Tag: Basel III

The Capital Schmozzle

“schmozzle (plural schmozzles). (informal) A disorganized mess; (informal) A melee”.

When the FSI inquiry was handed down last year, with recommendations mostly later accepted by Government, a cornerstone was to avoid the risk of a failing bank needing to be bailed out by tax payers, as happened in a number of countries during the GFC.

A year later, we can look back to see significant changes to the current capital rules for “Advanced” banks (those that use their own approved internal models) and significant capital raisings of more than $30bn by the industry. This has translated into higher interest rates on mortgages, especially investment property loans.

Currently underway are discussions about the next iteration of the capital rules, with the expectations that “Advanced” banks’ rules will be tightened, and the rules for other banks will get more complex, with capital ratios being determined for example by the loan-to-value (LVR) of loans, as well as differentiation between loans serviced by income, and those materially serviced by rental income flows.

APRA last week said they would look to encourage more banks to move towards the “Advanced” methods, with a series of potential interim steps, at the time when the rules are under review. They also said that the current counter cyclical buffer would be set to zero.

Five Australian Banks have “Advanced” capital management, and a number of other banks are already on the journey to “Advanced” capital methods; but it is a complex and twisted path, and the destination is not yet clear. Better data, models and systems are required to meet the necessary hurdles.

What is likely though is that the journey to hold more capital is far from over, whether “Advanced” or “Standard”, and that the light between the two systems is closing, as the “Standard” system gets more complex, and the “Advanced” ratios are lifted higher.

We think that there will be only limited upside to be gained from moving to “Advanced”, as the gap closes, and complexity increases in the standard approach. We also think significant further capital will be required – some are suggesting an additional $30-40bn in the next couple of years, enough to force mortgage prices across the board significantly higher again. As these adjustments are essentially across the board, to a greater or lesser extent, we doubt that smaller players will actually get much differential benefit. Indeed, if investment mortgages require higher capital still. (that depends on the definition of what is “material” – yet to be made clear; and the LVR), some banks could need much more capital than is currently assumed.

It is also worth noting that spreads on overseas bank capital raisings are rising, indeed, spreads are wider now across the market, as we noted last week.

So what is the potential impact of lifting capital ratios? We already mentioned the uplift in mortgage rates, as banks seek to cover the additional costs involved. Households should expect to pay more. Shareholders may also have to take a haircut in future returns, as the economics of banks change. The super profits banks have enjoyed may be trimmed a little.

But a recent paper from the Bank of England has also highlighted that lifting capital may not reduce systemic risks much. The study, a working paper “Capital requirements, risk shifting and the mortgage market” looked at what happened when capital ratios were lifted. They found that whilst the average value of a loan made fell a little, there was no reduction in higher risk lending, despite the requirements for higher capital, because the lender was looking to protect overall margins and still chose to take more risks. If this is true, higher capital requirements does not necessarily reduced systemic risks. Banks may still need Government support in a crisis.

But wait, was that not the whole reason for lifting capital ratios in the first place? Looks like a schmozzle to me!

 

SME Deposits and Basel

APRA has today written to ADIs about best practices in assessing SME deposits accounts. Essentially, in a recent review of 14 institutions, they found significant inconsistencies, based on how individual ADI’s were choosing to flag balances as a “stable deposit”, whether the customer was in a “stable relationship” with the ADI, and which types of account – especially internet based account should be considered “less stable deposits”. In addition “heavily rate driven deposits” need to be correctly classified.

This complexity is a result of the Basel Committee who  introduced a globally harmonised liquidity framework by developing two minimum standards with the objective of promoting short-term and long-term resilience. The Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) were developed to fulfil these objectives and to also enable regulators and investors to make meaningful comparisons between banks. APRA’s expectation is that ADIs with similar business models, balance sheets and customer groups would generate similar cash outflows under the LCR.

The net effect may well be to change the relative attractiveness of rates offered by banks, especially for call deposits offered on line, as they will cost the banks more. On the other hand, deposits, held as part of a longer relationship, with notice periods attached could become more attractive.

Finally, APRA noted that few ADIs benchmarked their offered rates against rates offered by peer competitors for the purposes of this classification and suggests that such benchmarking would constitute good practice.

