Prudential Regulators: Basel III Final Rules

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Timeline-Basel III Implementation, Prudential Regulators
Interim Final Rule Final Rule Implementation Phase-in
September 10, 2013 April 14, 2014 2015-2019

On July 2nd, 2013 the Prudential Regulators finalized rules on the implementation of the Basel III accords.

Background[edit]

Basel III is the third installment of recommendations from the Basel Committee on Banking Supervision. Seeking to rectify problems that were exposed in the 2007-8 financial crisis, they have been adopted into US regulations. Building upon the prior Basel II and Basel I recommendations, they seek to impose new capital requirements and risk mitigation methods to stabilize the financial system.


Capital Requirement Rules[edit]

The final rule does not change the definition of Common Equity Tier 1 capital (CET1). The final rule requires that the effective minimum for CET1 requirements is 7%, while Global Systemically Important Financial Institutions (GSIFIs) are subject to a 10% effective CET1 requirement. The breakdown of the requirements are:

  • a CET1 ratio of 4.5
  • A 2.5% capital conservation buffer
  • a counter-cyclical buffer of 2.5% for advanced banks
  • for GSIFIs, an additional capital buffer of up to 2.5% as determined by regulators<ref>U.S Regulatory Capital Rules. Deloitte. Retrieved on May 14th, 2015.</ref>

Risk Weighting[edit]

The new Basel III rules introduce a new risk weight structure that reassesses various types of asset classes. This was in response to the failure of the risk weighting system in the financial crisis of 2007-08, after banks were bailed out.

Sovereigns[edit]

A new RW system, for sovereign claims, has been established by Basel III. They are:

    • OECD member with no Country Risk Classification(CRC) is 0%
    • 0% for a a Sovereign CRC of 0-1, 20% for 2, 50% for 3, 4-6 is 100%, and 150% for a 7. Sovereign defaults are weighted at 150% and Non-OECD members with no CRC are weighted at 100%
  • Public sector entities outside of the the U.S. are weighted depending on CRC and OECD membership. They are as follows:
    • CRC of 0-1 has a 20% RW
    • CRC of 2 has a RW of 50%
    • CRC of 3 has a RW of 100%
    • CRC of 4 or greater has a RW of 150%
    • Sovereign defaults are weighted at 150%
    • OECD members have a RW of 20%

Unsettled Transactions[edit]

Unsettled transactions are weighted equivalent to positive current exposure x risk weight. The risk weights are broken down by time after settlement date:


Equities[edit]

Basel III has given new RWs to to equities exposure changing the former rule under Basel I.

  • 0% for Equity exposures to a sovereign, certain supranational entities (e.g. EU)
  • 20% for equity exposures to a PSE
  • 100% for community development investments and small business investment companies
  • 250% for Significant Investments
  • 300% for publicly-traded equity exposure
  • 400% for non-publicly traded equities
  • 600% exposure to firms that meet traditional securitization definition <ref>U.S. Basel III Final Rule: Standardized Risk Weights Tool. Davis Polk. Retrieved on May 14th, 2015.</ref>

Mortgages, Derivatives, and Defaulted Exposures[edit]

New risk weights have also been assigned to mortgages, OTC derivatives, and guaranteed defaulted exposures. After the 2007-08 crises, new rules governing the RW of mortgages, and defaulted exposures were deemed necessary by the BIS Basel Committee on Banking Supervision.

  • Mortgages will be have a risk weight(RW) of either 50% or 100% depending on type of mortgage
  • A new 20% RW for US guaranteed defaulted exposures
  • Removes 50% cap on on OTC derivatives

Final Rule as it Appears in The Federal Register[edit]

References[edit]

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