Basel 3 standards. Basel III and the revival of gold's status as an international safe-haven banking asset
The Basel II rules divided bank assets into three categories: the first category included assets that were considered the least risky, and the third the most risky. Under Basel II rules, gold was included in either the first or third category, “at the discretion of the national authorities, gold bullion held in official vaults or in the form of dedicated assets to the extent that they are secured by obligations to supply the yellow metal, can be treated as money and therefore have a 0% risk level.” In Basel III rules third category excluded , therefore all assets are divided into the first and second categories. In addition, from now on, the level of “trimmed” liquidity (obtaining liquidity secured by assets in an amount less than the real value of these assets) of gold increases with 50% to 100%. from March 29, banks are allowed to take gold into account equity at 100% price. Gold moves from the third to the first category. This means that from On March 29, gold again becomes full-fledged money - like the dollar, euro or British pound.
The announcement of the new rules also states that “in the final version, financial security is defined as security in the following forms: 1) funds on deposit with a banking organization (including cash stored in a banking organization by a third-party custodian or trustee); 2) gold bars.
Valentin Katasonov recently described his point of view on this event and in my opinion there is nothing to add here, but it looks like this:
Gold has served as money for centuries and even millennia. However, several decades ago, gold was demoted from a monetary metal to an ordinary exchange commodity. The gold standard effectively ended on August 15, 1971, when Richard Nixon announced that the US Treasury would stop trading greens for the yellow metal. The thread connecting gold with the world of money was broken.
Legally, this connection was broken at the Jamaica Monetary and Financial Conference in 1976, where IMF member countries announced the demonetization of gold. In fact, the decisions of the Bretton Woods Conference of 1944 were canceled, when the dollar and gold were declared international money, and the US Treasury was supposed to ensure the free exchange of dollars for gold.
The Jamaican conference actually proclaimed that the only world currency remains the US dollar, and gold turns into a commodity commodity, such as oil, wheat, and coffee. After this, the use of gold in international payments almost ceased. True, the behavior of central banks and ministries of finance, which continued to hold seemingly useless gold in their reserves, was surprising. For some reason, the United States continued to keep more than 8 thousand tons of gold in its international reserves. Another strange phenomenon was the unbridled rise in gold prices; at the beginning of 1980, the price of the yellow metal soared to $800 per troy ounce. Then, however, the price began to fall, sometimes dropping to almost $300.
The world has lived without gold as money for more than four decades. Some people understood, however, that the world of gold has an external, visible side and another, shadow side, which few know about. On the other side there was constant manipulation with the yellow metal. The manipulations pursued both the selfish interests of individual players and the strategic goals of the owners of the money - the main shareholders of the Federal reserve system USA. Their main goal was to maintain a low price for gold. Without its “squeezing”, it is impossible to guarantee the hegemony of the US dollar in the world - the higher the price of the precious metal, the weaker the dollar became. Serious financiers understand a simple truth: whoever controls gold controls the global monetary and financial system. There have been several significant events in the history of gold and international finance over the past four decades, and one of them is about to happen in a few days. I recommend paying attention to it. We are talking about the next stage of implementation of Basel III. What it is?
The informal control center of the global banking system is the Bank for International Settlements (BIS) in Basel (Switzerland). This is a kind of club of central banks. The BIS has a Committee on Banking Supervision (CBS), an organization that develops uniform standards and methods for regulating banking activities. The first important document born in the depths of the CBN was called “Basel-I” (1988). Then another document appeared - Basel II (2004); Its full title is “International convergence of capital measurement and capital standards: new approaches.” Finally, in 2010-2011. The Basel III document was approved. His birth was a reaction to the global financial crisis 2008-2009, which demonstrated that the proper stability of banks is not ensured. Basel III increased the requirements for the adequacy of banks' own capital and determined what is considered equity capital and how to evaluate it. The recommendations of this document are currently being implemented in the banking world, and on March 29 it will enter the final phase. From this day on, the status of gold as part of banks' equity capital will change.