DFA looked at SME savings balances in our recent report. SME’s have deposits in total worth more than $107bn. The distribution of deposits varies with size. Nearly half is held by the largest firms, and holdings decrease as we look across the smaller-sized firms. The average savings balance varies also between firms which are credit avoiders, and those who are not.

 

 

APRA Declares Countercyclical Buffer Rate Is Zero

APRA has today announced that the countercyclical capital buffer applying to the Australian exposures of authorised deposit-taking institutions (ADIs) from 1 January 2016 will be set at zero per cent.

The countercyclical buffer was included within the ADI capital framework as part of the Basel III reforms that were introduced by APRA in 2013. Although the minimum Basel III requirements were implemented from 1 January 2013, the buffer component of the framework will take effect from 1 January 2016.

The capital framework requires ADIs to hold a buffer of Common Equity Tier 1 (CET1) capital, over and above each ADI’s minimum requirement, comprised of three components:

  • a capital conservation buffer, applicable at all times and equal to 2.5 per cent of risk-weighted assets (unless determined otherwise by APRA);
  • an additional capital buffer applicable to any ADI designated by APRA as a domestic systemically important bank (D-SIB), currently set to 1.0 per cent of risk-weighted assets; and
  • a countercyclical buffer which may vary over time in response to market conditions. This buffer may range between zero and 2.5 per cent of risk-weighted assets.

The role of the countercyclical buffer within the Basel III reforms is to ensure that banking sector capital requirements take account of the macro-financial environment in which ADIs operate. It can be deployed by national jurisdictions when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses. The buffer can be reduced or removed when system-wide risk crystallises or dissipates. For an ADI with international exposures, the countercyclical buffer applicable to its business will be the weighted average of the countercyclical buffers applied by the jurisdictions in which it operates.

APRA Chairman Wayne Byres noted the decision to set the countercyclical buffer for Australian exposures at zero per cent of risk-weighted assets was made following consultation with the Council of Financial Regulators.

‘Based on APRA’s assessment of current levels of systemic risk, including credit growth, asset prices and lending standards, APRA did not see a case for imposing a countercyclical buffer for Australian exposures at this point in time,’ Mr Byres said. ‘APRA will continue to monitor developments in a range of financial risk indicators, and will revise the determination if conditions warrant it in future.’

The consequence of this decision is that ADIs will generally be required, from 1 January 2016, to maintain a minimum CET1 ratio of 4.5 per cent, plus a 2.5 per cent capital conservation buffer (3.5 per cent for D-SIBs) and a buffer for international exposures in jurisdictions that have set a non-zero countercyclical capital buffer rate. For some ADIs, additional capital requirements are also applied via Pillar 2 (i.e. in response to institution-specific risks and issues). All Australian ADIs currently report CET1 ratios above these requirements: the aggregate CET1 ratio for the banking system as at end September 2015 was 10.1 per cent.

Where an individual ADI does not hold sufficient capital to meet its aggregate buffer requirement, the ADI would be subject to constraints on its ability to make capital and bonus distributions. The distribution constraints imposed on an ADI when its capital levels fall into the buffer range increase as the ADI’s capital level approaches the minimum requirements. This encourages ADIs to maintain a sound capital buffer and provides a mechanism to ensure ADIs conserve capital, and have a strong incentive to restore their capital strength, after a period of loss.

In addition to today’s announcement on the size of the buffer, APRA has also released today:

  • an information paper, The countercyclical capital buffer in Australia, setting out APRA’s approach to assessing the appropriate settings for the countercyclical buffer;
  • a revised and final version of Prudential Standard APS 110 Capital Adequacy (APS 110) that clarifies operational aspects of the countercyclical capital buffer, following consultation earlier this year; and
  • a draft version of Prudential Practice Guide APG 110 Capital Buffers (APG 110) for consultation. The draft APG110 provides additional guidance on the operation of the capital buffers, including some worked examples.

APRA has also informed the Basel Committee on Banking Supervision of the Australian countercyclical capital buffer rate so it can be added to the list of jurisdictions’ buffers that are maintained on the Bank for International Settlements’ website.

The countercyclical buffer information paper, the draft prudential practice guide on capital buffers, and the revised prudential standard APS 110 can be viewed on APRA’s website.

