Carrie Cheadle
Director, Deloitte & Touche LLP
Governance, Regulatory & Risk Services
Chicago, IL
Phone: +1 312 486 4095
E-mail: ccheadle@deloitte.com
51
Robert Maxant
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