Basel Committee on banking supervision

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The lessons of the global financial crisis 2008-2009 biennium forced the Basel Committee on banking supervision (BCBS) to fundamentally revise the existing capital adequacy requirements. The result is a system of requirements for capital adequacy and liquidity, dubbed Basel III and endorsed by the g-20 "Summit in Seoul in November 2010.

Structurally, Basel II is divided into three parts (components):

Component 1. Calculation of minimum capital requirements. He is calculating general minimum capital requirements for credit, market and operational risks. Ratio of capital to assets is calculated using the definition of regulatory capital and risk-weighted assets. Total capital to total assets ratio should not be less than 8%. Second level capital must not exceed 100% of the capital.

Component 2. Surveillance process. This section discusses the basic principles of the supervisory process, risk management, transparency and accountability to the organs of the Bank Supervision Committee of banking risks, including proposals concerning, among other things, the treatment of interest rate risk in the banking portfolio credit risk (stress-testing, determination of default, residual risk and credit concentration risk), operational risk, increase in cross-border communication and interaction, and securitization.

Component 3. Market discipline. Supplements the minimum capital requirements (pillar 1) and surveillance process (component 2). Basel Committee seeks to stimulate market discipline by developing a set of disclosure requirements that will allow market participants to assess the basic data on the scope of the, capital, risk, risk assessment processes and, consequently, on the capital adequacy of institutions. The Committee believes that such disclosure is particularly relevant in the light of the agreement under which reliance on in-Bank methodology gives banks more leeway in valuing capital requirements.

In the beginning of the 20th century, the world is facing one of the most severe financial crises, which forced the banking systems around the world to reconsider the requirements to the market of bank services for banks and their activities. Under the direction of the Basel Committee on banking regulation and supervision at the end of last year adopted new rules for the banking sector, briefly referred to as the "Basel III". They caused controversy among scholars and practitioners. Andreas Schmitz, President of the Federal Association of German banks and CEO of HSBC Trinkaus & Burkhardt AG, says that if the financial system was stable and sustainable requires the same stable stable banks: banks that would yield enough to safely survive the crisis. The State must ensure effective regulation, while banks must build a sustainable long-term business model, profitable success, i.e. revenue generation. In his view, the competition should conjure up these new business models. For their formation must take into account the desires of customers, new technologies, competition rules and legal requirements.

A. Schmitz also believes that in order to accelerate the pace of economic recovery, it is necessary to avoid excessive legal regulation of banking activities. Especially many questions arose in connection with the legislative requirements to the size of banks ' own funds. Lending to companies, individuals and Nations is the core function of banks. To credit institutions were able to successfully do so, they must have the necessary assets and, therefore, have sufficient own capital size.

Therefore, a. Schmitz, an international agreement that obliges banks to gradually increase the proportion of own capital. "Basel III" is meant to be a mechanism that will govern many highlights of banking activities, while avoiding excessive detail.

The Basel Committee's decision has been mixed and are equally mixed reactions among economists and researchers. Some actions called for in "Basel III", may appear to be excessively rigid, and someone too soft, still others will consider these measures are quite successful. Do not forget that the banking sector is not isolation but organically embedded in the financial system, so it is important to calculate the consequences not only for the banking sector but for the economy of the country and for the stability of the world economy as a whole.

The provisions of Basel III capital standards, offer new "leverage" and liquidity for more effective regulation, oversight and risk management in the banking sector. These standards, as compared with the earlier adopted Basel II, require larger capital from banks, as well as its better quality. New relation to borrowed capital determines the neriskovuы basis for the calculation of minimum capital requirements. Particularly important is the introduction of new liquidity ratios in respect of which-ensure adequate funding in crisis situations.

At the moment many details require further elaboration. A particularly tough lobbying is expected in the field of system-forming financial institutions (SIFI), whose role in these systemic crises cannot be underestimated.

At a meeting in Brussels May 15, 2012 Finance Ministers of member countries of the European Union was discussed a number of issues of Basel III.

A key topic was the introduction of minimum capital requirements. There exists a series of discussion questions. First, whether the EU Member States the right to impose at national level more stringent than prescribed by Basel III? Secondly, should the definition of high-quality capital and imposed restrictions on it be detailed in the legislation of the European Union? Thirdly, whether the period of introduction of nevzveљennogo of leverage capital and two new standards for liquidity (liquidity ratio liquidity coverage ratio-and the net stable funding-net stable funding ration) be enshrined in legislation?

These coefficients have been developed by the Basel Committee as a response to difficulties with 2008, banking institutions have faced when refinancing markets. They allow you to measure the degree of sustainability of the banks in the event of mass withdrawals from the accounts, which could lead to the deployment of systemic crisis. One of the direct effects of these factors will be the possibility of an exhaustive analysis of the Bank asset portfolios, which would entail the revision of strategies for European credit institutions. Making an informed decision on the matter is particularly relevant.