APRA On Securitisation

APRA has released a consultation paper on proposed revisions to the securitisation regime in Australia, including the explicit recognition of funding-only securitisation. The likely net effect will be to encourage greater use of this vehicle by banks as part of their capital management programmes.  The proposals also reflect the Basel III changes. APRA invites written submissions on the proposals by 1 March 2016.

The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper on its proposals to revise the prudential framework for securitisation for authorised deposit-taking institutions (ADIs). APRA is also releasing a draft Prudential Standard APS 120 Securitisation (APS 120).

APRA’s objective in revising the prudential requirements for securitisation is to establish a simplified framework, taking into account global reform initiatives and the lessons learned from the global financial crisis. One of these lessons was that securitisation structures had become excessively complex and opaque, and that prudential regulation of securitisation had become similarly complex.

APRA first consulted on initiatives to simplify its prudential framework for securitisation in April 2014. Following consideration of the issues raised in submissions, APRA has amended its proposals in some areas. APRA’s amended proposals include:

  • dispensing with a credit risk retention or ‘skin-in-the-game’ requirement;
  • allowing for more flexibility in funding-only securitisation; and
  • removing explicit references to warehouse arrangements in the prudential framework.

These amended proposals are expected to assist ADIs to further strengthen their funding profile and provide clarity for ADIs that undertake securitisation for capital benefits.

In December 2014, the Basel Committee on Banking Supervision (Basel Committee) released its updated securitisation framework (Basel III securitisation framework). The changes aim to enhance the Basel Committee’s existing securitisation framework and to strengthen regulatory capital standards.

APRA’s latest proposals incorporate the new Basel III securitisation framework, with appropriate adjustments to reflect the Australian context and APRA’s objectives, and will be applicable equally to all ADIs. Subject to consultation on this discussion paper and draft prudential standard, APRA proposes to implement these changes in line with the Basel Committee’s effective date of 1 January 2018.

In proposing revisions to its securitisation framework, APRA has sought to find an appropriate balance between the objectives of financial safety and efficiency, competition, contestability and competitive neutrality. APRA considers its proposals will deliver improved prudential outcomes and provide efficiency benefits to ADIs, particularly through the explicit recognition of funding-only securitisation within the prudential framework.

APRA invites written submissions on the proposals in this discussion paper by 1 March 2016. APRA also intends to release a draft prudential practice guide (PPG) and reporting standards and reporting forms, for consultation in the first half of 2016. APRA expects that the final prudential standard, PPG, reporting standards and reporting forms, will be released in the second half of 2016.

Background

Q: What is securitisation and is it important in Australia?

A: Securitisation is a form of funding where a ‘pool’ of assets, often residential housing loans, is separated from the originating ADI into a special purpose vehicle (‘SPV’). Cash flows from the pool of assets are used to make payments to investors in debt securities issued by the SPV. These payments are effectively secured by the pool of assets, hence the name “securitisation”.

The debt securities issued to investors will typically have a different order of priority claim over the assets in the pool. The senior class will have first claim, while more junior (or subordinated) class(es) will be utilised to absorb losses in the event of non-performance by some or all of the assets. The senior class of debt securities is therefore normally considered to be of lower risk than that of the underlying pool of assets, and this allows ADIs to source funding on attractive terms.

Sometimes an ADI will arrange for only the senior class to be sold to investors. Alternatively, where an ADI arranges to sell the junior class(es) to investors, they have transferred substantially all the credit risk of the pool to external investors. In these circumstances an ADI may also obtain regulatory capital benefits as APRA will, subject to meeting the specific requirements of APS 120, no longer require the ADI to hold capital against the credit risk of the pool.

Having a robust securitisation market therefore allows ADIs to strengthen their funding profile, and can offer capital management benefits as well. For smaller ADIs that may not have efficient access to unsecured wholesale debt markets, securitisation can be a valuable source of funding and, potentially, capital efficiency. As such, securitisation can support competition in the banking industry.

Q: How has APRA simplified the prudential framework?

A: APRA’s main proposals relating to the simplification of the prudential framework for securitisation are:

  • the explicit recognition of funding-only securitisation. A simple structure facilitates a strong funding-only regime, where the originating ADI retains the junior securities and obtains funding from third parties through the sale of the senior securities. The explicit recognition of funding-only securitisation will assist ADIs to further strengthen their funding profiles;
  • well defined thresholds for capital relief securitisation, which better articulate the requirements to be met for regulatory capital relief; and
  • streamlining the approaches to determining regulatory capital requirements for ADIs’ securitisation exposures, and harmonising them for ADIs using standardised or internally-modelled risk weights.

