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FreeMockTestforJAIIB&CAIIB
DailyConceptsBaselIII
BaselIIICapitalRegulationsarebeingimplementedinIndiawitheffectfromApril1,2013inaphased
manner.
IrequestallofyoutogothroughtheAmendedMasterCircularBaselIII(01July2015)here:
"https://rbidocs.rbi.org.in/rdocs/notification/PDFs/58BS09C403D06BC14726AB61783180628D39.PDF"
RevisedFrameworkforLeverageRatioforImplementationofBaselIIICapitalRegulationsinIndiacan
bebetterexplainedunderthefollowingheadings.
RationaleandObjective
Definition,MinimumRequirementandScopeofApplicationoftheLeverageRatio
CapitalMeasure
ExposureMeasure
Transitionalarrangements
Disclosurerequirements
Theycanbebetterunderstoodindetailbygoingthrough"http://icmai.in/upload/pd/RBICircular
09012015.pdf".Wecanalsodiscussindetailsifmemberswantsto.
JustarecollectionofBaselIIIdevelopmentstillnow:
BaselIIIreleasedinDecember,2010isthethirdintheseriesofBaselAccords.Theseaccordsdealwith
riskmanagementaspectsforthebankingsector.InanutshellwecansaythatBaselIIIistheglobal
regulatorystandard(agreeduponbythemembersoftheBaselCommitteeonBankingSupervision)on
bankcapitaladequacy,stresstestingandmarketliquidityrisk.(BaselIandBaselIIaretheearlier
versionsofthesame,andwerelessstringent)
AccordingtoBaselCommitteeonBankingSupervision"BaselIIIisacomprehensivesetofreform
measures,developedbytheBaselCommitteeonBankingSupervision,tostrengthentheregulation,
supervisionandriskmanagementofthebankingsector".

Thus,wecansaythatBaselIIIisonlyacontinuationofeffortinitiatedbytheBaselCommitteeon
BankingSupervisiontoenhancethebankingregulatoryframeworkunderBaselIandBaselII.This
latestAccordnowseekstoimprovethebankingsector'sabilitytodealwithfinancialandeconomic
stress,improveriskmanagementandstrengthenthebanks'transparency.

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Objectives/aimsoftheBaselIIImeasures

BaselIIImeasuresaimto:
improvethebankingsector'sabilitytoabsorbshocksarisingfromfinancialandeconomicstress,
whateverthesource
improveriskmanagementandgovernance
strengthenbanks'transparencyanddisclosures.

ThuswecansaythatBaselIIIguidelinesareaimedattoimprovetheabilityofbankstowithstand
periodsofeconomicandfinancialstressasthenewguidelinesaremorestringentthantheearlier
requirementsforcapitalandliquidityinthebankingsector.

HowDoesBaselIIIRequirementsWillAffectIndianBanks:

TheBaselIIIwhichistobeimplementedbybanksinIndiaaspertheguidelinesissuedbyRBIfromtime
totime,willbechallengingtasknotonlyforthebanksbutalsoforGOI.ItisestimatedthatIndianbanks
willberequiredtoraisRs6,00,000croresinexternalcapitalinnextnineyearsorsoi.e.by2020(The
estimatesvaryfromorganisationtoorganisation).Expansionofcapitaltothisextentwillaffectthe
returnsontheequityofthesebanksspeciallypublicsectorbanks.However,onlyconsolationforIndian
banksisthefactthathistoricallytheyhavemaintainedtheircoreandoverallcapitalwellinexcessofthe
regulatoryminimum.

ThebasicstructureofBaselIIIremainsunchangedwiththreemutuallyreinforcingpillars.

