Basel III – A Global (IMF) Perspective Vanessa Le Leslé

1. Basel III – A Global (IMF) PerspectiveVanessa Le Leslé Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR, INDIA The views expressed in this presentation are my own and do not necessarily reflect those of the International Monetary Fund

2. Contents • Basel III – A brief overview of the state of play • Where do we stand? • Objectives • Overview of select regulations • State of progress • What remains to be done? • Focus on one example – Revisiting Risk-Weighted Assets • IMF contribution to the surveillance of the global financial sector • Overview of ways the IMF can contribute to global surveillance of the financial sector • Surveillance through Financial Sector Assessment Programs (FSAP) • FSAPs – How do they work? • FSAPs – Key takeaways

3. The G 20 Reform Agenda The G20 Financial Regulation Reform Agenda The Big Picture

4. 1a. An Overview of Basel III Basel Headquarters, Switzerland

5. What Basel III aims to do

6. The crisis has prompted a broad regulatory overhaul, both domestic and international – Snapshot of select reforms

7. Phase-in of capital requirements and capital buffers Countercyclical Buffer (if applicable; CET1/possibly AT1) 2,5% 1,875% 1,25% 1,25% Capital Conservation Buffer (CET1 only) 2,5% 1,875% 0,625% 1,25% 0,625% 8% 2% 2% 2% 2% Tier 2 2% 1,5% 1,5% 1,5% 1,5% 1,5% Additional Tier 1 4% 4,5% 4,5% Common Equity Tier 1 4,5% 4,5% 4,5% 2017 2015 2016 2018 2019 2020

8. Future capital structure – what it could look like Total Capital Up to 19% or 20%, with Additional domestic buffers Domestic Surcharge 2.0%+ 20% 0 ≦ X ≧ 3.0%? Tier 2 Capital High Trigger CoCos 0≦ X ≧3%? Counter-Cyclical Buffer Primary Loss Absorbing Capital Total Capital , with buffers 11.5% - 13.0% 0-2.5% Additional Tier 1 Capital 1.5%+ 7≦ X ≧ 10%? 12.0% SIFI Buffer 1-3.5% Capital Conservation Buffer 10% 2.5% Total Capital 8.0% 8.0% Tier 2 Capital Pillar 1 Requirement + Standard Buffers 2.0% Core Tier 1 Capital Core Tier 1 Capital Pillar 1 Requirement Non-Core Tier 1 Capital 1.5% Total Tier 1: 6.0% Common Equity Capital Min. CET1 4.5% Minimum Capital Requirement Basel III Standard Buffers National Buffers Potential Capital Structure including all Buffers A country example: United Kingdom 8

9. Liquidity risk: the new metrics Liquidity Coverage Ratio and Net Stable Funding Ratio LCR:short-term - to ensure that a bank maintains an adequate level of unencumbered, high quality assets that can be converted into cash to meet its liquidity needs for a 30-day time horizon under an acute liquidity stress scenario. NSFR:medium to long-term - a full balance-sheet metric that compares, under more prolonged but less acute stress than in the LCR, an estimate of reliable funding sources to an estimate of required stable funding over the 1 year horizon. Two complementary metrics with different time horizons Stock of High Quality Liquid Assets Available Amount of Stable Funding > 100% > 100% Net Cash Outflows over a 30-day time period under stress Required Amount of Stable Funding

10. Leverage Ratio – The backstop to supplement risk-based capital Simple, transparent, non-risk based measure Capital to total on and off balance sheet assets

11. Progress of Work and Work in Progress – Some unfinished business

12. 1b. What remains to be done? A stylized example Revisiting Risk-Weighted Assets