Q: How will APRA’s proposals assist in facilitating a larger funding-only securitisation market?

A: The explicit recognition of funding-only securitisation, including the flexibility for bullet maturity structures that include a date-based call option, are likely to increase the potential size of the term securitisation market by attracting a broader investor base. These structures have not been permitted within the prudential framework previously.

Q: Why is APRA proposing not to include a ‘skin-in-the-game’ requirement in the prudential framework?

A: Skin-in the-game requirements are intended to address the misalignment of incentives whereby lenders may lack motivation to originate higher quality loans, since they may not have exposure to the loans once they are in a securitisation. A variety of skin-in-the-game requirements have emerged internationally and introducing an additional Australian requirement would run contrary to APRA’s objective of creating a simplified framework. In addition, Australian ADIs already have linkages to their securitisation — such as servicing of the underlying loans and entitlement to residual income — that reinforce incentives to maintain the quality of lending standards.

Q: How is APRA proposing to treat warehouse arrangements?

A: Warehouse arrangements allow ADIs to aggregate assets into pools before securities are issued to third parties. This can enable some ADIs to improve access to wholesale funding markets and raise funds at more competitive rates. The current regulatory requirements for warehouse arrangements have, however, created a gap in the prudential framework, such that less capital is held in the banking system relative to the risk retained in the system.

APRA is seeking submissions on viable approaches that maintain the benefits of warehouse arrangements but also address the gap in the prudential framework. In the absence of any such submissions APRA has indicated it will take a principles-based, rather than rules-based approach and will remove explicit reference to warehouse arrangements in APS 120. In these circumstances warehouse arrangements can still be entered into, but would need to meet the relevant requirements in APS 120 to be considered a securitisation.

New Bank Operational Risk Method May Boost Comparability

Operational risks will rise as banks increasingly rely on technology, heightening exposure to systems failure and cyber attacks. Banks also face growing compliance and regulatory risks and the overhang of unresolved litigation is still considerable in some markets.

According to Fitch Ratings, the Basel Committee’s proposed overhaul of the way banks calculate how much capital they need to cover operational risk should result in simpler, more standardised charges, allowing for greater comparability.

Banks have been calculating operational risk capital requirements for over 10 years since the implementation of Basel II, but in many cases capital set aside proved inadequate to cover substantial losses arising from misconduct fines, controls failure or fraud, for example.

The Basel Committee’s update on post-crisis reforms, presented to the G20 leaders at the recent Antalya summit, confirms that it is considering eliminating the use of internal models to calculate operational risk capital charges. Basel II introduced several methods for calculating operational risks to reflect particular risk profiles across banks, variations in operating environment and management practices. But we believe flexibility has confused market participants and contributed to a lack of transparency.

The Basel Committee is considering replacing all current approaches with a single new standardised measurement approach (SMA), and will open a one-year consultation period by end-2015. SMA will borrow from the current advanced measurement approach (AMA) by incorporating a requirement for banks to continue to collect operational risk loss data, but internal modelling will not be used to determine appropriate capital levels. Comparing operational risk capital charges currently set aside by banks using AMA has proved difficult, largely because internal models are highly complex, methodologies vary from bank to bank and calculation outputs lack transparency.

Some Basel II methods for calculating operational risk charges are predetermined by regulators, such as the basic indicator and standardised approaches, both of which link capital charges to gross income (the standardised approach allows banks to vary multipliers across business lines and units). But operational risk capital charges can also be calculated using an internal measurement approach where banks draw on data from their internal operational loss experiences. The Basel Committee, which is already driving a trend to reduce reliance on complex models in other areas, says it will consult on removing the AMA. The AMA gave banks the greatest amount of freedom to set operational risk charges, as flexibility on the modelling approach meant risk charges would differ even when applied to the same base data.

Proposed Basel Market Risk Framework Will Demand More Capital

Trading banks will find their capital requirements rising by more than 2%, according to the Basel Committee on Banking Supervision who has today published the results of its interim impact analysis of its fundamental review of the trading book. The report assesses the impact of proposed revisions to the market risk framework set out in two consultative documents published in October 2013 and December 2014. Further revisions to the market risk rules have since been made, and the Committee expects to finalise the standard around year-end.