Pillar1:MinimumRegulatoryCapitalRequirementsbasedonRiskWeightedAssets(RWAs):
Maintainingcapitalcalculatedthroughcredit,marketandoperationalriskareas.
Pillar2:SupervisoryReviewProcess:Regulatingtoolsandframeworksfordealingwithperipheralrisks
thatbanksface.
Pillar3:MarketDiscipline:Increasingthedisclosuresthatbanksmustprovidetoincreasethe
transparencyofbanks

MajorChangesProposedinBaselIIIoverearlierAccordsi.e.BaselIandBaselII

(a)BetterCapitalQuality:OneofthekeyelementsofBasel3istheintroductionofmuchstricter
definitionofcapital.Betterqualitycapitalmeansthehigherlossabsorbingcapacity.Thisinturnwill
meanthatbankswillbestronger,allowingthemtobetterwithstandperiodsofstress.

(b)CapitalConservationBuffer:AnotherkeyfeatureofBaseliiiisthatnowbankswillberequiredto
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holdacapitalconservationbufferof2.5%.Theaimofaskingtobuildconservationbufferistoensure
thatbanksmaintainacushionofcapitalthatcanbeusedtoabsorblossesduringperiodsoffinancial
andeconomicstress.

(c)CountercyclicalBuffer:ThisisalsooneofthekeyelementsofBaselIII.Thecountercyclical
bufferhasbeenintroducedwiththeobjectivetoincreasecapitalrequirementsingoodtimesand
decreasethesameinbadtimes.Thebufferwillslowbankingactivitywhenitoverheatsandwill
encouragelendingwhentimesaretoughi.e.inbadtimes.Thebufferwillrangefrom0%to2.5%,
consistingofcommonequityorotherfullylossabsorbingcapital.

(d)MinimumCommonEquityandTier1CapitalRequirements:Theminimumrequirementfor
commonequity,thehighestformoflossabsorbingcapital,hasbeenraisedunderBaselIIIfrom2%to
4.5%oftotalriskweightedassets.TheoverallTier1capitalrequirement,consistingofnotonlycommon
equitybutalsootherqualifyingfinancialinstruments,willalsoincreasefromthecurrentminimumof4%
to6%.Althoughtheminimumtotalcapitalrequirementwillremainatthecurrent8%level,yetthe
requiredtotalcapitalwillincreaseto10.5%whencombinedwiththeconservationbuffer.

(e)LeverageRatio:Areviewofthefinancialcrisisof2008hasindictedthatthevalueofmanyassets
fellquickerthanassumedfromhistoricalexperience.Thus,nowBaselIIIrulesincludealeverageratio
toserveasasafetynet.Aleverageratioistherelativeamountofcapitaltototalassets(notrisk
weighted).Thisaimstoputacaponswellingofleverageinthebankingsectoronaglobalbasis.3%
leverageratioofTier1willbetestedbeforeamandatoryleverageratioisintroducedinJanuary2018.

(f)LiquidityRatios:UnderBaselIII,aframeworkforliquidityriskmanagementwillbecreated.Anew
LiquidityCoverageRatio(LCR)andNetStableFundingRatio(NSFR)aretobeintroducedin2015and
2018,respectively.

(g)SystemicallyImportantFinancialInstitutions(SIFI):Aspartofthemacroprudentialframework,
systemicallyimportantbankswillbeexpectedtohavelossabsorbingcapabilitybeyondtheBaselIII
requirements.Optionsforimplementationincludecapitalsurcharges,contingentcapitalandbailindebt.