According to the CBN rules, banks' capital is divided into three categories. The highest category has always been money (currency) in cash and non-cash forms. Next are Treasuries with the highest ratings (primarily US Treasuries). And the third, lowest category included gold, which was considered as a kind of money. And the calculation of equity capital by banks was carried out based on the assessment of the gold available to the bank in the amount of 50% of its market value. Naturally, with such discrimination against gold, banks had no particular desire to accumulate the precious metal.
So, from March 29, banks are allowed to take gold into account as part of their own capital at a 100% price. Gold moves from the third to the first category. This means that from March 29, gold again becomes full-fledged money - like the dollar, euro or British pound. Maybe after March 29, outwardly everything will look the same as before, but still the “golden mine” will have to explode.
It is noteworthy that after the adoption of Basel III, central banks stopped selling the yellow metal. Moreover, they have become pronounced net buyers of gold. In 2018, central banks around the world increased their official gold reserves by 651.5 tons - this is largest indicator since 1971, when the gold standard was abolished. And this is 74% more than in 2017 (374.8 tons). Data taken from the World Gold Council's Gold Demand Trends report.
The Bank of Russia became the largest buyer of gold in 2018 by a huge margin. Its gold reserves increased by a record 274.3 tons, which is 42% of all last year's gold purchases by central banks. In second place in gold purchases is the Central Bank of Turkey (+51.5 tons), in third place is the Central Bank of Kazakhstan (+50.6 tons). Among the leading buyers at the end of last year are India (+40.5 tons), Poland (+25.7 tons), Mongolia (+22 tons). Poland last year became the first EU country since 1998 to buy gold for reserves. Everyone was also surprised by the Central Bank of Hungary, which had not bought gold since 1986, and in October last year unexpectedly increased its gold reserves tenfold - from 3.1 tons to 31.5 tons.
However, the picture of gold purchases by central banks presented in the World Gold Council report is incomplete and not very accurate. According to expert estimates, in recent years, the largest buyer of the yellow metal on the world market among central banks, along with the Bank of Russia, is the People's Bank of China (PBOC). However, data on the increase in gold reserves by the Chinese Central Bank is hidden; only sometimes NBK statistics record some increases in gold reserves.
As of February 2019, the leading countries in terms of gold reserves, according to official data, are (tons): USA - 8,133.5; Germany – 3,369.7; Italy – 2,451.8; France – 2.436.0; Russia – 2.119.2; China – 1,864.3; Switzerland – 1,040.0.
And here’s what’s interesting: with a clearly growing demand for gold, its price on the world market fell by about 5% last year. The fact is that players who rely on a significant increase in their gold reserves have long been pursuing a policy of artificially suppressing the price of gold. A “paper gold” market has emerged and is thriving, with turnover that is many times higher than that on the physical metal market. By increasing the supply of “paper gold” it is possible to buy physical metal at a low price. However, this is for the time being. At some point the pendulum will go to reverse side, and a rapid rise in prices for the yellow metal will begin.
Naturally, everyone wants to stock up on gold before this happens. Against the backdrop of “resurrected” gold, other financial instruments will look unimportant. The assets and “portfolios” of participants in global financial markets will change their structure in favor of the yellow metal by reducing the positions of such instruments as debt and equity securities. Speculators who do not have access to a printing press will seek to buy gold using the money they receive from the sale of government and corporate bonds, as well as shares. The world today is already on the verge of a second wave of the financial crisis, and its trigger could be the entry into force of the “golden rule” of Basel III. Perhaps, for those who survive the crisis, gold will once again take its rightful place in the world of money.
The event is gaining interest, Katasonov’s text “appears” in several videos from YouTube trends, I decided to give you the opportunity to familiarize yourself with this information in its original form. Some view this event as the “beginning of the end,” as the author himself does.
Of course, it cannot be ruled out, and most likely it is the case, that this information has already been “played out” and the market will not react strongly or immediately to this event. From the point of view of fundamental factors, this is a long-term calculation, one might say a potential “strengthening” of a real competitor to the USD and the endowment of gold with full rights for banks; from March 29, gold again becomes full-fledged money - like the dollar, euro or British pound. In the Russian Federation, instructions from the Bank of Russia were also recently published, which “equalize gold”, making it full-fledged and equivalent to the dollar based on Basel 3 standards for banks.