The analysis was based on a sample of 44 banks (including 2 from Australia) that provided usable data for the study and assumed that the proposed market risk framework was fully in force as of 31 December 2014. It shows that the change in market risk capital charges would produce a 4.7% increase in the overall Basel III minimum capital requirement. When the bank with the largest value of market risk-weighted assets is excluded from the sample, the change in total market risk capital charges leads to a 2.3% increase in overall Basel III minimum regulatory capital.

Compared with the current market risk framework, the proposed standard would result in a weighted average increase of 74% in aggregate market risk capital. When measured as a simple average, the increase in the total market risk capital requirement is 41%. For the median bank in the same sample, the capital increase is 18%.

Compared with the current internally modelled approaches for market risk, the capital requirement under the proposed internally modelled approaches would result in an increase of 54%. For the median bank, the capital requirement under the proposed internally modelled approaches is 13% higher.

Compared with the current standardised approach for market risk, the capital requirement under the proposed standardised approach is 128% higher. For the median bank, the capital requirement under the proposed standardised approach is 51% higher.

New Total Loss Absorbing Capacity Standard for Global Banks Is Credit Positive – Moody’s

In Moody’s latest Credit Outlook, they discuss the impact of the new Total Loss Absorbing Capacity (TLAC) Standard for Global Banks.

Last Monday, the Financial Stability Board (FSB) published its standard for total loss absorbing capacity (TLAC), which sets forth the amount, composition and location of capital and debt required to meet bank recapitalization needs in a resolution. The standard prompts global systemically important banks (G-SIBs) to increase the resources available to absorb losses beyond the regulatory capital requirements and buffers embedded in the Basel III framework, a credit positive.

The TLAC framework aims to ensure that banks maintain sufficient loss-absorbing instruments (both capital and eligible long-term debt) to absorb losses and recapitalize a bank in a resolution without the use of public funds and to reduce the chance of systemic disruption. The TLAC standard applies to the 30 institutions that the FSB designated as G-SIBs, although national regulators might also require non-G-SIBs to conform with the global standard. Firms will be required to meet TLAC standards alongside regulatory capital requirements and buffers set out in the Basel III framework.

The FSB set an initial level of TLAC at 16% of risk-weighted assets (RWAs) and 6% of the leverage exposure (the denominator of the Basel III leverage ratio) starting 1 January 2019. This will rise to 18% of RWAs and 6.75% of leverage exposure starting 1 January 2022. The 1 January 2019 start date should provide banks with sufficient time to reach the required levels.

Chinese G-SIBs have been exempted from the initial TLAC deadlines given the still-low levels of demand among Chinese non-bank investors for fixed-income assets, which constrains the extent to which banks can issue substantial volumes of capital and debt instruments. Nevertheless, Chinese G-SIBs will be required to meet the first benchmark – 16% of RWAs and 6% of leverage exposure – by 1 January 2025, and the 18% of RWAs and 6.75% of leverage exposure requirement by 1 January 2028.

TLAC can comprise a range of instruments, from equity to long-term senior debt. Senior holding company debt should typically be eligible as TLAC owing to its structural subordination. The guideline contemplates the eligibility of senior unsecured bank debt normally ranking pari passu with excluded liabilities such as derivative liabilities and short-term deposits by allowing senior bank debt of up to 2.5% of RWAs in 2019 and 3.5% in 2022 issued by institutions subject to resolution regimes that provide for partial or complete exclusion of the pari passu liabilities from bail-in. However, it remains unclear how the preconditions for the eligibility of senior bank debt would be fulfilled. In particular, the inclusion of such debt must not give rise to material risk of legal challenge under the no creditor worse off principle.

The Basel Committee on Banking Supervision estimated that for a sample of 29 G-SIBs based on last year’s G-SIB list, the average eligible external TLAC ratio at the end of 2014 was 13.1% of RWAs and 7.2% of the leverage exposure. This estimate assumed no bank-issued senior debt would be eligible as TLAC, and revealed that only six banks met the 16% TLAC requirement. The aggregate shortfall to the 2022 TLAC requirements totals €1.1 trillion for all 30 G-SIBs, or €755 billion when excluding the Chinese G-SIBs. For banks subject to operational resolution regimes, which include all US and European G-SIBs, the introduction of TLAC requirements will benefit depositors and other senior unsecured creditors because of a larger cushion available to absorb losses at failure from the issuance of more subordinated securities.