BaselIIIisacomprehensivesetofreformmeasures,developedbytheBaselCommitteeonBanking
Supervision,tostrengthentheregulation,supervisionandriskofthebankingsector.
TheBaselCommitteeistheprimaryglobalstandardsetterfortheprudentialregulationofbanksand
providesaforumforcooperationonbankingsupervisorymatters.Itsmandateistostrengthenthe
regulation,supervisionandpracticesofbanksworldwidewiththepurposeofenhancingfinancial
stability.
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TheCommitteereportstotheGroupofGovernorsandHeadsofSupervision(GHOS).TheCommittee
seekstheendorsementofGHOSforitsmajordecisionsanditsworkprogramme.
TheCommittee'smemberscomefromArgentina,Australia,Belgium,Brazil,Canada,China,European
Union,France,Germany,HongKongSAR,India,Indonesia,Italy,Japan,Korea,Luxembourg,Mexico,
theNetherlands,Russia,SaudiArabia,Singapore,SouthAfrica,Spain,Sweden,Switzerland,Turkey,the
UnitedKingdomandtheUnitedStates.
TheBaselIIIreformmeasuresaimto:
Improvethebankingsector'sabilitytoabsorbshocksarisingfromfinancialandeconomicstress,
whateverthesource
Improveriskmanagementandgovernance
Strengthenbanks'transparencyanddisclosures.
Thereformstarget:
a.Banklevel,ormicroprudential,regulation,whichwillhelpraisetheresilienceofindividualbanking
institutionstoperiodsofstress.
b.Macroprudential,systemwiderisksthatcanbuildupacrossthebankingsectoraswellasthe
procyclicalamplificationoftheserisksovertime.
Thesetwoapproachestosupervisionarecomplementaryasgreaterresilienceattheindividualbank
levelreducestheriskofsystemwideshocks.
From1993to2008thetotalassetsofasampleofwhatwecallglobalsystemicallyimportantbankssaw
atwelvefoldincrease(increasingfrom$2.6trilliontojustover$30trillion).Butthecapitalfundingthese
assetsonlyincreasedsevenfold,(from$125billionto$890billion).Putdifferently,theaveragerisk
weightdeclinedfrom70%tobelow40%.
Theproblemwasthatthisreductiondidnotrepresentagenuinereductioninriskinthebankingsystem.
Oneofthemainreasonstheeconomicandfinancialcrisisbecamesoseverewasthatthebanking
sectorsofmanycountrieshadbuiltupexcessiveonandoffbalancesheetleverage.Thiswas
accompaniedbyagradualerosionofthelevelandqualityofthecapitalbase.
Atthesametime,manybankswereholdinginsufficientliquiditybuffers.
Thebankingsystemthereforewasnotabletoabsorbtheresultingsystemictradingandcreditlosses
norcoulditcopewiththereintermediationoflargeoffbalancesheetexposuresthathadbuiltupinthe
shadowbankingsystem.