The new international banking regulation standard, Basel 3, was introduced after the 2007-2008 crisis. Its main task is to reduce the risks of the banking sector. However, the accelerated implementation of the new standard in Russia itself carries significant risks.
Petr Rushailo
System of weights and measures
The Basel Committee on Banking Supervision was created in 1974 on the basis of the Bank for International Settlements, its main task was to develop standards that would improve sustainability banking system. Almost a decade and a half later, in 1988, the first international standard, called Basel 1, appeared. It determined the methodology for calculating bank capital and its minimum level - no less than 8% of the amount of risk-weighted assets.
The Basel 1 methods were adjusted several times, but they underwent a truly serious modernization only 16 years later, in 2004, when the Basel 2 standard was introduced. By that time financial market has changed significantly: the sectors of derivative financial instruments and corporate bonds have grown very strongly, complex structured products have appeared - mortgage bonds, credit notes, that is, instruments for which the assessment of credit and market risks required completely different approaches than when assessing the risks of an individual issuer or borrower.
With such a complex and dynamic market, and a global one at that, it was quite difficult for regulators to respond to market conditions by promptly changing asset valuation standards and capital adequacy requirements. Therefore, it was decided to give the largest banks “freedom of choice.” They received the right, in agreement with their national regulators, to use assessments based on their own models instead of standard risk assessments. When applied to credit risk, this practice is called the internal ratings-based risk approach (IRB).
Bankers took advantage of the chance that fell to them - over the next couple of years, the growth rate of lending volumes significantly accelerated. And not only in Europe, where Basel 2 was introduced, but also in the United States, where the process of credit expansion was driven by various types of derivative instruments and the inflation of off-balance sheet liabilities of banks. As a result, monetary authorities started talking about the danger of another bubble and tried to prevent the market from overheating by increasing the cost of money. How it ended is well known: the growth interest rates in the USA led to the collapse of the weak link - the relatively small segment of subprime mortgages, after which it became clear that no one really understands the real risks embedded in structured financial products, consisting of sets of various securities and instruments, as well as the volume of investments of banks in such products . A crisis of confidence began, which instantly grew into a liquidity crisis, the market froze, and only the heroic issuance efforts of central banks and cash injections from governments managed to save most of the large banks.
“One of the main reasons that the economic and financial crisis was so severe was that the banking sectors of many countries allowed excessive imbalances between their own funds and assets and off-balance sheet liabilities (excessive leverage). This was accompanied by a gradual decline in the size and quality of banks’ own funds "At the same time, many banks held insufficient liquidity reserves. The banking system was thus unable to withstand the resulting systemic losses on commercial transactions and loans, and also could not resist the immobilization of capital for large off-balance sheet risks that arose in the shadow banking system." , the Basel Committee later concluded.
It became clear that the risk management system in banks is still far from perfect. As a result, the Basel 2.5 interim package was released in 2009, tightening the requirements for risk assessment of derivative instruments, and immediately after that the Basel 3 standard, approved at the G20 summit in 2010, was released.
Basel 3 significantly tightens the regulatory principles set out in Basel 2. First of all, the concept of first-tier capital is clarified, that is, that capital that should amortize losses during the period while the bank has not yet been brought to bankruptcy. The concept of basic capital (ordinary shares and retained earnings) is introduced, for which separate adequacy standards are established. Other forms of Tier 1 capital (subordinated loans, options and others) are taken into account in Tier 1 capital only under certain conditions (in particular, subordinated loans must be perpetual and contain conditions for conversion into ordinary shares). In addition, capital buffers are introduced: a conservation buffer (accumulated in favorable periods to compensate for losses in unfavorable ones) and a countercyclical buffer (introduced by the regulator to protect the market from overheating).
New liquidity standards are also being introduced - instant, short-term and long-term - and new methods and approaches to measuring and assessing risks. Tighter standards of banking supervision, increased requirements for information disclosure and risk management are designed to ensure the functionality of the new system. And in addition to this control system, a leverage indicator will also be introduced - the maximum ratio of the amount of assets without taking into account risk weights to capital.