Additionally, other things being equal, a larger layer of any given class of debt will benefit the ratings of that class, given that potential losses would be spread over a larger pool of investors. This could be somewhat offset by an increased reliance on wholesale funding, and a weakening of profitability should funding costs increase. However, we do not expect a material effect on those metrics.

US Banking Supervision, More To Do

Fed Chair Janet L. Yellen addressed the Committee on Financial Services, U.S. House of Representatives on Banking Sector Supervision. She said that before the crisis, their primary goal was to ensure the safety and soundness of individual financial institutions. A key shortcoming of that approach was that they did not focus sufficiently on shared vulnerabilities across firms or the systemic consequences of the distress or failure of the largest, most complex firms. Although changes have been made, substantial compliance and risk-management issues remain.

There has since been a significant shift in focus has led to a comprehensive change in the regulation and supervision of large financial institutions. These reforms are designed to reduce the probability that large financial institutions will fail by requiring those institutions to make themselves more resilient to stress. However, recognising that the possibility of a large financial institution’s failing cannot be eliminated, a second aim of the post-crisis reforms has been to limit the systemic damage that would result if a large financial institution does fail. This effort has involved taking steps to help ensure that authorities would have the ability to resolve a failed firm in an orderly manner while its critical operations continue to function.

They created the Large Institution Supervision Coordinating Committee (LISCC). The LISCC is charged with the supervision of the firms that pose elevated risk to U.S. financial stability. Those firms include the eight U.S. banking organizations that have been identified as GSIBs, four foreign banking organizations with large and complex U.S. operations, and the four nonbank financial institutions that have been designated as systemically important by the Financial Stability Oversight Council (FSOC).

With regard to capital adequacy, the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) is designed to ensure that large U.S. bank holding companies, including the LISCC firms, have rigorous, forward-looking capital planning processes and have sufficient levels of capital to operate through times of stress, as defined by the Federal Reserve’s supervisory stress scenario. The program enables regulators to make a quantitative and qualitative assessment of the resilience and capital planning abilities of the largest banking firms on an annual basis and to limit capital distributions for firms that exhibit weaknesses.

The financial condition of the firms in the LISCC portfolio has strengthened considerably since the crisis. Common equity capital at the eight U.S. GSIBs alone has more than doubled since 2008, representing an increase of almost $500 billion. Moreover, these firms generally have much more stable funding positions. The amount of high-quality liquid assets held by the eight U.S. GSIBs has increased by roughly two-thirds since 2012, and their reliance on short-term wholesale funding has dropped considerably. The new regulatory and supervisory approaches are aimed at helping ensure these firms remain strong. Requiring these firms to plan for an orderly resolution has forced them to think more carefully about the sustainability of their business models and corporate structures.

Nevertheless, while they have seen some evidence of improved risk management, internal controls, and governance at the LISCC firms, they continue to have substantial compliance and risk-management issues. Compliance breakdowns in recent years have undermined confidence in the LISCC firms’ risk management and controls and could have implications for financial stability, given the firms’ size, complexity, and interconnectedness. The LISCC firms must address these issues directly and comprehensively.

Their examinations have found large and regional banks to be well capitalized. Both large and regional banking organizations experienced dramatic improvements in profitability since the financial crisis, although these banks have also faced challenges in recent years due to weak growth in interest and noninterest income. Both large and regional institutions have seen robust growth in commercial and industrial lending.

Finally, community banks are significantly healthier. More than 95 percent are now profitable, and capital lost during the crisis has been largely replenished. Loan growth is picking up, and problem loans are now at levels last seen early in the financial crisis.

FSB Updates G-SIB List

The FSB and the Basel Committee on Banking Supervision (BCBS) have updated the list of global systemically important banks (G-SIBs), using end-2014 data and the updated assessment methodology published by the BCBS in July 2013.  One bank has been added to and one bank has been removed from the list of G-SIBs that were identified in 2014, and therefore the overall number of G-SIBs remains 30. None are Australian.

The changes in the institutions included in the list and in their allocation across buckets reflect the combined effects of data quality improvements, changes in underlying activity, and the use of supervisory judgement.