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Thecrisiswasfurtheramplifiedbyaprocyclicaldeleveragingprocessandbytheinterconnectednessof
systemicinstitutionsthroughanarrayofcomplextransactions.
Duringthemostsevereepisodeofthecrisis,themarketlostconfidenceinthesolvencyandliquidityof
manybankinginstitutions.Theweaknessesinthebankingsectorwererapidlytransmittedtotherestof
thefinancialsystemandtherealeconomy,resultinginamassivecontractionofliquidityandcredit
availability.
Ultimatelythepublicsectorhadtostepinwithunprecedentedinjectionsofliquidity,capitalsupportand
guarantees,exposingtaxpayerstolargelosses.
Theeffectonbanks,financialsystemsandeconomiesattheepicentreofthecrisiswasimmediate.
However,thecrisisalsospreadtoawidercircleofcountriesaroundtheglobe.Forthesecountriesthe
transmissionchannelswerelessdirect,resultingfromaseverecontractioningloballiquidity,cross
bordercreditavailabilityanddemandforexports.
Giventhescopeandspeedwithwhichtherecentandpreviouscriseshavebeentransmittedaroundthe
globeaswellastheunpredictablenatureoffuturecrises,itiscriticalthatallcountriesraisethe
resilienceoftheirbankingsectorstobothinternalandexternalshocks.
TheG20LeadersattheSeoulSummitendorsedtheBaselIIIframeworkandtheFinancialStability
Boards(FSB)policyframeworkforreducingthemoralhazardofsystemicallyimportantfinancial
institutions(SIFIs),includingtheworkprocessesandtimelinessetoutinthereportsubmittedtothe
Summit.
SIFIsarefinancialinstitutionswhosedisorderlyfailure,becauseoftheirsize,complexityandsystemic
interconnectedness,wouldcausesignificantdisruptiontothewiderfinancialsystemandeconomic
activity.
WereadinthefinalG20Communique:
"WeendorsedthelandmarkagreementreachedbytheBaselCommitteeonthenewbankcapitaland
liquidityframework,whichincreasestheresilienceoftheglobalbankingsystembyraisingthequality,
quantityandinternationalconsistencyofbankcapitalandliquidity,constrainsthebuildupofleverage
andmaturitymismatches,andintroducescapitalbuffersabovetheminimumrequirementsthatcanbe
drawnuponinbadtimes.
Theframeworkincludesaninternationallyharmonizedleverageratiotoserveasabackstoptotherisk
basedcapitalmeasures.
Withthis,wehaveachievedfarreachingreformoftheglobalbankingsystem.
Thenewstandardswillmarkedlyreducebanks'incentivetotakeexcessiverisks,lowerthelikelihood
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andseverityoffuturecrises,andenablebankstowithstandwithoutextraordinarygovernmentsupport
stressesofamagnitudeassociatedwiththerecentfinancialcrisis.
Thiswillresultinabankingsystemthatcanbettersupportstableeconomicgrowth.
Wearecommittedtoadoptandimplementfullythesestandardswithintheagreedtimeframethatis
consistentwitheconomicrecoveryandfinancialstability.
Thenewframeworkwillbetranslatedintoournationallawsandregulations,andwillbeimplemented
startingonJanuary1,2013andfullyphasedinbyJanuary1,2019."
Toensurevisibilityoftheimplementationofreforms,theBaselCommitteehasbeenregularlypublishing
informationaboutmembersadoptionofBaselIIItokeepallstakeholdersandthemarketsinformed,and
tomaintainpeerpressurewherenecessary.
Itisespeciallyimportantthatjurisdictionsthatarehometoglobalsystemicallyimportantbanks(GSIBs)
makeeveryefforttoissuefinalregulationsattheearliestpossibleopportunity.
ButsimplyissuingdomesticrulesisnotenoughtoachievewhattheG20Leadersaskedfor:full,timely
andconsistentimplementationofBaselIII.Inresponsetothiscall,in2012theCommitteeinitiatedwhat
hasbecomeknownastheRegulatoryConsistencyAssessmentProgramme(RCAP).
Theregularprogressreportsaresimplyonepartofthisprogramme,whichassessesdomestic
regulationscompliancewiththeBaselstandards,andexaminestheoutcomesatindividualbanks.
TheRCAPprocesswillbefundamentaltoensuringconfidenceinregulatoryratiosandpromotingalevel
playingfieldforinternationallyoperatingbanks.
Itisinevitablethat,astheCommitteebeginstoreviewaspectsoftheregulatoryframeworkinfarmore
detailthanit(oranyoneelse)haseverdoneinthepast,therewillbeaspectsofimplementationthatdo
notmeettheG20saspiration:full,timelyandconsistent.
Thefinancialcrisisidentifiedthat,likethestandardsthemselves,implementationofglobalstandardswas
notasrobustasitshouldhavebeen.
Thiscouldbeclassedasafailurebyglobalstandardsetters.
Tosomeextent,thecriticismcanbejustifiednotenoughhasbeendoneinthepasttoensureglobal
agreementshavebeentrulyimplementedbynationalauthorities.
However,justastheCommitteehasbeendeterminedtorevisetheBaselframeworktofixtheproblems
thatemergedfromthelessonsofthecrisis,theRCAPshouldbeseenasdemonstratingthe
Committeesdeterminationtoalsofindimplementationproblemsandfixthem.
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BaselIIIisdividedintwomainareas:
Regulatorycapital
Assetandliabilitymanagement
AREA1:RegulatoryCapital
Banksshallprogressivelyreachaminimumsolvencyratioof7%asof2019:
Solvencyratio=(RegulatoryCapital)/(RiskWeightedAssets).[RWA=RiskWeightedAssets]