The Basel 3 standard is being implemented in stages, the corresponding program is designed until 2019. Implementation time frame different countries Specific regulatory requirements and approaches vary depending on the characteristics of national regulation and the state of the country's economy. And in this regard, it seems that Russia, as always, will have a special path.
Review of additional direct restrictions (limits) on transactions with bank-related parties
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Total limit for related parties (bank and non-bank): 15-75% of tier 1 capital depending on the rating
Your own arshin
Russia began implementing Basel 3 without actually introducing the main approaches of Basel 2—domestic banks were not given the opportunity to evaluate all the benefits of self-assessment of risks within the framework of this standard.
On the one hand, this probably slowed down the pace of their development in the pre-crisis period; on the other hand, it may have made the crisis less painful: the majority were able to survive it by receiving unsecured refinancing from the Central Bank (not counting, of course, investment banks, which in batches sought salvation through sales to large universal banks both here and in the West; the Bank of Moscow and Mezhprombank can also be ignored - these seem to be stories that have little to do with the crisis). Perhaps the fact that the equity capital adequacy standard in Russia was higher than that provided for by Basel 2 also played a role - 10% versus 8% of the amount of risk-weighted assets.
True, Russian bankers still demonstrated their ability to handle market risks - on the repo market, which almost completely stopped after the collapse in the stock market and they had to unravel non-payments there with no less energy than after the default of 1998; This story cost the investment bank KIT Finance its life.
Nevertheless, the absence of a “golden” period under Basel-2 may now create certain problems for Russian banks when implementing Basel-3. More precisely, not the standard itself, but rather advanced approaches related to the implementation of their own risk assessment systems.
The introduction of such systems, let us remind you, is voluntary. The bank may prefer to operate as usual, using a “standard approach”, that is, standard risk ratios corresponding to different types of assets. And the transition to “individual plans” is a rather expensive procedure; it requires not only the development and implementation of appropriate methods, management procedures and IT support, but also mandatory certification by the Central Bank, which actually implies an external audit of the risk management system by the Central Bank. Not to mention increased transparency, the bank has to disclose much more information about its activities.
In Russia, the introduction of the PVR approach will only become possible next year. That is, after the introduction of Basel 3, which established more stringent requirements in terms of capital formation and risk assessment. This means that it will be much more difficult for Russian bankers to derive significant benefits from independent risk assessments.
Moreover, more stringent requirements are being introduced in Russia than those provided for by the “global” Basel-3 standards, both for the minimum basic capital (5% versus 4.5% of the amount of risk-weighted assets) and for the total bank capital (10% versus 8%). It is true that it is not yet clear whether the Bank of Russia will follow Western regulators in gradually forming a capital conservation buffer starting in 2016, but this will not change the essence of the matter: Russian requirements will remain more stringent than global ones.
Another difference in Russian and foreign Basel regulation is the approach to accounting for loans issued to “related parties”. The Bank of Russia treats such loans as instruments with a higher level of risk and introduces stricter limits on concentration on transactions with “related parties.” At the same time, most foreign regulators allow such transactions to be treated by analogy with loans provided to “ordinary” borrowers, provided that such loans are provided to counterparties on market conditions (see sidebar “Overview of additional direct restrictions (limits) on transactions with “related parties” "").
In addition, the approach of the Central Bank in terms of assessing the credit risk of participation in the capital of third parties, that is, the purchase of shares, including those traded on the stock exchange, looks overly conservative. In terms of such investments, Basel 2 gives the opportunity to choose one of three approaches - either use fixed risk weights, or use one of two options for internal models. In the Russian version, banks that have chosen the RRP are able to use only fixed risk weights to assess credit risks, twice as high as those established for banks operating within the framework of standard risk assessment standards, that is, theoretically having a less advanced risk management system.
Moreover, this is hardly an oversight: the Central Bank in every possible way demonstrates attention to the opinions of market participants and puts forward for discussion documents related to the introduction of Basel-3. And also corrects them if necessary.
