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Posts Tagged ‘Tier 1 capital’

Basel III norms will kick-start from January 1, 2013

Posted by Admin on January 1, 2012

http://www.thehindu.com/business/Economy/article2761226.ece?css=print

By

K. T. Jagannathan

The Reserve Bank of India draft guidelines prescribe minimum capital requirements and also capital conservation buffer. Photo: Paul Norionha
Photo: Paul Norionha
The Reserve Bank of India draft guidelines prescribe minimum capital requirements and also capital conservation buffer.

Reserve Bank of India prescribes Tier I capital at 7 per cent of risk-weighted assets

The implementation of Basel III capital regulation will kick-start from January 1, 2013. It will be fully implemented by March 31, 2017. The Reserve Bank of India indicated this while releasing the draft guidelines outlining the proposed implementation of Basel III capital regulation in India.

These guidelines are in response to the comprehensive reform package entitled ‘Basel III: A global regulatory framework for more resilient banks and banking systems’ of the Basel Committee on Banking Supervision (BCBS), issued in December, 2010.

The draft guidelines prescribe minimum capital requirements and also capital conservation buffer.

The apex bank has said that the common equity Tier-1 (CET1) capital must be at least 5.5 per cent of the risk-weighted assets (RWAs). While stating that the Tier-1 capital must be at least 7 per cent of RWAs, it has proposed the total capital to be at least 9 per cent of RWAs. The implementation period of minimum capital requirements and deductions from common equity will begin from January 1, 2013, and be fully implemented as on March 31, 2017. Under the Basel III norms, Tier-I capital should predominantly consist of common equity.

The objective is to improve the quality of capital.

The draft guidelines have also proposed a capital conservation buffer in the form of common equity of 2.5 per cent of RWAs.

The capital conservation buffer is designed to ensure that banks build up capital buffers during normal times (that is, outside periods of stress), which can be drawn down as losses incurred during the stressed period. The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements. The capital conservation buffer in the form of a common equity will be phased in over four years in a uniform manner. The capital conservation buffer requirement is proposed to be implemented between March 31, 2014, and March 31, 2017.

The draft guidelines have also indicated that a counter-cyclical buffer within a range of 0-2.5 per cent of common equity or other fully loss absorbing capital will be implemented according to national circumstances.

“The purpose of counter-cyclical buffer is to achieve the broader macro-prudential goal of protecting the banking sector from periods of excessive aggregate credit growth,” the Reserve Bank says. The counter-cyclical capital buffer would be introduced as an extension of the capital conservation buffer range.

The implementation schedule indicated above, however, will be finalised taking into account the feedback received on these guidelines.

According to the guidelines, instruments, which no longer qualify as regulatory capital instruments, will be phased out during the period beginning from January 1, 2013, to March 31, 2022.

For OTC derivatives, in addition to the capital charge for counterparty default risk under current exposure method, banks will be required to compute an additional credit value adjustments (CVA) risk capital charge.

The parallel run for the leverage ratio will be from January 1, 2013, to January 1, 2017, during which banks are expected to strive to operate at a minimum Tier-1 leverage ratio of five per cent.

The leverage ratio requirement will be finalised taking into account the final proposal of the Basel Committee.

The apex bank has said comments/feedback on the draft guidelines, including implementation schedule, should be sent by February 15, 2012.

Keywords: Basel III capital regulationRBI

Also go to

http://www.moodysanalytics.com//basel3implementation2011

to download the Implementing Basel III: The Challenges, Options & Opportunities Whitepaper

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Basel III rules could spell potholes, literally

Posted by Admin on April 24, 2011

http://in.finance.yahoo.com/news/Basel-III-rules-spell-reuters-1529902422.html

On Tuesday 19 April 2011, 9:40 PM

By Greg Roumeliotis, European Infrastructure Correspondent

AMSTERDAM (Reuters) – Rules designed to spare the world’s taxpayers from paying for a future financial crisis could also make it more difficult to build and replace infrastructure such as the roads they drive on.

The rules, known as Basel III, will weigh on the ability of banks to provide project finance loans on which cash-strapped governments and developers of power plants, pipelines and renewable energy such as wind farms rely to fund schemes.

