Bennett Quillen – Basel III Measurements
by Bennett Quillen
Basel III common equity and tier 1 capital changes
Summary of Basel III changes
• Minimum common equity requirement 2 to 4.5%
• Capital conservation buffer 2.5% – met with common equity. If under, greater contraints on earning distributions are imposed
• Total common equity requirement is 7%
• Higher capital requirements for trading, derivatives, securitisation at end 2011
• Tier 1 capital from 4 to 6% over the same period
• Countercyclical buffer in the range of 0 to 2.5% of common equity according to national circumstances
• Supplemented by non risk based leverage ratio
• Pillar 1 treatment will start on the 1st January 2018
Systemically important banks should have a loss absorbing capacity beyond the standards above. Such guidelines are being developed which could include capital surcharge, contingent capital and bail in debt.
Note: Large banks need a significant amount of additional capital
Facilitating “sound practices” in risk management with IBM® OpenPages® Operational Risk Management
This whitepaper discusses operational risk management in the context of “Sound Practices for the Management and Supervision of Operational Risk,” a paper from the Basel Committee that provides an outline for building an effective ORM framework to deliver a better return on investment and improved business performance.
Risk management in the current post-meltdown economy is perhaps the single largest challenge organizations are facing in today’s troubled corporate climate. The events of the last few years have prompted executives to focus their operational sights on risk management and take measures to evaluate how a well-defined risk strategy can drive business performance, even in the most perilous economic environment.
Factors such as increased transaction volumes, dependence on new technologies, the internet and mergers and acquisitions have introduced higher degrees of complexity and uncertainty in business operations.
In addition, rising shareholder influence and the recent high-profile financial fiascos resulting from the financial meltdown have led to increased regulation and anticipated legislation to ensure that risks are being managed in a more effective and auditable fashion.
As a result, organizations’ boards of directors now assume a greater degree of accountability and have begun to fully understand the importance of instilling a risk-aware culture to gain better visibility of corporate risk. To achieve these goals, organizations need to foster a risk-based approach to enterprise governance, where all employees view risk management as an integral part of their daily responsibilities. Whether employees are IT, audit, compliance or business line managers, there is always a risk of non-compliance risk of IT security or regulatory non-compliance, operational risk and so on. To be effective, a risk-based strategy requires cross-departmental collaboration and coordination to create a common language for risk and synchronize the activities of the different operational functions.
1 Executive summary
2 The importance of risk management
2 The need for sound business practices
2 The Ability to Enforce Sound Practices
3 Principle I: Board approval
3 Principle II: Independent internal audit
3 Principle III: Senior management implementation
4 Principle IV: Risk identification and assessment
4 Principle V: Risk monitoring and reporting
5 Principle VI: Risk mitigation
5 Principle VII: Contingency and continuity Planning
5 Principle VIII: Supervisors requirement
5 Principle IX: Supervisors requirement
5 Principle X: Disclosure
6 Conclusion6 About IBM Business Analytics