Theminimumrequirementusedtobe2%priortoBasel3,withmanynationalbankingauthorities
requiringmuchmoreleadingtothatmostbanksusedtohaveaTier1ratioexceeding7%
AccordingtotheBaselIIIimpactstudy,attheendof2009,theaveragesolvencyratio(CoreTierOne)of
largebankswas11.1%
So,whatistheproblem,ifbanksalreadyexceedtheminimumsolvencyratiosetbyBaselIII?Thedevil
isinthedetailsandhereiswherewefindtheproblemscausedtothecorporatesector:
ThedefinitionsoftheRegulatoryCapitalandtheRWAhavechanged:
CalculatedaccordingtotheBaselIIIdefinitions,theCoreTierOneratiowouldhavebeen5.7%instead
of11.1%accordingtotheolddefinitions
The87largebankswhoansweredtheimpactstudywouldhavebeenshortof600bnofequityatthe
endof2009.Newstresstestsaredisclosedregularlyandtheshortcomingsdiffer,buttheyarestillthere.
Thismeansthatbankswilleither/orhavetoraisemorecapitalordecreaseitspresentlending,whichwill
createacrowdingoutofcapitalinthefinancialmarketseitherway.
Therearenewdefinitionsofcoreequityleadingtothatitisreducedwithupto40%forlargebanks
increasedthecrowdingouteffectsevenfurther.Majorchangesinthedefinition:
SomefinancialinstrumentsarenotanylongereligibleasRegulatoryCapital
IntangiblesanddeferredtaxassetsshallbedeductedfromtheRegulatoryCapital
TherearechangesinhowRWAiscalculatedinaverageincreasingitwith23%.Majorchangesinclude:
SharpincreaseofRWAamountsfromtradingactivities(stresstestsonvalueatrisk,securitisations)
leadingtomanybanksdecreasingthetradingleadingtofewerbanksquotingprices.Thishasalready
ledtoreducedliquidityandincreasedcostsandrisksforcorporatesinmanagingitsfinancialexposure
fromimportandexportetc
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Thisencouragesparticularlybankstoperformtheirswapsthroughclearinghouses
Thismayweightoncomplexderivativesbusinesses
Loanportfoliosrequirebeingmarkedtomarketeventhoughitisnotrequiredbyaccountingstandards.
Thisincreasesprocyclicality
BaselIIIintroducesaLeverageRatiosuchthattheamountsofassetsandcommitmentsshouldnot
representmorethan33timestheRegulatoryCapital,regardlessoftheleveloftheirriskweightingand
ofthecreditcommitmentsbeingdrawndownornot
TheFinancialStabilityBoardrecommendedinJuly2011thatthe29identifiedsystemicallyimportant
financialinstitutionshaveaCoreTier1ratioincreasedbetween1%and2.5%.OfcoursetheseSIFIs
arethemainlargecorporatesbankingcounterparts.ThisprovisionhasbeenenactedbytheG20in
November2011.
TheEuropeanCommissionhasadded:
Minimumsolvencyratioshallbe9%fortheEUbanks(insteadof7%)
TheEUbanksshallcomplywiththislevelinJune2012(insteadof2019)
AREA2:Assetsandliabilitiesmanagement
Bankswillhavetocomplywithtwonewratios:
LiquidityCoverageRatio(LCR)
NetStableFundingRatio(NSFR)
LCR:highqualityhighlyliquidassetsavailablemustexceedthenetcashoutflowsofthenext30days:
Highqualityhighlyliquidassets:
Level1assets:Recognizedat100%:cash,sovereigndebtofcountriesweightedat0%(whichinclude
thePIIGSastheyarepartoftheEurozone),depositatcentralbank.Level1assetsshallaccountforat
least60%ofthehighqualityhighlyliquidassets
Level2Aassets:Recognizedat85%andmustnotrepresentmorethan40%oftheassets:sovereign
debtweightedat20%(countriesratedbelowAA),corporatebondsandcoveredbondsratedatleast
AA
Level2Bassets(introducedJan,2013):nonfinancialcorporatebondsratedbetweenBBBandA+,with
ahaircutof50%certainunencumberedequities,withahaircutof50%andcertainresidential
mortgagebackedsecurities(RMBS),withahaircutof25%.
TheLevel2Bassetswillnotbeeligibleformorethan15%ofthehighqualityhighlyliquidassetsanda
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totallevel2assetswillnotbeeligibleformorethan40%ofthehighqualityhighlyliquidassets
ChangesfromJanuary2013provide:
Tosomeextent,lessercostofcarryforbanksonhighqualityhighlyliquidassetsbutstilllimited
becauseofthe50%haircutand15%limitation
Improvementforthefinancingofinvestmentgradedcompanies(BBBandabove)bybanksthrough
bonds,whichwillremainincompetitionwithresidentialmortgagebackedsecurities(RBMS)withlesser
haircutandwhosemarketsisrestoredwiththesenewprovisions
Level1assetsremainatleast60%ofthehighqualityhighlyliquidassets,whichmeansthat
concentrationrisksandcostofcarryremain.
Netcashoutflows=cashoutflowscashinflows
NSFR:longtermfinancialresourcesmustexceedlongtermcommitments(longterm=andmorethan1
year):
Stablefunding:
equityandanyliabilitymaturingafteroneyear
90%ofretaildeposits
50%ofdepositsfromnonfinancialcorporatesandpublicentities
Longtermuses:
5%oflongtermsovereigndebtorequivalentwith0%BaselIIStandardapproachriskweighting(see
commentaboveforLCR)witharesidualmaturityabove1year
20%ofnonfinancialcorporateorcoveredbondsatleastratedAAwitharesidualmaturityabove1year
50%ofnonfinancialcorporateorcoveredbondsatleastratedbetweenAandA+witharesidual
maturityabove1year
50%ofloanstononfinancialcorporatesorpublicsector
65%ofresidentialmortgagewitharesidualmaturityabove1year
5%ofundrawncreditandliquidityfacilities