About the Basel initiatives there are two different positions. A number of countries-United Kingdom, Sweden, Spain, with the support of the European Central Bank to give positive answers to all three discussion question. Other position, with the support of the European Commission, Germany and France, are interested in the conservation of some components of the banking capital in the status of high quality.

Has adopted the following decision. Members of the European Union with the national banking legislation weighted capital adequacy standards set by Basel III, exceeding the size of more than 300 basis points, should receive the endorsement of the Pan-European level. With respect to standards for national institutions, the threshold value defined in 500 b. p.

The agreement will allow European banks to take into account the number of equity instruments with questionable quality (dubious loss-absorbency), including the so-called unofficial participation of German banks and minoritarnoe part of French banks in insurance companies. That is not consistent with the concept of improving the quality of own capital-one of the most important requirements of time.

On the one hand, the decisions adopted at the Summit represented a step forward in the reform of the financial sector: they fixed the need to consolidate the standards applicable to capital, in national legislation. On the other hand, they impede the reform this. Indeed, the need to obtain approval for higher standards would deter the capitalization (or recapitalisation) euro area banks. (A) the possibility of weakening the quality requirements for bank capital could lead to the so-called race to the bottom (race to the bottom), which in turn will help to reduce possible losses to taxpayers perekladyvaemyh.

The minimum capital requirements set by Basel III, more adequate than the previous ones, but it was still not sufficiently stringent. Therefore, each country should be able to enter at the national banking laws of higher demands.

Arguments against imposing higher capital requirements are as follows: it will significantly increase the cost of funding, lower lending volumes and slowing economic growth as a whole. There is even a belief that the introduction of higher than under Basel III requirements would compromise the very concept of a single market. However, increasing demands on capital requirements will not necessarily leads to reduced lending volumes. There are a number of successful examples of funding non-financial corporations at the expense of extra capital. And in lending the most serious problems occurred just during periods of insufficient banking capital. When the size of leverage are insignificant-as was the case with the "Internet bubble" effects at the macro level, the less painful than when the leverage is considerable.

Despite positive developments in the process of reforming oversight and regulation, extremely topical issue of capital requirements for banks from the category of Too Big to Fail remains unresolved. However, examples of this kind of quite a few institutions. For example, the combined assets of the five largest banks in Britain and the Netherlands that make up about 450% of GDP, three times the assets of banks in Germany and Italy. And the greater the size of the banks that fall into the category of Too Big to Fail, the more acute the need for more stringent risk control. For example, Switzerland and the United Kingdom--countries where the combined assets of some of the largest banks are particularly large in relation to the national GDP-already apply higher capital adequacy ratios than prescribed Basel III, however, the decisions taken at the ministerial level on May 15, the EU limit that possibility in the future. For countries whose banking systems have big players remain two ways. Either split the large banks-perspective, which is still not considered as probable, or accept the fact that if the players such acute problems, costs or support the elimination will be carried over to taxpayers. The latter circumstance is contrary to the stated objectives of European governments.

Basel III calls for not only a quantitative increase of capital, but also the quality, so that it was able to absorb potential losses. Before the Basel Committee allowed the recording of financial instruments as regulatory capital, that led to the de facto situation of capital shortage and the need on the part of the State to pour in funds to support the Bank. To avoid the recurrence of such situations, Basel III imposes restrictions at a rate of 15% for the share of financial instruments of lesser quality, as follows: deferred tax assets, rights, mortgage servicing, as well as significant investments in non-consolidated ordinary shares of financial institutions, including insurance companies.

Basel III, sections related to the quality of bank capital, represented a compromise reached by the United States, Japan and the European Union: limit inferior component of banking capital, though it has traditionally been attractive for banks. So, compromise by Japanese banks was the first disqualification of deferred tax assets, judgments made by the United States-rights to service mortgage loans-a minority participation in the EU's non-consolidated structures. Decisions taken by the 15 may reduce the value of achieved compromises, which benefits the German and French banks, interested in the conservation of some low-quality components in the banking capital.

Departures from the original concept of the quality of capital can have several effects on the banks of the European Union.

First, the French and German banks, recognizing the role of high-quality capital, not quite qualitative tools continue to risk taxpayers.

Secondly, the granting of concessions to Germany and France is likely to increase pressure on the part of the United States and Japan banks on their regulators to demand similar breaks. If successful, these actions will reduce the overall concept of Basel III-increase the responsibility of banks for financing the losses incurred, not to shift it to the taxpayers.

In terms of the potential impact of the introduction of standards of Basel III will be more productive when using two methodological approaches.

First-review requirements as prescription of quantitative information (the minimum capital adequacy ratio).

Second-order analysis of qualitative information (specifications, quality requirements of capital).

Each of the two approaches allows for a more adequate and balanced implementation of Basel III principles laid down in. So, the first approach would be more effective if the country has the ability to set higher standards for capital adequacy, appropriate economic reality. Use the second approach implies the harmonization of quality capital. In this area it seems necessary, strict compliance with the established quality requirements, without differentiation on national levels.