In November 2011 the Financial Stability Board published an integrated set of policy measures to address the systemic and moral hazard risks associated with systemically important financial institutions (SIFIs).  In that publication, the FSB identified as global SIFIs (G-SIFIs) an initial group of G-SIBs, using a methodology developed by the BCBS. The November 2011 report noted that the group of G-SIBs would be updated annually based on new data and published by the FSB each November.

Since the November 2012 update, the G-SIBs have been allocated to buckets corresponding to the higher loss absorbency requirements that they would be required to hold. The higher loss absorbency requirements begin to be phased in from 1 January 2016 for G-SIBs that were identified in November 2014 (with full implementation by 1 January 2019). The higher loss absorbency requirements for the G-SIBs identified in the annual update each November will apply to them as from January fourteen months later. The assignment of the G-SIBs to the buckets in the updated list published today determines the higher loss absorbency requirement that will apply to each G-SIB from 1 January 2017.

G-SIBs in the updated list will be required to meet a new standard on Total Loss Absorbing Capacity (TLAC) alongside regulatory capital requirements set out in the Basel III framework.4 The new TLAC standard will be phased-in as from 1 January 2019.

G-SIBs are also subject to: Requirements for group-wide resolution planning and regular resolvability assessments. In addition, the resolvability of each G-SIB is also reviewed in a high-level FSB Resolvability Assessment Process (RAP) by senior policy-makers within the firms’ Crisis Management Groups. Higher supervisory expectations for risk management functions, risk data aggregation capabilities, risk governance and internal controls.

Since November 2013 the BCBS has published the denominators used to calculate banks’ scores, and the thresholds used to allocate the banks to buckets.6 In November 2014 the BCBS published a technical summary of the methodology, as well as the links to the GSIBs’ public disclosures. Starting this year, the BCBS also publishes and provides the links to the public disclosures of the full sample of banks assessed, as determined by the sample criteria set out in the BCBS G-SIB framework.

The list of G-SIBs will be next updated in November 2016.

HSBC
JP Morgan Chase
Barclays
BNP Paribas
Citigroup
Deutsche Bank
Bank of America
Credit Suisse
Goldman Sachs
Mitsubishi UFJ FG
Morgan Stanley
Agricultural Bank of China
Bank of China
Bank of New York Mellon
China Construction Bank
Groupe BPCE
Groupe Crédit Agricole
Industrial and Commercial Bank of China Limited
ING Bank
Mizuho FG
Nordea
Royal Bank of Scotland
Santander
Société Générale
Standard Chartered
State Street
Sumitomo Mitsui FG
UBS
Unicredit Group
Wells Fargo

Basel III Implementation In Australia: Slow But Sure?

A progress report (the ninth) on adoption of the Basel regulatory framework was issued today by BIS.  This report sets out the adoption status of Basel III regulations for each Basel Committee on Banking Supervision (BCBS) member jurisdiction as of end-September 2015. It updates the Committee’s previous progress reports, which have been published on a semiannual basis since October 2011.

Regarding the consistency of regulatory implementation, the Committee has published its assessment reports on 22 members – Australia, Brazil, Canada, China, nine members of the European Union, Hong Kong SAR, India, Japan, Saudi Arabia, Mexico, Singapore, South Africa, Switzerland and the United States – regarding their implementation of Basel III risk-based capital regulations, which are available on the Committee’s website. This includes all members that are home jurisdictions of global systemically important banks (G-SIBs). The Committee has also published five assessment reports (Hong Kong SAR, India, Saudi Arabia, Mexico and South Africa) on the domestic adoption of the Basel LCR standards. The assessments of Russia, Turkey, South Korea and Indonesia are under way, including consistency of implementation of both risk-based capital and LCR standards. Further, preparatory work for the assessment of G-SIB standards has already started in mid-2015 and its assessment work will start later this year. By September 2016, the Committee aims to have assessed the consistency of risk-based capital standards of all 27 member jurisdictions and the consistency of G-SIB standards of all five member jurisdictions that are home jurisdictions of G-SIBs.