For example, it was initially planned that the minimum requirement for the basic capital of the first level would be 5.6% of the amount of risk-weighted assets, but in the middle of last year the Central Bank decided that the corresponding standard, introduced in 2014, would be 5%. “In accordance with KPMG research on the impact of new capital adequacy requirements, conducted on the basis of open data, the initial estimate of the capital deficit of the top 50 banks in the amount of 304 billion rubles was reduced to 3.1 billion rubles,” specialists from the consulting company commented on this decision then KPMG in its review.
The Central Bank consistently “plays for its own” in another important issue related to the ratings of obligations and issuers. This problem is quite acute: the Basel standards stipulate, for example, that when assessing the risk of a loan, the presence of a guarantee is taken into account only if the guarantor has a rating of at least A- on the S&P scale or a similar one on another scale. But the Bank of Russia decided to allow the probability of default of the borrower to be replaced by the probability of default of the guarantor, despite the restriction on the external rating. Since there are no companies with such high ratings in Russia (and due to the recent decline in the country rating of the Russian Federation and complete uncertainty with the further development of the geopolitical situation, they are unlikely to appear soon), the decision of the Central Bank looks quite logical and very useful for large holdings acting as guarantors for loans their "daughters". A similar approach to ratings can probably be expected with the introduction of Basel liquidity standards - in the international version they are also focused on the availability of portfolios of banks valuable papers with high ratings.
If we also take into account that the Central Bank has established very high (50%) discounts on shares when calculating capital requirements, the following picture emerges. Introducing Basel 3 in conditions of high capital requirements, the Central Bank reasonably believes that only the largest banks will use IRP - it will simply be unprofitable for the rest. At the same time, advanced approaches to risk management also require more careful control, which will allow these banks to be subject to strict supervision by the regulator. From unnecessary risks from outside stock market these banks will also be ring-fenced.
Thus, it may indeed be possible to form in Russia a certain backbone of large banks of “increased reliability.” The only question is: how will such a system develop?
Comparison of original Basel III minimum capital requirements versus similar requirements for Russia
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*Data on capital buffers are provided according to publications of the Central Bank and at the time of compilation of the table are not official requirements.
***In Russia there are no banks that belong to global SSBs.
****Set by national regulator.
*****Not including buffer for SZB.
******Not including buffer for SZB.
I. General information, basic principles and approaches
The Basel Committee on Banking Supervision was founded in 1974 at the Bank for International Settlements. It includes the Central Banks of the largest countries*. The Committee develops recommendations and standards for Banking supervision applied by banking regulatory and supervisory authorities in different countries.
Since 1975, the Committee has issued a significant number of recommendations regarding banking regulations.
Figure 1 Stages of preparation and implementation of the Basel Accords.
First Basel Accord (Basel I) - "International convergence of capital measurement and capital standards"
The development of the first Capital Adequacy Agreement (Basel I) in 1988 by the Basel Committee on Banking Supervision was a response by the banking community and supervisory authorities to the large losses and bankruptcies of banks, hedge funds and institutional investors observed in the 70s and 80s.
Initially, the agreement was considered as a recommendation, but since 1992 it has become a mandatory norm for the G-10 countries. To date, more than 100 countries have fully or partially acceded to Basel I.
The main goal of Basel I is to limit credit risks (losses from borrower default, etc.) by developing a set of supervisory principles. The main thing is to determine capital adequacy.
Minimum size The bank's capital adequacy, which is sometimes called normative (regulatory) capital, is set at 8% of the amount of assets and off-balance sheet items, determined taking into account the risk:
Determining the amount of credit risk is achieved by multiplying (weighing) the value of the asset by risk weights, or risk weights. To do this, assets are divided into four groups according to the degree of risk, for which the following weighting coefficients are adopted: 0, 20, 50 and 100. The higher the risk, the greater the weight.
Accordingly, a factor of 0 is applied to risk-free assets (cash, gold bullion, obligations of Organization for Economic Co-operation and Development (OECD) countries, government debt of G-10 countries and other zero-risk assets). Thus, the relevant assets are effectively excluded from the assessment of the amount of credit risk.
