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    Copyright 2011 Accenture All Rights Reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

    Basel III and Liquidity Standard Status Quo and Next Steps

    Dr. Georg von Pfstl

    PRMIA Frankfurt Chapter, Sept. 2011

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    Agenda

    Basel III Status Quo

    Basel III Liquidity Standard

    Basel III Implications & Implementation Challenges

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    Key topics of Basel III will be implemented through anEU Regulation no further translation into national

    law required

    From Basel II to Basel III

    Basel 2.5 Basel III

    Legal basis (EU)

    CRD (2009/111/EC)published in the OfficialJournal (Nov. 2009)(CRD II)

    CRD (2010/76/EU)published in theOfficial Journal (Dec.2010) (CRD III)

    CRD IV (package of two legal instruments: Directiveand Regulation)

    Status European/national imple-mentation and

    transposed intonational law

    partially transposedinto national law

    Basel III published by the BCBS in Dec. 2010 (rev.version of capital framework June 2011)

    Proposals of Directive and Regulation published by the

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    uropean omm ss on n u y

    Directive: to be translated into national law till 31 Dec.2012; Regulation: no national translation required

    Coming into force 31 Dec., 2010 31 Dec. 2011 01 Jan. 2013 (with transition periods till 2019)

    Topics large exposures

    securitization

    hybrid capitalinstruments

    liquidity riskmanagement

    cross bordersupervision

    re-securitization

    disclosuresecuritization risks

    trading book

    Remunerationpolicies

    Regulation

    definition of capital

    liquidity risk

    leverage ratio counterparty credit risk

    single rule book (through Regulation)

    Directive

    capital buffers

    enhanced governance

    sanctions

    enhanced supervision

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    Accenture estimated impact of Basel III (1/2)

    Topic Brief description Potential impact for banks*

    Impact Explanation/remarksDefinition ofcapital

    New definition of capital toincrease quality, consistencyand transparency of thecapital base

    High New definition of capital leads to a significantreduction of the capital ratios build up of capital(quantitative/qualitative), e.g. by issuing capitalinstruments or retaining earnings

    The new liquidity ratios are the key challenge for mostbanks as they influence liquidity and funding strategy,

    pricing and the business model

    everage ra o ew everage ra o as a

    supplementary measure tothe risk-based Basel IIframework

    e um everage a o es gn: er cap a o a

    exposure; gross ratio calibration: 3%) mightnarrow the scope of action for banks given theexisting capital

    Liquiditystandards

    Introduction of a short-termLCR and a longer-termNSFR

    High Ratios require increase of high quality liquid assetsand change of funding mix which leads to higherliquidity costs. Further banks are expected toadhere to the sound principles of liquidity riskmanagement

    Counterpartycredit risk(CCR)

    Higher capital requirementsfor CCR arising fromderivatives, repos andsecurities financing activities

    Medium toHigh**

    Enhanced risk coverage (CCR; CVA; wrong wayrisk; asset value correlation for large financialinstitutions; CCP) leads to an increase of capitalrequirements for the trading book and complexsecuritization exposures

    * Rough assessment; impact depends on bank specifics** Depending on trading book and investment bank activities

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    Accenture estimated impact of Basel III (2/2)

    Topic Brief description Potential impact for banks*

    Impact Explanation/remarksCounter-cyclicalmeasures

    Introduction of capital con-servation and countercyclicalcapital bufferIn discussion: EL-approachfor provisioning; TTC**

    Medium When capital levels fall into conservation rangeconstraints on capital distribution are imposed.Countercyclical buffer extends capital conservationbuffer. Pressure from the market to fulfill ratiosbefore regulatory deadline

    The discussed measures for SIFIs might have a materialimpact on those institutions. The definition of SIFIs is

    currently in discussion

    parameters

    Systemicallyimportantfinancialinstitutions

    Approach could includecombinations of capitalsurcharges, contingentcapital and bail-in debt (indiscussion)Capital surcharge of 1-2.5%is proposed (CET1 capital)

    High Different measures currently in discussion; capitalsurcharge of 1-2.5% of RWA (depending onbucket) is proposed (CET 1 capital); definition ofSIFIs currently in discussion ( Indicator-basedmeasurement approach)

    Single rulebook (entireregulation)