RBIGuidelinesforImplementationofBaselIIIGuidelines
BackGroundforBaselIII:

EarlierguidelineswereknownasBaselIandBaselIIaccords.Lateronthecommitteewasexpandedto
includemembersfromnearly30countries,includingIndia.InspiteofimplementationofBaselIandII
guidelines,thefinancialworldsawtheworstcrisisinearly2008andwholefinancialmarketstumbled.
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OneofthemajordebacleswasthefallofLehmanBrothers.Oneoftheinterestingcommentsonthe
BalanceSheetofLehmanBrothersread:Whateverwasonthelefthandside(liabilities)wasnotright
andwhateverwasontherighthandside(assets)wasnotleft.Thus,itbecamenecessarytorevisit
BaselIIandplugtheloopholesandmakeBaselnormsmorestringentandwiderinscope.

BCBS,throughBaselIII,putforwardnormsaimedatstrengtheningbothsidesofbalancesheetsof
banksviz.
(a)enhancingthequantumofcommonequity
(b)improvingthequalityofcapitalbase
(c)creationofcapitalbufferstoabsorbshocks
(d)improvingliquidityofassets
(e)optimisingtheleveragethroughLeverageRatio
(f)creatingmorespaceforbankingsupervisionbyregulatorsunderPillarIIand
(g)bringingfurthertransparencyandmarketdisciplineunderPillarIII.
Thus,BaselIIInormswerereleasedbyBCBSandindividualcentralbankswereaskedtoimplement
theseinaphasedmanner.RBI(India'scentralbank)tooissueddraftguidelinesintheinitialstageand
thencameupwiththefinalguidelines.
OverViewftheRBIGuidelinesforImplementationofBaselIIIguidelines:

ThefinalguidelineshavebeenissuedbyReserveBankofIndiaforimplementationofBasel3guidelines
on2ndMay,2012.FulldetailedguidelinescanbedownloadedfromRBIwebsite,byclickingonthe
followinglink:ImplementationofBaseIIIGuidelines.Majorfeaturesoftheseguidelinesare:

(a)TheseguidelineswouldbecomeeffectivefromJanuary1,2013inaphasedmanner.Thismeans
thatasatthecloseofbusinessonJanuary1,2013,banksmustbeabletodeclareordisclosecapital
ratioscomputedundertheamendedguidelinesTheBaselIIIcapitalratioswillbefullyimplementedason
March31,2018