Limits the ability of the alleged risk of destruction of the single market for EU Member States to impose their own minimum capital requirements above the Basel III is not justified. The main obstacle in the evolution of the single market for financial services remains the national character of the existing bodies for supervision and regulation: sustainability of banks depends on the perspective of a regulator. Productive measures to strengthen the single market for financial services could be the creation of a pan-European deposit insurance systems and launching mechanisms for resolving problems.

Decisions taken by the EU Finance Ministers fail to adequately address the problems that provoked the crisis, and hamper resolution of the debt crisis in some European countries. However, it is possible that final rules on bank capital, approved by the European Parliament, will include a number of weighted changes.

In Basel III, a new concept - "the root tier 1 capital", as well as a clarification that tier 1 capital consists of two elements. Capital's primary task is to pay damages under the Bank (prior to bankruptcy and liquidation), therefore it is necessary to ensure stock that will be available to the Bank for payment of damages without intervention investors. The permanence and stability of the capital constituted guarantees its availability in times of financial crisis, so should not be dated. Otherwise, investors may return the paper issued by the Bank at a time when the Bank is less than the total available funds. The principles underlying the key features of the capital are set out in table 2. 2 to tier 1 instruments in Basel III.

The minimum size of the capital base that can only consist of ordinary shares corresponding to reserves and retained earnings, should encourage banks to restrict the issuance of preferred shares. Retained earnings remains one of the main sources of root capital. Hybrid instruments included in Basel II will be excluded, as they usually have fixed dividends/payments and final term of repayment. Limitation of dividend payments for instruments included in tier 1 capital and additional capital of second level, should not be permanent, as this can interfere with the recapitalization of banks, giving false promises to investors.

Capital buffer (buffer capital protection) is designed to cover losses during periods of financial and economic tensions. It must relate exclusively to the root capital. Banks, lacking the buffer of capital, will be restricted to payments of dividends and bonuses. This approach will increase the resilience of banks to negative changes in the market.

The introduction of the concept of "capital buffer" implies that banks should build up a reserve of capital during favourable periods, which can be used in cases of damages. This approach helps reduce the procyclical effect. Savings can be realized by reducing the dividend, buyback and the payment of bonuses to employees. As an alternative to the "conservation" of the generated inside the capital banks can also attract new funds into the capital from the private sector. The balance between these options to be determined by the banks.

A buffer of capital protection is set at 2.5% and consists of a root capital, which is identified by the regulator to minimum capital requirements. Root tier 1 capital must first be used to meet the minimum requirements (including 6% for tier 1 and 8% for the total capital), only then the rest can be inserted into a buffer of capital protection. For example, a bank with a level of 8% of regulatory capital and without additional tier 1 or tier 2 capital would be consistent with the minimum requirements, but would have a level capital protection buffer 0% and would have to enter 100% restriction on the allocation of capital.

Restrictions on payments of profits imposed on banks when their capital cushion does not comply with the rules will increase as the buffer protecting capital. Under the proposed approach, the restrictions imposed on banks with capital protection, buffer levels close to 2.5% will be minimal. Banks should be able to exercise normal business when their capital cushion fell as a result. Limitations are imposed only in respect of payments of profit, but not with respect to the operations of the Bank.

banking supervision basel сapital

For some banks, more complex formulas for calculating assets, weighted according to risk, will significantly reduce the amount of regulatory capital. This may be especially true for the retail segment. Nevertheless, savings on regulatory capital reduction may not happen due to coefficients gearing and borrowed money, which will be calculated in accordance with the requirements of Basel III. However, banks can save on the cost of raising funds. For similar projects the typical benefits of rising profits before tax, may be obtained by increasing the margin to 2-3% depending on the composition of the Bank's assets. These advantages stem from:

1. More efficient management of bad debts by using sensitive instruments, risk rating, which can improve the quality of forecasting of default and lower the amount of bad loans.

2. risk-based Pricing with rates, adjusted for risk, which allows the Bank to increase profitability by differentiation of credit risk across the customer base.

3. optimisation of operating costs through more efficient operating processes and systems as well as systems and processes for risk management; minimization of errors based on judgment, through integration of rating models.

You can significantly increase your profits by reducing capital adequacy requirements, the relative percentage of profits can vary depending on the composition of the Bank's assets. For retail banks, the figure could be as high as 20%, which would free up capital for other asset classes.

For large diversified banks the costs of transition to use of improved approaches can range from 20 to 30 million dollars. United States until 3-4 years. This is due mainly to the new requirements to data collection, risk management and reporting for the IT systems and processes. 60-65% of the approximately cost of the introduction of improved approaches will account for investment in an IT related to credit risk transfer and data entry tools and new processes, and about a 15-20% off-grid construction will be linked to the development of rating models.

In addition to the pilot, apply advanced approaches banks may want to 30-40 major banks. This happens because the banks-competitors (pilot banks) are already using this approach, we were able to observe that in almost all countries during their transition to the capital adequacy requirements under the Basel II agreement.

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