Basel Iii Essay

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RBS Basel III

Basel III proposes many new capital, leverage and liquidity standards to strengthen the regulation, supervision and risk management of the banking sector. The capital standards and new capital buffers will require banks to hold more capital and higher quality of capital than under current Basel II rules. The new leverage ratio introduces a non-risk based measure to supplement the risk-based minimum capital requirements. The new liquidity ratios ensure that adequate funding is maintained in case of crisis.

| | | | | | | | | | | | | | | | | | Basel III | | | | | | | | | | | | | Basel II | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pillar I | | | Pillar II | | | Pillar III | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pillar I | | | Pillar II | | | Pillar III | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Enhanced Minimum | | | Enhanced | | | Enhanced Risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | Minimum | | | Supervisory | | | Disclosure | | | | Capital & Liquidity | | Supervisory Review | | | Disclosure & | | | | Capital | | | Review | | | & Market | | | | Requirements | | | Process for | | Market Discipline | | | | Requirements | | | Process | | | Discipline | | | | | | | | Firm-wide Risk | | | | | | | | | | | | | | | | | | | | | | | | | | Management and | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital Planning | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |

Basel III strengthens the three Basel II pillars, especially pillar 1 with enhanced minimum capital and liquidity requirements.
The major elements of the proposals are noted below.

Regulatory Element | RBS Requirement | | | Higher Minimum Tier 1 | »» Tier 1 Capital Ratio: increases from 4% to 6% | Capital Requirement | »» The ratio will be set at 4.5% from 1 January 2013, 5.5% from 1 January 2014 and 6% | | from 1 January 2015 | | »» Predominance of common equity will now reach 82.3% of Tier 1 capital, inclusive of | | capital conservation buffer | New Capital Conservation Buffer | »» Used to absorb losses during periods of financial and economic stress | | »» Banks will be required to hold a capital conservation buffer of 2.5% to withstand | | future periods of stress bringing the total common equity requirement to 7% | | (4.5% common equity requirement and the 2.5% capital conservation buffer) | | »» The capital conservation buffer must be met exclusively with common equity | | »» Banks that do not maintain the capital conservation buffer will face restrictions on | | payouts of dividends, share buybacks and bonuses | Countercyclical Capital Buffer | »» A countercyclical buffer within a range of 0% - 2.5% of common equity or other fully | | loss absorbing capital will be implemented according to national circumstances | | »» When in effect, this is an extension to the conservation buffer | | |

Regulatory Element | Proposed Requirement | | | Higher Minimum Tier 1 | »» Tier 1 Common Equity Requirement: increase from 2% to 4.5% | Common Equity Requirement | »» The ratio will be set at 3.5% from 1 January 2013, 4% from 1 January 2014 and | | 4.5% from 1 January 2015 |

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