(b)ThecapitalrequirementsfortheimplementationofBaselIIIguidelinesmaybelowerduringtheinitial
periodsandhigherduringthelateryears.BanksneedstokeepthisinviewwhileCapitalPlanning

(c)GuidelinesonoperationalaspectsofimplementationoftheCountercyclicalCapitalBuffer.Guidance
tobanksonthiswillbeissuedinduecourseasRBIisstillworkingonthese.Moreover,someother
proposalsviz.DefinitionofCapitalDisclosureRequirements,CapitalisationofBankExposuresto
CentralCounterpartiesetc.,arealsoengagingtheattentionoftheBaselCommitteeatpresent.
Therefore,thefinalproposalsoftheBasel
Committeeontheseaspectswillbeconsideredforimplementation,totheextentapplicable,infuture.
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(d)ForthefinancialyearendingMarch31,2013,bankswillhavetodisclosethecapitalratioscomputed
undertheexistingguidelines(BaselII)oncapitaladequacyaswellasthosecomputedundertheBasel
IIIcapitaladequacyframework.

(e)TheguidelinesrequirebankstomaintainaMinimumTotalCapital(MTC)of9%against8%
(international)prescribedbytheBaselCommitteeofTotalRiskWeightedassets.Thishasbeen
decidedbyIndianregulatorasamatterofprudence.Thus,itrequirementinthisregardremainedat
thesamelevel.However,bankswillneedtoraisemoremoneythanunderBaselIIasseveralitemsare
excludedunderthenewdefinition.

(f)oftheabove,CommonEquityTier1(CET1)capitalmustbeatleast5.5%ofRWAs

(g)InadditiontotheMinimumCommonEquityTier1capitalof5.5%ofRWAs,(internationalstandards
requirethesetobeonlyat4.5%)banksarealsorequiredtomaintainaCapitalConservationBuffer
(CCB)of2.5%ofRWAsintheformofCommonEquityTier1capital.CCBisdesignedtoensurethat
banksbuildupcapitalbuffersduringnormaltimes(i.e.outsideperiodsofstress)whichcanbedrawn
downaslossesareincurredduringastressedperiod.Incasesuchbuffershavebeendrawndown,the
bankshavetorebuildthemthroughreduceddiscretionarydistributionofearnings.Thiscouldinclude
reducingdividendpayments,sharebuybacksandstaffbonus.

(h)IndianbanksunderBaselIIarerequiredtomaintainTier1capitalof6%,whichhasbeenraisedto
7%underBaselIII.Moreover,certaininstruments,includingsomewiththecharacteristicsofdebts,will
notbenowincludedforarrivingatTier1capital

(i)Thenewnormsdonotallowbankstousetheconsolidatedcapitalofanyinsuranceornonfinancial
subsidiariesforcalculatingcapitaladequacy.

(j)LeverageRatio:Underthenewsetofguidelines,RBIhassettheleverageratioat4.5%(3%under
BaselIII).LeverageratiohasbeenintroducedinBasel3toregulatebankswhichhavehugetrading
bookandoffbalancesheetderivativepositions.However,InIndia,mostofbanksdonothavelarge
derivativeactivitiessoastoarrangeenhancedcoverforcounterpartycreditrisk.Hence,thepressure
onbanksshouldbeminimalonthiscount.
(k)Liquiditynorms:TheLiquidityCoverageRatio(LCR)underBaselIIIrequiresbankstoholdenough
unencumberedliquidassetstocoverexpectednetoutflowsduringa30daystressperiod.InIndia,the
burdenfromLCRstipulationwilldependonhowmuchofCRRandSLRcanbeoffsetagainstLCR.
Underpresentguidelines,IndianbanksalreadyfollowthenormssetbyRBIforthestatutoryliquidity
ratio(SLR)andcashreserveratio(CRR),whichareliquiditybuffers.TheSLRismainlygovernment
securitieswhiletheCRRismainlycash.Thus,forthisaspectalsoIndianbanksarebetterplacedover
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manyoftheiroverseascounterparts.

