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Basel ("BIS ratio or Basel I) (Basel II (expand in (number of risk…

- - - - non cumulative preferred stocks and other hybrid equity instruments
      - surplus plus retained earnings
      - minority interst in consolidated subsidiaries
      - capital reserves less intangibles
      - tangible equity including common stock
    - - minority interest in consolidated subsidiaries
      - loan loss reserves
      - subordinated capital notes and debentures less than 5 years to maturity
  - - - swaps
      - FX agreements
      - futures
      - letters of credit
  - - - 2 new objectives added in
        
        provide banks with impetus and incentive for enhanced risk measurement and management
        
        promote market discipline by the way of improved disclosure
      - key areas: identification, quantification and management of risk, Basel II asims to relate cap requirement not only to the amount of risk that banks undertake, but how well they manage that risk
    - - number of risk categories and use external credit ratings
      - use own credit risk models: banks can choose their own approach
      - internal management procedure subject to supervisory review
      - increased disclosure
    - - Pillar 2
        
        deals with other risks not covered under pillar 1, requires banks to hold capital to cover these risks and requires supervisors to review banks' capital planning
      - Pillar 3
        
        requires a bank to enhance its public disclosures on its risk profile, capital adequacy and key financial info
      - Pillar 1
        
        sets out minimum requirement for a bank's credit, market and operational risks
    - - comprehensive process with industry resulted in significant changes and delays in implementation
      - significant divergence of opinion between US and Europe
        
        US the only big developed financial market to have delayed implementation at biggest banks until 2009
        
        EU clear implementation timetable: 07' to 08'
        
        Most asian countries implemented between 07 and 10
      - a more complex set of regulations
      - US had only partially implemented as crisis unfolded, so transition is incomplete
  - - - min at at 3%
      - gross asset value includes
        
        Repos
        
        values of
        
        trade finance commitments
        
        SBLCs and guarantees
        
        lending commitments
        
        All assets held including cash and liquid assets
        
        even if
        
        guarantee or collateral available
        
        netting available
      - capital base will most likely be tier 1 only
    - - stricter eligibility rules deductions from capital
      - increased risk weighting for many assets but particularly securitisation
      - targets increased overall but specifically minimum core equity ,ore than doubled, additional capital for SIFIs Counter cyclical buffer
    - - liquidity coverage ratio
        
        would require banks to hold a sufficient amount of high quality liquid assets to survive a severe stress for a period of 30 days, outflows can only be met by generating liquidity from high quality government bonds and central bank deposits
      - net stable funding ratio
        
        measures stable funding relative to the liquidity of the assets funded, and the potential draw on off-balance sheet commitments over a one year period
    - - Ability of banks to raise substantial amounts of capital in a crisis
      - Local markets may prevent some of the rules from being directly implemented
      - Implementation timetable is very long
        
        will another crisis arise while delay?
      - significant impact of Basel rules on entire sectors such as trade finance, project finance and securitization
      - Basel guidelines are not directly enforceable
        
        each local regulator publishes implementation rules
        
        sig divergence of view between diff regulators
      - Basel 4?