Basel_III_-_Impact_on_Foreign_Banks_in_India.pdf

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Basel III Impact onForeign Banks in India Discussion note

May 2012

www.pwc.com

May 2012


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RBI guidelines on Basel III Key components

Tighter definitionsfor regulatory

capital

Capital bufferrequirements

Enhancedcounterparty credit

risk controls

Enhanced liquiditystandards

Leverage ratio

Redefined Core, Tier1, Tier 2 capital:Qualifying asset types arerestricted and tier isstructure is rationalized

Public disclosure

requirements: Banksmust reconcile regulatorycapital to auditedfinancial statements

Higher levels ofcapital: Common equityrequirement increasedfrom 2% to 5.5%, plus a2.5% conservation. Tier 1capital ratio increased to

8% Contingent capital:

Banks must hold furtherdebt securities that canconvert to equity in timesof stress

Capital conservationbuffer: Banks mustmaintain a buffer abovethe minimum capitalrequirements

Countercyclical

capital buffer: Banksmust maintain anadditional capital bufferduring times of excessivecredit growth

Framework forcapital bufferreplenishment: Banksare constrained indistributing earnings if

buffers under-funded

Strengthenedcounterparty creditrisk management:Banks must includeStressed inputs, creditvaluation adjustments

and wrong-way risk inrisk modelling andconduct robust back-testing

Strengthenedcollateral mgmtstandards: Banks mustimprove collateraloperations and applylonger margining periods

for derivatives exposures Incentives for central

clearing of OTCProducts: Centrallycleared products aregiven low risk weightings

Short-term liquiditycoverage ratio: Banksmust meet fundingobligations for 30 daysunder an acute liquiditystress scenario

Long-term net stablefunding ratio: Banksmust hold adequatelonger-term stablefunding sources in termsof the liquidity profile oftheir assets

Non-risk weightedmeasure of exposure:Banks must keep the ratioof Tier 1 capital to gross-exposures, including off-balance sheet exposures,

at specific conversionrates, above 4.5%(current RBI guidelines)

As RBI guidelines on Basel III impact heavily on capital, liquidity and overall leverage, they willnecessitate changes to the business and operational strategy of several banks

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Capital Base Transitional arrangements : RBI guidelineson Basel III

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Jan 1,2013

Mar 31,2014

Mar 31,2015

Mar 31,2016

Mar 31,2017

Mar 31,2018

Min Common Equity Tier 1 4.5% 5.0% 5.5% 5.5% 5.5% 5.5%

Capital conservation buffer - - 0.625% 1.25% 1.875% 2.5%

Min common equity + capconservation buffer

4.5% 5.0% 6.125% 6.75% 7.375% 8.0%

Minimum Tier 1 Capital 6.0% 6.5% 7.0% 7.0% 7.0% 7.0%

Minimum Total Capital * 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%

Min Total Capital + capconservation buffer

9.0% 9.0% 9.625% 10.25% 10.875% 11.5%

Phase in of deductions fromCommon Equity Tier 1

40% 40% 60% 80% 100% 100%

Capital instruments that nolonger qualify as Tier 1 or Tier 2

Phased out over 10 year period starting January 2013

* The difference between the minimum total capital requirement of 9% and the Tier 1 requirement can bemet with Tier 2 and higher forms of capital.


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RBI guidelines on Basel III Impact on foreign banks inIndia (1)

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Common equity and retained earnings should be the predominant component of Tier 1capital instead of debt-like instruments, well above the current 50% rule

Gradual phase-out of hybrid Tier 1 components including many of the step-up /innovative / SPV issued Tier 1 instruments used by banks

Minimum common equity Tier 1:

Increased from 2% to 5.5%

Plus capital conservation buffer of 2.5%

Bringing total common equity requirements to 8.0%

Minimum total capital:

Increased from 9.0% to 11.5% (including conservation buffer)

To be phased in from 2013 to 2018

Tighterdefinitions for

regulatorycapital

Capital conservation buffer of 2.5 % in addition to minimum capital requirements Counter-cyclical capital buffer being developed which is expected to be implementedby increases to the capital conservation buffer during periods of excessive creditgrowth. RBI will issue further guidelines on CC, this may lead to marginally additionalcapital requirement

Capital bufferrequirements


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RBI guidelines on Basel III Impact on foreign banks inIndia (2)

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Improved counterparty risk management standards in the area of collateralmanagement and stress-testing

Encouraging use of Central Counterparties (CCPs) for standardised derivatives

Enhancedcounterpartycredit riskcontrols

The liquidity coverage ratio will help ensure that banks have sufficient high-qualityliquid assets to withstand a stressed funding scenario specified by RBI

For liquidity coverage ratio, assets get a liquidity based weightage varying from100% for government bonds and cash to 0%-50% for corporate bonds

For net stable funding ratio, required and available funding amounts are determinedusing weighing factors, reflecting the stability of the funding available and theduration of the asset LCR & NSFR

For net stable funding ratio, the weightage factors for assets vary from 0% and 5% forcash and government bonds, to 85% for retail loans and small business loans(remaining maturity < 1 year) and 100% for other assets

Enhancedliquiditystandards

The leverage ratio is implemented on a gross and un-weighted basis (banks totalassets including both on and off-balance sheet assets) as a proportion of the bankstotal capital. This does not take into account the risks related to the assets. Finalleverage ratio requirement would be prescribed by RBI after the parallel run takinginto account the prescriptions given by the Basel Committee

Banks which at present have the leverage ratio below 4.5% may endeavor to bring itabove 4.5% as early as possible

LeverageRatio


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