Basel III- not a matter of if but when

The new regulatory regime of Basel III goes live on 1 January 2013, for both reporting and the new minimum capital requirements. Indeed from as early as this summer, banks are expected to capture and report on key aspects of the new ratios, despite the fact the new EU directive and regulation have yet to be finalized in readiness for the 2013 live date.

Banks will have to meet the following minimum capital requirements expressed in risk-weighted assets: 3.5% share capital, 4.5%Tier 1 capital and 8% total capital. Preparation for the new reporting and stress testing requirements must be largely complete by the end of 2012.Other measures to be implemented by the beginning of 2013 include new regulations for counterparty credit risk and minimum core tier 1 ratios, and new treatment of banks’ short-term liquidity.

The long transition period outlined for Basel III – with the last of the ratio changes not being imposed until 2019 – is a bit of a misnomer as many jurisdictions, particularly in Asia, aim to go fully live years before this and banks hope to have the systems that are compliant with the new regime built by the end of 2013.

Geographic uptake
In terms of drafting and implementation of Basel III final rules by national regulators, progress has been made. However, to date, Saudi Arabia, which already has more stringent banking regulations than most, is the only country to have issued final Basel III rules to its regulated firms, and Gulf banks are likely to adopt the rules this year, ahead of the deadlines set.

While Basel 2.5 rules were adopted by EU Member States at the end of 2011, the Basel III proposals will be implemented into EU law through CRD IV. This will be a key instrument through which the Commission intends to introduce substantive parts of the new European supervisory architecture, including the development of the Single Rule Book for financial services. These changes are due to be implemented from 1 January 2013, although there will be transitional arrangements for some elements.

There are some concerns about the US, where Basel 2.5 and Basel III rules must be coordinated with work on implementation of the Dodd-Frank regulatory reform legislation, in particular with regard to the use of credit ratings. Despite the fact the US didn’t implement Basel II, the US Federal Reserve announced in December 2011 that it would implement substantially all of the Basel III rules and made clear they would apply not only to banks but to all institutions with more than US$50 billion in assets. Already, fifteen of the US’s largest 19 bank holding companies were shown to have adequate capital under what is understood to be the Fed’s most stringent stress test scenario to date.

Some national authorities are actually setting out to apply the minimum capital requirements ahead of the mandated deadlines. They include the Australian Prudential Regulation Authority, which is proposing that banks meet the revised minimum capital ratios in full from January 2013, and to be fully compliant with the capital conservation buffer form January 2016, ahead of Basel III deadlines of January 2015 and January 2019, respectively.

The Reserve Bank of New Zealand (RBNZ) has also already stated that banks will have to meet the minimum capital ratios in full from 2013 and is now proposing to implement the capital conservation and counter-cyclical buffers of the Basel III framework in full from January 1, 2014 – two years ahead of the timetable set down by the Basel Committee.

And similarly, the Reserve Bank of India has told domestic banks they must start reporting on aspects of Basel III liquidity strength measures from as early as June this year, ahead of the reporting timetable laid out by the Basel Committee. Furthermore, it has stipulated that banks go above and beyond Basel III requirements and provide a statement outlining their bond spread movements compared to their share price in a bid to better monitor early signs of systemic risk.

In China, the broad concept of Basel III is supported as it indirectly endorses the conservative regulatory approach the Chinese have always adopted and banks are regarded as generally well-positioned to meet the higher standards and measures required. In Hong Kong too, despite escaping the global financial crisis relatively unscathed, regulators intend to implement the Basel III reform package, despite concerns about some of the unintended consequences, particularly the impact of the liquidity rules on the relatively immature corporate debt markets in Asia.

Likewise, while Singapore officials support Basel III it has been made clear that rules should be adapted to local circumstances to reflect the different stages of economic growth, banking and regulatory approaches in Asia. The Monetary Authority of Singapore (MAS) is requiring that Singapore banks both meet Basel III capital standards earlier and to exceed Basel III’s common equity requirements by 2%. This is primarily due to the fact the four locally incorporated banks are systemically important domestically.Similarly, the Central Bank of the Philippines is insisting on full implementation of all of Basel III’s regulations by the end of 2014 – well ahead of schedule.

Non-compliance – not an option
The onslaught of the Eurozone debt crisis, coupled with the sheer scale and complexity of Basel III – CRD IV runs to more than 1,000 pages, with at least 200 references to points that need fleshing out and formalized by the EBA – has prompted some to speculate whether the implementation timelines are realistic, but there seems little likelihood that there will be much leeway now that the legally binding framework is in place and the wheels are in motion for the technical standards coming from the EBA.

Furthermore, we are witnessing a wave of banks rushing to become compliant before deadline. Some banks already hold more high quality capital than Basel III will require and many are already disclosing figures in a bid show investors that they can comply with the new regime sooner rather than later. Indeed, Barclays, for one, as far back as its 2010 annual results indicated an LCR of 80 per cent and a 94 per cent ratio for the NSFR. The products, risks and returns expected from banking are all changing as a direct impact of Basel III, and many banks have been aggressively reviewing their business models, because the sooner they can tackle compliance and ensure the minimum of capital is invested in it, the sooner they can get back to the main business of banking and finding better returns on equity.

Basel III represents a wholly new era in banking regulation. Non-compliance is not an option, only how quickly and accurately compliance can be achieved. Unlike Basel II, the implementation of Basel III is being monitored at every step of the way and with the findings set to become public, the implication is that no further regulation will swiftly follow until the new risk paradigm is reached.

This article is taken from a Wolters Kluwer Financial Services’ FRSGlobal paper entitled ‘Implementing Basel III – Are you ready?’. If you would like to receive a full copy of the paper, please click here.