    Creation of consistent rules removal of nationaldiscretions

    Low Regulation harmonizes divergent nationalsupervisory approaches by removing options anddiscretions

    * Rough assessment; impact depends on bank specifics** through the cycle

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    Accenture estimated implementation effort of Basel III

    Topic Implementation effort*

    Functional Technical Organizational

    Definition capital High Medium Medium

    Leverage Ratio Low Low Low

    The liquidity standards will have a high functional,technical as well as organizational implementation

    effort

    Liquidity standards High High High

    Counterparty creditrisk (CCR)

    High High Low

    Countercyclicalmeasures

    Medium Medium Low

    SIFIs Medium Medium High (depending onregulation evolution)

    Single rule book Low Low Low

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    * Rough assessment; implementation effoert depends on bank specifics

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    Basel III introduces two liquidity ratios to promotethe short-term and the longer-term resilience of the

    liquidity risk profile of institutions

    Global Liquidity Standard

    100%

    LCR

    High quality liquid assets

    Total net cash outflows-

    > 100%

    Available stable funding

    Required stable funding

    NSFR

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    Institutions have to ensure that they havesufficient high quality liquid assets to survivean acute stress scenario lasting for 30 days

    Institutions are required to fund theiractivities with more stable sources offunding on an ongoing structural basis

    Frequency of calculation and reporting: Banks are expected to meet the requirements of the

    standards continuously; first reporting to supervisors is expected by Jan 1, 2012 LCR: reported at least monthly, with the operational capacity to increase the frequency to weekly or even

    daily in stressed situations; introduced on Jan 1, 2015

    NSFR: calculated and reported at least quarterly; introduced on Jan 1, 2018

    Scope of application: Level of individual institution (with legal personality)

    Disclosure of LCR and NSFR under pillar 3

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    The LCR aims to ensure that banks maintain anadequate level of high-quality liquid assets to survive

    a severe liquidity stress scenario lasting for 30 days

    LCR: High quality liquid assets

    High quality liquid assets

    Conditions high quality liquid assets (e.g.):

    Not issued by the institution or parent/subsidiary

    Eligibility as collateral in normal times for intradayliquidity needs and overnight liquidity facilities of a CB

    Listed on a recognized exchange

    LCR

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    100%. .

    Appropriate diversification Assets are legally and practically readily available at any

    time during the next 30 days

    Liquid assets are controlled by a liquidity managementfunction

    High quality liquid assets items: Level 1 assets (cash; transferable assets of extremely

    high liquidity and credit quality): min. 60% of liquidassets; market value; no haircut

    Level 2 assets (transferable assets that are of highliquidity and credit quality): max. 40% of liquid assets;

    market value; haircut of min. 15%

    Total net liquidity outflowsover 30-day time period

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    Total net cash outflows are defined as the totalexpected cash outflows minus total expected cash

    inflows in the specified stress scenario

    Net liquidity outflows =

    Liquidity outflows Min {Liquidity inflows; 75% ofliquidity outflows)

    Net liquidity outflows:

    LCR: Net liquidity outflows

    LCR

    High quality liquid assets

    Liquidity outflows minus liquidity inflows in the stress

    scenario. The scenario includes firm-specific andsystemic factors

    Calculation liquidity outflows:

    Multiplication of the items with the respective run offfactor

    Calculation liquidity inflows:

    Multiplication of the items with the specified inflowfactor; inflows are capped with 75% of the outflows

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    100%Total net liquidity outflows

    over 30-day time period

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    Liquidity Coverage Ratio

    The definition of high quality liquid assets and thetreatment of interbank funding are key discussion

    points

    LCR

    100%

    Level 1 assets: cash; transferable assets of extremelyhigh liquidity and credit quality (min. 60% of liquid assets)

    Level 2 assets: transferable assets that are of highliquidity and credit quality): max. 40% of liquid assets;market value; haircut of min. 15%

    High quality liquid assets

    10

    Retail deposits (5-10%)

    Other liabilites coming dueduring next 30 days (0-100%)

    Collateral other than level 1assets (15-20%)

    Credit and liquidity facilities (5-100%)

    Monies due from non financial customer(50%)

    Secured lending and capital marketdriven transactions (0%-100%)

    Undrawn credit and liquidity facilities(0%)