“Banks have been the stalwart of privately financed projects. If long-term lending requires more capital to back it, it affects the enthusiasm of banks to provide it,” said Andrew Davison, senior vice president at credit rating agency Moody’s.

In Europe, this will hamper efforts to attract private funds into transport, energy and communication networks that are key to economic growth as well as providing jobs at a time when many European countries are struggling with unemployment.

Construction accounts for 7.1 percent of Europe`s total employment, according to the European Construction Industry Federation. The European Union (EU) says Europe’s infrastructure investment needs to 2020 could be up to 2 trillion euros.

Project finance loans are also big business for banks, having grown from a $110.8 billion global industry in 2000 to $208.1 billion in 2010, according to data compiled by Thomson Reuters Project Finance International.

This rise, driven by the private sector’s increasing participation in the funding of infrastructure, is at risk under Basel III, which will make project finance loans scarcer and more expensive due to the way they are accounted for.

“There is an expectation that the volume of project finance loans will drop very significantly over the coming years under Basel III,” said Timothy Stone, chairman of the global infrastructure and projects group at accounting firm KPMG.

Under Basel III, a short-term liquidity buffer, known as the liquidity coverage ratio, will include liquid forms of debt such as government bonds and top-notch corporate paper, but not project finance loans, seen as among the most illiquid.

A second ratio, the net stable funding ratio, makes the provision of long-term debt such as project finance more expensive for banks by requiring them to match their liabilities with their assets in terms of funding.

While not all banks will abandon project finance as a result, their business will be severely affected, said Noburu Kato, EMEA head of structured finance at Sumitomo Mitsui Banking Corporation.

“I believe project finance by banks will continue because there is an increasing need for it, from governments that need to invest in infrastructure and companies that do not want to use their balance sheet. But costs will increase,” Kato said.

Although Basel III is to be implemented between 2013 and 2018, bankers say the impact on project finance will be felt before the rules kick in as banks compete to show investors they are well positioned for the new capital requirements.

“I would expect most of the impact of Basel III on project finance to be priced in by 2014,” said KPMG’s Stone.

In the European Union (EU), project finance accounts for slightly less than ten percent of total infrastructure finance, according to a 2010 European Investment Bank study. The European Commission is exploring initiatives such as backing project bonds to compensate for any drop in project finance loans.

Bonds made up only 9 percent of global project finance activity in 2010 according to Project Finance International. The market for project bonds suffered after the woes of monolines — companies that insure bonds — in the credit crisis of 2007.

But some financiers see opportunities to create new instruments to replace the monolines that can lift a project bond’s credit rating from the BBB range into the A category, attracting a wide poll of institutional investors.

Such a market is still in its infancy but has the potential to fill the gap left by the Basel III-hit project finance industry, its advocates say. Last year, British insurer Aviva partnered with Hadrian’s Wall Capital, an advisory firm, to create a debt fund dedicated to such instruments.

“Our form of credit enhancement can help the project finance bond market take off. We are looking to raise approximately 1 billion pounds with our fund and with that we should be able to provide around 10 billion pounds in financing,” said Hadrian’s Wall Capital Chief Executive Marc Bajer.

(Editing by David Cowell)

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Comments – Prof S P Garg Wed 20 Apr 2011 12:16 AM EDT Report Abuse

Basel II requirements and their strict compliance has protected the major banks and financial institutions worldwide.International Bank for Settlement (IBS) is doing a remarkablec job by way of stipulating the necessary capital requirements ina very prudent manner.The developing countries ,in the initial years might have faced the difficulties in its implementation but results are praiseworthy. The stringent measures must go on and Basel III is a welcome step.
Infrastructure projects and other long term investments would require higher capital requirements but for maintaining the robust health of the banks it is needed.The Central banking system of each country would take necessary steps to augument their caital is these activities have to be pushed in a big way.Not only this, there is a long time gap in implementation and during this period, each institution is needed to take strong steps to boost their capital needs to cater the needs of these sectors.As such, there should be any apprehension that development process would suffer dur to Basel III.Robustness of the financial institutions is to be maintained.
In India, the regulatory framework is so strong which has given a big support to the banks in comliance matters, governance and reporting system.The RBI has shown the path to other countries,Regulatory bodies and central banks that how to grow even in difficult times alongwith maintaining strong standards of compliance.

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