The Basel III framework builds on and enhances the regulatory framework set out under Basel II and Basel 2.5. The structure of the attached table has been revamped (effective from October 2015) to monitor the adoption progress of all Basel III standards, which will come into effect by 2019. The monitoring table no longer includes the reporting columns for Basel II and 2.5, as almost all BCBS member jurisdictions have completed their regulatory adoption. The attached table therefore reviews members’ regulatory adoption of the following standards:

  • Basel III Capital: In December 2010, the Committee released Basel III, which set higher levels for capital requirements and introduced a new global liquidity framework. Committee members agreed to implement Basel III from 1 January 2013, subject to transitional and phase-in arrangements.
  1. Capital conservation buffer: The capital conservation buffer will be phased in between 1 January 2016 and year-end 2018, becoming fully effective on 1 January 2019.
  2. Countercyclical buffer: The countercyclical buffer will be phased in parallel to the capital conservation buffer between 1 January 2016 and year-end 2018, becoming fully effective on 1 January 2019.
  3. Capital requirements for equity investment in funds: In December 2013, the Committee issued the final standard for the treatment of banks’ investments in the equity of funds that are held in the banking book, which will take effect from 1 January 2017.
  4. Standardised approach for measuring counterparty credit risk exposures (SA-CCR): In March 2014, the Committee issued the final standard on SA-CCR, which will take effect from 1 January 2017. It will replace both the Current Exposure Method (CEM) and the Standardised Method (SM) in the capital adequacy framework, while the IMM (Internal Model Method) shortcut method will be eliminated from the framework.
  5. Securitisation framework: The Committee issued revisions to the securitisation framework in December 2014 to strengthen the capital standards for securitisation exposures held in the banking book, which will come into effect in January 2018.
  6. Capital requirements for bank exposures to central counterparties: In April 2014, the Committee issued the final standard for the capital treatment of bank exposures to central counterparties, which will come into effect on 1 January 2017.
  • Basel III leverage ratio: In January 2014, the Basel Committee issued the Basel III leverage ratio framework and disclosure requirements. Implementation of the leverage ratio requirements began with bank-level reporting to national supervisors until 1 January 2015, while public disclosure started on 1 January 2015. The Committee will carefully monitor the impact of these disclosure requirements. Any final adjustments to the definition and calibration of the leverage ratio will be made by 2017, with a view to migrating to a Pillar 1 (minimum capital requirements) treatment on 1 January 2018 based on appropriate review and calibration.
  • Basel III liquidity coverage ratio (LCR): In January 2013, the Basel Committee issued the revised LCR. It came into effect on 1 January 2015 and is subject to a transitional arrangement before reaching full implementation on 1 January 2019.
  • Basel III net stable funding ratio (NSFR): In October 2014, the Basel Committee issued the final standard for the NSFR. In line with the timeline specified in the 2010 publication of the liquidity risk framework, the NSFR will become a minimum standard by 1 January 2018.
  • G-SIB framework: In July 2013, the Committee published an updated framework for the assessment methodology and higher loss absorbency requirements for G-SIBs. The requirements will be introduced on 1 January 2016 and become fully effective on 1 January 2019. To enable their timely implementation, national jurisdictions agreed to implement by 1 January 2014 the official regulations/legislation that establish the reporting and disclosure requirements.
  • D-SIB framework: In October 2012, the Committee issued a set of principles on the assessment methodology and the higher loss absorbency requirement for domestic systemically important banks (D-SIBs). Given that the D-SIB framework complements the G-SIB framework, the Committee believes it would be appropriate if banks identified as D-SIBs by their national authorities were required to comply with the principles in line with the phase-in arrangements for the G-SIB framework, ie from January 2016.
  • Pillar 3 disclosure requirements: In January 2015, the Basel Committee issued the final standard for revised Pillar 3 disclosure requirements, which will take effect from end-2016 (ie banks will be required to publish their first Pillar 3 report under the revised framework concurrently with their year-end 2016 financial report). The standard supersedes the existing Pillar 3 disclosure requirements first issued as part of the Basel II framework in 2004 and the Basel 2.5 revisions and enhancements introduced in 2009.
  • Large exposures framework: In April 2014, the Committee issued the final standard that sets out a supervisory framework for measuring and controlling large exposures, which will take effect from 1 January 2019.

They published an assessment of Australia’s progress:

Oz-Status-Key OZ-Status-9Still a long way to go; highly complex, and this is before Basel IV arrives. Is more complexity better?