The new regulatory regime of Basel III goes live on 1 January 2013, for both reporting and the new minimum capital requirements. Indeed from as early as this summer, banks are expected to capture and report on key aspects of the new ratios, despite the fact the new EU directive and regulation have yet to be finalized in readiness for the 2013 live date.

Banks will have to meet the following minimum capital requirements expressed in risk-weighted assets: 3.5% share capital, 4.5%Tier 1 capital and 8% total capital. Preparation for the new reporting and stress testing requirements must be largely complete by the end of 2012.Other measures to be implemented by the beginning of 2013 include new regulations for counterparty credit risk and minimum core tier 1 ratios, and new treatment of banks’ short-term liquidity.

The long transition period outlined for Basel III – with the last of the ratio changes not being imposed until 2019 – is a bit of a misnomer as many jurisdictions, particularly in Asia, aim to go fully live years before this and banks hope to have the systems that are compliant with the new regime built by the end of 2013.

Geographic uptake
In terms of drafting and implementation of Basel III final rules by national regulators, progress has been made. However, to date, Saudi Arabia, which already has more stringent banking regulations than most, is the only country to have issued final Basel III rules to its regulated firms, and Gulf banks are likely to adopt the rules this year, ahead of the deadlines set.

While Basel 2.5 rules were adopted by EU Member States at the end of 2011, the Basel III proposals will be implemented into EU law through CRD IV. This will be a key instrument through which the Commission intends to introduce substantive parts of the new European supervisory architecture, including the development of the Single Rule Book for financial services. These changes are due to be implemented from 1 January 2013, although there will be transitional arrangements for some elements.

There are some concerns about the US, where Basel 2.5 and Basel III rules must be coordinated with work on implementation of the Dodd-Frank regulatory reform legislation, in particular with regard to the use of credit ratings. Despite the fact the US didn’t implement Basel II, the US Federal Reserve announced in December 2011 that it would implement substantially all of the Basel III rules and made clear they would apply not only to banks but to all institutions with more than US$50 billion in assets. Already, fifteen of the US’s largest 19 bank holding companies were shown to have adequate capital under what is understood to be the Fed’s most stringent stress test scenario to date.

Some national authorities are actually setting out to apply the minimum capital requirements ahead of the mandated deadlines. They include the Australian Prudential Regulation Authority, which is proposing that banks meet the revised minimum capital ratios in full from January 2013, and to be fully compliant with the capital conservation buffer form January 2016, ahead of Basel III deadlines of January 2015 and January 2019, respectively.

The Reserve Bank of New Zealand (RBNZ) has also already stated that banks will have to meet the minimum capital ratios in full from 2013 and is now proposing to implement the capital conservation and counter-cyclical buffers of the Basel III framework in full from January 1, 2014 – two years ahead of the timetable set down by the Basel Committee.

And similarly, the Reserve Bank of India has told domestic banks they must start reporting on aspects of Basel III liquidity strength measures from as early as June this year, ahead of the reporting timetable laid out by the Basel Committee. Furthermore, it has stipulated that banks go above and beyond Basel III requirements and provide a statement outlining their bond spread movements compared to their share price in a bid to better monitor early signs of systemic risk.

In China, the broad concept of Basel III is supported as it indirectly endorses the conservative regulatory approach the Chinese have always adopted and banks are regarded as generally well-positioned to meet the higher standards and measures required. In Hong Kong too, despite escaping the global financial crisis relatively unscathed, regulators intend to implement the Basel III reform package, despite concerns about some of the unintended consequences, particularly the impact of the liquidity rules on the relatively immature corporate debt markets in Asia.

Likewise, while Singapore officials support Basel III it has been made clear that rules should be adapted to local circumstances to reflect the different stages of economic growth, banking and regulatory approaches in Asia. The Monetary Authority of Singapore (MAS) is requiring that Singapore banks both meet Basel III capital standards earlier and to exceed Basel III’s common equity requirements by 2%. This is primarily due to the fact the four locally incorporated banks are systemically important domestically.Similarly, the Central Bank of the Philippines is insisting on full implementation of all of Basel III’s regulations by the end of 2014 – well ahead of schedule.

Non-compliance – not an option
The onslaught of the Eurozone debt crisis, coupled with the sheer scale and complexity of Basel III – CRD IV runs to more than 1,000 pages, with at least 200 references to points that need fleshing out and formalized by the EBA – has prompted some to speculate whether the implementation timelines are realistic, but there seems little likelihood that there will be much leeway now that the legally binding framework is in place and the wheels are in motion for the technical standards coming from the EBA.

Furthermore, we are witnessing a wave of banks rushing to become compliant before deadline. Some banks already hold more high quality capital than Basel III will require and many are already disclosing figures in a bid show investors that they can comply with the new regime sooner rather than later. Indeed, Barclays, for one, as far back as its 2010 annual results indicated an LCR of 80 per cent and a 94 per cent ratio for the NSFR. The products, risks and returns expected from banking are all changing as a direct impact of Basel III, and many banks have been aggressively reviewing their business models, because the sooner they can tackle compliance and ensure the minimum of capital is invested in it, the sooner they can get back to the main business of banking and finding better returns on equity.

Basel III represents a wholly new era in banking regulation. Non-compliance is not an option, only how quickly and accurately compliance can be achieved. Unlike Basel II, the implementation of Basel III is being monitored at every step of the way and with the findings set to become public, the implication is that no further regulation will swiftly follow until the new risk paradigm is reached.

This article is taken from a Wolters Kluwer Financial Services’ FRSGlobal paper entitled ‘Implementing Basel III – Are you ready?’. If you would like to receive a full copy of the paper, please click here.