13. Revisiting RWAs – Why does it matter? • What are the key concerns with regard to the banks’ risk-weighted assets (RWAs)? • The opacity and complexity of internal models used by banks to compute RWAs have led to questions about consistency and comparability of risk-weighted capital ratios across banks and jurisdictions • This also raises concerns about the adequacy of capital held by banks, even where the reported ratios look good and led to complaints of manipulation and an unlevel playing field • Addressing these concerns is important, given the critical focus of markets and the authorities globally on reported capital ratios • Key Takeaways: • There are some important differences across jurisdictions in the calculation of RWAs that need to be kept in mind when making cross country comparisons • These differences are driven by a range of factors including the regulatory framework; the accounting standards, business model and location in the business cycle • The Basel Committee plans to assess the RWA practices across its membership to reduce inconsistencies in (i) RWA measurement by banks and (ii) in supervisory practices • In addition, this should be supplemented by (i) More intrusive supervision (ii) Better bank risk management and (iii) Improved disclosure

14. The Transatlantic debate The ranking of 44 Systemically Important Banks (SIB) based on Core Tier 1 Ratios (capital over risk-weighted assets (RWA)) shows no clear geographical pattern. However, the ranking based on Leverage Ratio (capital over un-weighted assets) seems to suggest that the US and Asian banks are better capitalized than European banks. In other words, the RWA/TA ratios of European banks tend to be lower than those of US and Asian banks. Are these differences justified? Ranking of banks by Leverage Ratio (TCE/Tangible Assets) (percent) Ranking of banks by Core Tier 1 Ratio (percent) Source: Bloomberg; Company data – Legend: North America (red) / Asia (yellow) / Europe (blue)

15. What explains the RWA/TA differences across banks? country-specific factors and bank-specific factors

16. Supervision – macro prudential surveillance in the BCP • BCBS is revising the 2006 Core Principles and the assessment methodology • Review and update each Core Principle, taking into consideration the lessons learnt from the crisis, the post-crisis banking and regulatory landscape, as well as consequent impact on banking supervisory approach and practices • Supervisory implications of international regulatory standards (such as Basel III) and various supervisory guidance issued by the BCBS and other standard setting bodies which have been introduced or enhanced since the last review of the Core Principles. • Recommendations of the Senior Supervisors Group’s report on “Risk Management Lessons from the Global Banking Crisis of 2008”, the Financial Stability Board’s report on “Intensity and Effectiveness of SIFI Supervision” and relevant reports by other international bodies. • Review experiences gained from the International Monetary Fund’s and World Bank’s assessments of countries’ compliance with the Core Principles

17. 2. Contribution of the IMF to the Surveillance of the Global Financial Sector IMF Headquarters, United States of America

18. How can the Fund help? Assist Member Countries

19. Surveillance through FSAP: A risk-based approach • Assess financial sector stabilityand, where relevant, development needs, by the IMF and World Bank, respectively • Joint IMF/World Bank program in LICs and EMs; Fund-only in advanced economies • Stability and developmental assessments may be done together or in separate modules • May optionally include formal assessments of compliance with financial sector standards (ROSCs) • Since 2010, stability assessments a mandatory part of IMF surveillance every 5 years for 25 countries with systemically important financial sectors

20. Overview of perimeter of application of FSAPs 25 jurisdictions which have a systemically important financial sector Key components of a FSAP

21. The FSAP and financial sector standards: what’s covered? FSB “Key Standards for Sound Financial Systems” Financial Regulation and Supervision Macroeconomic Policy and Data Transparency Institutional and Market Infrastructure Banking (BCP) Insurance (IAIS) Securities (IOSCO) Monetary and financial policy transparency (IMF) Fiscal policy transparency (IMF) Data dissemination (IMF) Payments, clearing & settlement (CPSS/IOSCO) Crisis resolution & deposit insurance (BCBS/IADI) Market integrity (FATF) Corporate governance (OECD) Accounting & auditing (IASB/IAASB) Insolvency & Creditor Rights (World Bank/UN)

22. FSAP - Common findings across sectors • Progress in implementation over time though compliance weakened in some areas in recent assessments • Independence and sufficiency of resources continue to one of the be greatest challenge • Legislative frameworks still have gaps but the bigger challenge is monitoring, implementation and enforcement • Risk management oversight needs improvement • Consolidated supervision practices still weak / evolving • Standards becoming more complex and assessments more challenging over time

23. FSAP - Main deficiencies across sectors The need to strengthen supervisory independence, authority, resources and capacity emerges as common themes across jurisdictions.

24. Questions ?