Re­quired bank­ing re­forms are com­plex

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sures the risk of in­sol­vency from ex­ces­sive losses — im­proved from 14.9% at the end of De­cem­ber 2010 to 15.1% at the end of De­cem­ber 2011.

The Tier 1 cap­i­tal-ad­e­quacy ra­tio (CAR) of the bank­ing sec­tor in­creased from 11.8% to 12.2% dur­ing the same pe­riod. It was last at a lit­tle over 15% in ag­gre­gate for the ma­jor banks — only a very slight de­cline from a year ago. The min­i­mum in­ter­na­tional stan­dard is 8%, so lo­cal banks are do­ing very well on this mea­sure.

Re­mem­ber this ra­tio is tier one plus tier two cap­i­tal di­vided by riskweighted as­sets — tier one cap­i­tal is that which can ab­sorb losses with­out a bank need­ing to cease op­er­a­tions (or­di­nary cap­i­tal) while tier two pro­vides lesser pro­tec­tion to de­pos­i­tors as it can only be used on a wind­ing up (it refers to sub­or­di­nated debt). To get the risk-weighted mea­sure each loan is as­signed a per­cent­age and the higher the per­cent­age the riskier the loan — for ex­am­ple, debt that does not have a credit rat­ing is as­signed 100% risk weight­ing, while it can be 150% for debt that is rated as junk. Govern­ment debt would be at 0% — mean­ing it is sub­tracted rather than added to the risk weight­ing.

What is im­por­tant is a liq­uid­ity cov­er­age ra­tio (LCR) was in­tro­duced on 1 Jan­uary 2015, but the min­i­mum re­quire­ment has been set at 60% and rises in equal an­nual steps to reach 100% on 1 Jan­uary 2019. This grad­u­ated ap­proach, cou­pled with the re­vi­sions made to the 2010 pub­li­ca­tion of the liq­uid­ity stan­dards, are de­signed to en­sure that the LCR can be in­tro­duced with­out ma­te­rial dis­rup­tion to the or­derly strength­en­ing of bank­ing sys­tems or the on­go­ing fi­nanc­ing of eco­nomic ac­tiv­ity.

It should be stressed that the LCR stan­dard es­tab­lishes a min­i­mum level of liq­uid­ity for in­ter­na­tion­ally ac­tive banks. Banks are ex­pected to meet this stan­dard as well as ad­here to the sound prin­ci­ples. Con­sis­tent with the com­mit­tee’s cap­i­tal ad­e­quacy stan­dards, na­tional au­thor­i­ties may re­quire higher min­i­mum lev­els of liq­uid­ity. In par­tic­u­lar, su­per­vi­sors should be mind­ful that the as­sump­tions within the LCR may not cap­ture all mar­ket con­di­tions or all pe­ri­ods of stress. Su­per­vi­sors are there­fore free to re­quire ad­di­tional lev­els of liq­uid­ity to be held, if they deem the LCR does not ad­e­quately re­flect the liq­uid­ity risks that their banks face.

In Jan­uary last year, the Basel Com­mit­tee on Bank­ing Su­per­vi­sion pub­lished the Basel III lever­age ra­tio frame­work and dis­clo­sure re­quire­ments to­gether with the pub­lic dis­clo­sure re­quire­ments ap­pli­ca­ble as of 1 Jan­uary this year. But since then the com­mit­tee has re­ceived nu­mer­ous re­quests about im­ple­men­ta­tion, which prompted a fur­ther doc­u­ment that pro­vided an­swers to the more com­mon ques­tions last month. In one of the an­swers it ad­mits more de­tailed anal­y­sis will be needed on is­sues aris­ing from for­eign ex­change risk due to cur­rency mis­matches be­tween the mar­ket value of the de­riv­a­tives and the as­so­ci­ated cash vari­a­tion mar­gins. In an­other it says para­graph 25(ii) of the Basel III lever­age ra­tio frame­work

Pic­ture: THINK­STOCK

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