(l)CountercyclicalBuffer:Economicactivitymovesincyclesandbankingsystemisinherentlyprocyclic.
Duringupswings,carriedawaybytheboom,banksendupinexcessivelendinganduncheckedrisk
buildup,whichcarrytheseedsofadisastrousdownturn.Theregulationtocreateadditionalcapital
bufferstolendfurtherwouldactasabreakonunbridledbanklending.Thedetailedguidelinesforthese
arelikelytobeissuedbyRBIonlyatalaterstage.

Onthedayofreleaseoftheseguidelines,analystsfeltthatIndiamayneedatleast$30billion(i.e.
aroundRs1.6trillion)to$40billionascapitaloverthenextsixyearstocomplywiththenewnorms.It
wasalsofeltthatthiswouldimposeaheavyfinancialburdenonthegovernment,asitwillneedtoinfuse
capitalincaseitwantstocontinueitsholdonthesePSBanks.RBIDeputyGovernor,MrAnandSinha
viewedthattheimplementationofBaselIImayhaveanegativeimpactonIndia'sgrowthstory.InFY
201213,GovernmentofIndiaisexpectedtoprovideRs15888crorestorecapitalizethebanks.asto
maintaincapitaladequacyof8%underoldBaselIInorms.

SomeMajorDevelopmentsafter2ndMay2012(i.e.thedatewhenRBIissuedBaselIIIguidelines):

(a)On30thOctober2012,RBIinitsSecondQuarterReviewofMonetaryPolicy201213hasdeclared
asfollows:

(i)"BaselIIIDisclosureRequirementsonRegulatoryCapitalComposition
TheBaselCommitteeonBankingSupervision(BCBS)hasfinalisedproposalsondisclosure
requirementsinrespectofthecompositionofregulatorycapital,aimedatimprovingtransparencyof
regulatorycapitalreportingaswellasmarketdiscipline.Asthesedisclosureshavetobegiveneffectby
nationalauthoritiesbyJune30,2013,ithasbeendecided:
toissuedraftguidelinesoncompositionofcapitaldisclosurerequirementsbyendDecember2012.
(ii)BanksExposurestoCentralCounterparties(CCP)
TheBCBShasalsoissuedaninterimframeworkfordeterminingcapitalrequirementsforbank
exposurestoCCPs.ThisframeworkisbeingintroducedasanamendmenttotheexistingBaselIIcapital
adequacyframeworkandisintendedtocreateincentivestoincreasetheuseofCCPs.Thesestandards
willcomeintoeffectonJanuary1,2013.Accordingly,ithasbeendecided:
toissuedraftguidelinesoncapitalrequirementsforbankexposurestocentralcounterparties,basedon
theinterimframeworkoftheBCBS,bymidNovember2012.

(iii)CorePrinciplesforEffectiveBankingSupervision
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6/6/2016

FreeMockTestforJAIIB&CAIIB

TheBaselCommitteehasissuedarevisedversionoftheCorePrinciplesinSeptember2012toreflect
thelessonslearnedduringtherecentglobalfinancialcrisis.Inthiscontext,itisproposed:
tocarryoutaselfassessmentoftheexistingregulatoryandsupervisorypracticesbasedontherevised
CorePrinciplesandtoinitiatestepstofurtherstrengthentheregulatoryandsupervisorymechanism.
(b)On7thNovember,2012:RBIhasissuedfinalguidelinesinrespectofLiquidityRiskManagementby
Banks
OnSeptember1,2014:RBIrevisedsomeofitsrulesgoverninginstrumentsthatqualifyasbankcapital
underBaselIII
RevisedrulesmakeinstrumentsmoreattractiveandbroadenthebaseforAT1bondstoincluderetail
investors
MoodyssaystheamendedruleswillalsoallowbankstohaveahigherproportionofAT1intheirTier1
capital
Themajorbenefitisexpectedtoaccruetopublicsectorbanks
LowcapitallevelsareakeycreditweaknessformanyIndianbanks,particularlyPSBs

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