Sai Sireesh: Top Six Basel III Design Elements

Let’s start learning LR, LCR, NSFR, Capital Surcharge, Gone Concern! A mouthful isn’t it?

Well, Basel III is coming our way sooner than expected! The much awaited (do I hear a groan?!) Basel III regulation is getting its final touches. The Group of Governors and Heads of Supervision - the oversight body of the Basel Committee on Banking Supervision - met on July 26, 2010 to review the Basel Committee's capital and liquidity reform package. The BIS, with G20 consultation, is driving the Basel III release by November 2010 with an implementation start by end 2012. Although, the deadline for final institution level Basel III conformance is expected around 2018.

Their focus is on:

  • quality, quantity, and international consistency of capital
  • strengthening liquidity standards
  • discouraging excessive leverage and risk-taking
  • reducing procyclicality

In general, banks will need to hold more capital and manage liquidity better to withstand economic and market events. The global regulators are reviewing new bank's Tier 1 capital requirement from its current four percent level. Another key decision awaited is the timeline for banks to exclude lower quality capital from their capital calculations.

While the regulation is still evolving, some of the design elements of Basel III at a high-level are:

  1. Definition of Capital - Tighter definition of top quality capital with a capital buffer range with capital distribution constraints around it
  2. Treatment of Counterparty credit risk – Capital buffers
  3. Leverage Ratio - Cap on debt via leverage ratio; Definition and Transition; 2011 start; Parallel run Jan 2013-Jan 2017; Disclosure starts Jan 2015; Migration Jan 2018
  4. Regulatory Buffers, Provisions, and Cyclicality of the minimum
  5. Systemic banks, contingent capital and a capital surcharge
  6. Global liquidity standard – Liquidity Coverage Ratio(LCR), Net Stable Funding ratio (NSFR) - Measure of long term liquidity but with diluted initial pilot of one year horizon liquidity buffer

Some of the industry concerns are already addressed in Basel III. For example, less stringent treatment of deferred tax assets and affiliates for calculating capital, longer phase-in for new liquidity rules, and cap on debt. These regulations especially help many banks gain time to raise vast amounts of funds and a more considered roadmap for their minority stakes.

Basel III originally proposed a ban on banks counting capital held in affiliates as part of their own holdings. This did trigger concerns of a freeze in acquisition of minority stakes or sell-offs to avoid the need for extra capital. Banks will now be able to include capital from minority-held companies up to a certain threshold. Basel III has included top-rated corporate debt in short term liquidity buffer. The industry and regional concerns about including only government bonds are being considered (i.e. countries such as Australia with strong public finances do not have enough government debt for local banks to buy).

For those of you wanting to dig deeper, you can download the document from

I look forward to your hearing thoughts and comments.

Source: BIS, Reuters, Bloomberg