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Role of the Bank for
International
Settlements(BIS) indeveloping norms in
banking sector
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Bank for international Settlements - Introduction
The Bank for International Settlements (BIS) isan intergovernmental organization of centralbanks which "fosters international monetary and
financial cooperation and serves as a bank for centralbanks."
It is not accountable to any national government. TheBIS carries out its work through subcommittees, thesecretariats it hosts, and through its annual General
Meeting of all members. It also provides bankingservices, but only to central banks, or to internationalorganizations like itself.
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The head office is in Basel, Switzerland and there are two
representative offices:-
1) Hong Kong Special Administrative Region of the People's Republic
of China
2) Mexico City.
Established on 17 May 1930, the BIS is the world's oldest
international financial organisation.
As its customers are central banks and international organisations,the BIS does not accept deposits from, or provide financial services
to, private individuals or corporate entities.
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Key Objectives of BIS
Promoting monetary and financial stability
Bimonthly meetings of the Governors and other senior officials of the BISmember central banks to discuss monetary and financial matters areinstrumental in pursuing this goal. The standing committees located at the
BIS support central banks, and authorities in charge of financial stabilitymore generally, by providing background analysis and policyrecommendations.
The committees are:
Basel Committee on Banking Supervision
Committee on the Global Financial SystemCommittee on Payment and Settlement Systems
Markets Committee
Irving Fisher Committee on Central Bank Statistics
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Goal of BIS
A "well-designed financial safety net, supported by strong prudential
regulation and supervision, effective laws that are enforced, and sound
accounting and disclosure regimes," are among the Bank's goals.
Two aspects of monetary policy have proven to be particularly sensitive, and
the BIS therefore has two specific goals:
1) To regulate capital adequacy and
2) To make reserve requirements transparent.
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Products & Services Offered
The BIS has developed a range of banking servicesspecifically designed to assist central banks, monetaryauthorities and international financial institutions in themanagement of their foreign exchange and gold reserves.
PRODUCTS OFFERED
BIS money market instruments
BIS tradable instruments
SERVICES OFFERED
Foreign exchange and gold services
Asset management services
Other services
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BIS Activities
A meeting place for central banks
Research and statistics
Seminars and workshops
Banking services for central banks
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BASEL III Norms
BASEL III is a new global regulatory standard on bank capital adequacy and liquidity
agreed by the members of the Basel Committee on Banking Supervision.The third of
the Basel Accords was developed in a response to the deficiencies in financial regulation
revealed by the global financial crisis.
These measures aim to:
- Improve the banking sector's ability to absorb shocks arising from financial and
economic stress, whatever the source
- Improve risk management and governance
-Strengthen banks' transparency and disclosures.
The proposed changes are to be phased in gradually, starting in January 2013 to January
2015, while the creation of a conservation buffer could be set up by banks during the
period January 2016 to 2019.
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Overview
According to Basel III norms, banks will require to :
- hold 4.5% of common equity (up from 2% in Basel II) and 6%
of Tier I capital (up from 4% in Basel II) of risk-weighted assets
(RWA).
It also introduces additional buffers as follows :
(i) a mandatory capital conservation buffer of 2.5% and
(ii) a discretionary countercyclical buffer, which allows nationalregulators to require up to another 2.5% of capital during
periods of high credit growth.
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In addition, Basel III introduces a minimum 3% leverage ratio and
two required liquidity ratios :
The Liquidity Coverage Ratio - requires a bank to hold sufficient
high-quality liquid assets to cover its total net cash flows over 30
days.
Net Stable Funding Ratio - requires the available amount of
stable funding to exceed the required amount of stable funding
over a one-year period of extended stress.
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Impact ofProposed norms
Impact on individual banks :
- Weaker banks crowded out
- Significant pressure on profitability and ROE
- Change in demand from short-term to long-term funding
Impact on the financial system
- Reduced risk of a systemic banking crisis
- Reduced lending capacity
- Reduced investor appetite for bank debt and equity
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To achieve the goals of developing these norms, the Basel III proposals
are broken down into three parts on the basis of the main areas they
address:
Capital reform (including quality and quantity of capital,complete risk coverage, leverage ratio and the introduction
of capital conservation buffers, and a counter-cyclical
capital buffer)
Liquidity reform (short-term and long-term ratios)
Other elements relating to general improvements to the
stability of the financial system.
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BASEL III
Capital Reform Liquidity Standards Systemic risk and
interconnectedness
Quality, consistency, and
transparency of capital
base
Capturing of all risks
Controlling leverage
Buffers
Short-term: Liquidity
Coverage Ratio (LCR)
Long-term: NetStable Funding Ratio
(NSFR)
Capital incentives for
using CCPs for OTC
Higher capital forsystemic
derivatives
Higher capital for inter-
financial
exposures
Contingent capital
Capital surcharge for
systemic banks
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Conclusion
The Basel III framework introduces a paradigm shift in capital
and liquidity standards, which was constructed and agreed to
in relatively record time.
Many elements, however, remain unfinished, and even the final
implementation date looks a long way off. However, market
pressure and competitor pressure is already driving considerable
change at a range of organizations.
Firms should ensure they are engaging with Basel III as soon as
possible to position themselves competitively in the new post-
crisis financial risk and regulatory landscape.
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THANK YOU !!