Basel III

Comply with evolving capital structure, liquidity risk & counterparty risk

Overview

Post Financial Crisis, Basel III guidelines were released to boost the quantity and quality of regulatory capital to increase the ability of banking system to absorb the unexpected shocks. The guidelines also focused on the liquidity requirements to ensure high quality liquid assets are available with the banks to meet the liquidity requirements during the crunch periods along with introduction of new leverage ratio, a non-risk based measure to supplement the risk-based minimum regulatory capital requirements.

Basel III requirements significantly impact the capital requirements of the bank and also have strategic business implications for different type of businesses, products etc of the bank. We ensure optimal solutions for our clients by taking a holistic approach to compliance.

Counterparty Credit Risk Capital is significant driver in OTC instruments and was identified as the major contributor to the financial crisis of 2007-08. Since then it has significantly changed due to Basel III regulations as well as banks setting up CVA desks transforming it from risk function to profit function.

We conduct diagnostic assessment to understand the areas of improvement. Subsequently, we help in addressing these gaps inclusive of modifications in policies, processes and implementation of IT system to take care of Basel III regulatory reporting requirements.

Offerings

Capital Conservation Buffer is designed to absorb losses during periods of financial and economic stress. Financial institutions will be required to hold a capital conservation buffer of to withstand future periods of stress. The capital conservation buffer must be met exclusively with common equity. Banks that do not maintain the capital conservation buffer face restrictions on payouts of dividends, share buybacks, and bonuses.

Countercyclical Capital Buffer is a countercyclical buffer of common equity or other fully loss absorbing capital is implemented according to local jurisdiction as adopted by the local regulators. This buffer serves as an extension to the capital conservation buffer.

Higher Common Equity Tier 1 (CET1) constitutes an increase to increase the loss absorption capacity of banks, essentially it focuses on improving the quality of regulatory capital that bank’s hold.

Leverage ratio - Basel III introduced a minimum "leverage ratio". The leverage ratio was calculated by dividing Tier 1 capital by the bank's average total consolidated assets; the banks were expected to maintain a leverage ratio under Basel III.

Basel III introduced two required liquidity ratios:

Liquidity Coverage Ratio (LCR) ensures that sufficient levels of high-quality liquid assets are available for one-month survival in a severe stress scenario.
Net Stable Funding Ratio (NSFR) promotes resilience over long-term time horizons by creating more incentives for financial institutions to fund their activities with more stable sources of funding on an ongoing structural basis.

Changes to Counterparty Credit Risk (CCR) - Basel III introduced capital requirements to cover Credit Value Adjustment (CVA) risk and higher capital requirements for securitization products.

Counterparty Credit Risk Management Policy
CVA Desk Governance Framework
Collateral Management Framework
Develop/Validate Models for Counterparty exposure measures such as Potential future exposure (PFE), Expected Exposure (EE), Expected positive exposure (EPE) and Effective Expected Exposure (EEE) etc.
Develop/Validate Models for XVA pricing adjustments – Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA)&Funding Valuation Adjustment (FVA).