    Specified payables and receivablesexpected over the 30 day horizon (100%)

    Liquid assets (0%)

    New issuance of obligations (0%)

    Liquidity outflows Liquidity inflows-

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    The NSFR should ensure that long term assets arefunded with at least a minimum amount of stable

    liabilities in relation to their liquidity risk profiles

    NSFR: Available stable funding

    Available stable funding

    Available stable funding*

    Items ASF factor**

    Tier 1 & 2 capital Preferred stock not included in Tier 2 capital with

    maturity 1 year Secured and unsecured borrowings and liabilities

    with effective remaining maturities 1 year

    100%

    NSFR

    * Stable funding is defined as the portion of those types and amounts of equity and liability financing expected to be reliable sources of funds over a one-year time horizon underconditions of extended stress.

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    > 100%

    Required stable funding

    "Stable" non-maturity (demand) deposits and/orterm deposits with residual maturity < 1 year 90%

    "Less stable" non-maturity (demand) depositsand/or term deposits with residual maturities < 1year

    80%

    Unsecured wholesale funding, non-maturitydeposits and/or term deposits with a residual

    maturity < 1 year, provided by non-financialcorporates, sovereigns, central banks, multilateraldevelopment banks and PSEs

    50%

    All other liabilities and equity categories notincluded in the above categories

    0%

    ** The proposed EU Regulation does not include any ASF- or RSF factor. Neither at this point in time it is stated whether the NSFR should be > or 100%.

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    Funding provided by financial institutions and loansto such firms are assigned with a low ASF and a high

    RSF respectively

    Required stable funding

    Items RSFfactor*

    Cash Short-term unsecured actively-traded instruments (< 1 yr) Securities with exactly offsetting reverse repo Securities with remaining maturity < 1 yr Non-renewable loans to FI with remaining maturity < 1 yr

    0%

    NSFR: Required stable funding

    NSFR

    Available stable funding

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    Debt issued or guaranteed by sovereigns, CB, BIS, IMF, EC, non-

    central government, MDB with a 0% STA risk weight

    5%

    Unencumbered non-financial senior unsecured corporate bonds andcovered bonds rated at least AA-, and debt that is issued bysovereigns, CB, and PSEs with a risk-weighting of 20%; maturity 1 yr

    20%

    Unencumbered listed equity securities or non-financial seniorunsecured corporate bonds (or covered bonds) rated from A+ to A-,maturity 1 yr

    Gold

    Loans to non-financial corporate clients, sovereigns, central banks, andPSEs with a maturity < 1 yr

    50%

    Unencumbered residential mortgages of any maturity and otherunencumbered loans, excluding loans to financial institutions with aremaining maturity of one year or greater that would qualify for the 35%or lower risk weight under Basel II standardised approach for credit risk

    65%

    Other loans to retail clients and small businesses having a maturity < 1yr

    85%

    All other assets 100%

    > 100%

    Required stable funding

    * The proposed EU Regulation does not include any ASF- orRSF factor. Neither at this point in time it is stated whether the

    NSFR should be > or 100%.

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    Basel III introduces a common set of monitoring toolsthat should allow competent authorities to obtain a

    comprehensive view of the liquidity profile of institutions

    Contractual

    maturitymismatch

    Contractual cash and security inflows and outflows from all on- and off-balancesheet items, mapped to defined time bands based on their respective maturities

    Monitoring Tools

    Concentrationof funding

    Different ratios/figures which should help to identify those sources of wholesalefunding that are of such significance that withdrawal of this funding could trigger

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    Availableunencumberedassets

    Available unencumbered assets that are marketable as collateral in secondarymarkets and/or eligible for central banks standing facilities

    LCR by

    significantcurrency

    Foreign Currency LCR = Stock of high-quality liquid assets in each significant

    currency / Total net cash outflows over a 30-day time period in each significantcurrency

    Market-relatedmonitoringtools

    Early warning indicators based on high frequency market data with little or no timelag (market wide information; information on the financial sector; bank-specificinformation)

    The proposed EU Regulation does not include any concrete monitoring tools. Rather EBA shall develop draft implementing technical standards regarding liquidity monitoringmetrics that allow competent authorities to obtain a comprehensive view of the liquidity profile of institutions.

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    Copyright 2011 Accenture All Rights Reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.