In turn, a coefficient of 100 means that the entire amount of the corresponding asset is considered risky and is fully included in the amount of credit risk. This group of assets includes various types of commercial and other debt obligations. non-governmental organizations, government obligations of non-industrialized countries, etc.
According to Basel I, the total amount of capital that is tested for adequacy consists of two levels of capital:
Level 1 is share capital and declared reserves; Level 2 is additional capital, or second-tier capital, which includes low-quality capital, hidden reserves available to the bank in accordance with the laws of the country, etc. Second-tier capital in the aggregate should not exceed the amount of first-tier capital.
The Basel I agreement has had a noticeable positive impact on the performance of banks. Moreover, recommendations originally developed for large international banks have now become acceptable to the global banking system as a whole. Banks and some other credit organizations began to take them into account, regardless of their size, structure, complexity of credit operations and risk characteristics.
However, the banking crises of the 90s. showed that the Capital Adequacy Agreement needs further refinement, clarification and improvement.
For example, the Agreement takes into account only credit risk, other types of risk are ignored.
A simplified gradation of credit risk is proposed that does not take into account the variety of possible real situations. Credit risk weights are set the same for all corporate loans, regardless of borrowers' credit ratings or loan quality.
In addition, practice has shown that meeting the requirement of the minimum allowable amount of capital cannot ensure the reliability of the bank and the entire banking system. Basel I defined capital requirements formally, without taking into account the real (economic) need of banks for it.
Since the conclusion of Basel I, new financial instruments have appeared and the banking technologies used have changed. In addition, banks have learned to work around loopholes in the old set of requirements and take advantage of differences in the requirements of supervisors in different countries (the so-called regulatory arbitrage).
Since 1993, taking into account criticism from the banking community and the opinions of a number of economists, Basel I has been revised, and in 2004, updated framework approaches were published (Basel II).
Second Basel Accord (Basel II) - “International convergence of capital measurement and capital standards: new approaches”
Basel II has three main components: minimum capital structure requirements, supervisory process, and market discipline.
The first component is the minimum capital structure requirements. Basel II maintains capital adequacy requirements at 8%. At the same time, together with credit risk market** and operational risks*** are taken into account:
When determining the amount of credit risk, the bank can choose one of three options:
a standardized approach using ratings from agencies external to the bank; a basic internal rating based on its own rating developments and assessments; an improved internal rating.
According to the new requirements for bank capital, risk weights are distributed not by type of asset, but by group of borrowers.
Basel II provides for an expanded interpretation of credit risk and a breakdown of borrowers by type (states, central banks, commercial banks, individual borrowers, etc.).
To distribute coefficients into groups, ratings developed by leading rating agencies are used.
The second component is the supervisory process. The basic principles of the supervisory process, risk management, as well as transparency of reporting to banking supervisory authorities as applied to banking risks are examined.
Interpretations of interest rate risk in the banking portfolio, credit risk (stress testing, default determination, residual risk and loan concentration risk), operational risk, growth of cross-border connections and interaction, as well as securitization are provided.
The third component is market discipline. Complements minimum capital requirements and supervisory process. Market discipline is stimulated by establishing a number of standards for information openness of banks, standards for their relations with supervisory authorities and the outside world.
One of the problems that the committee had to resolve in preparing Basel II was the compatibility of the Agreement with national accounting standards.
The Agreement contains requirements for the openness of information related to various types of bank operations, including information about the methods used by the bank in assessing their risk. This will allow market participants to receive key information about the reliability, risk vulnerability of the bank and its capitalization.
Third Basel Agreement (Basel III)
Basel III emerged as a response to the 2008 global financial crisis. Analyzing its causes, experts identified failures in prudential regulation of the activities of financial intermediaries as one of the main reasons. In conditions of deepening financial globalization national standards for the organization, functioning and regulation of the activities of financial intermediaries no longer meet modern requirements.
To save systemically important financial institutions (“too big to fail” - Northern Rock, Merrill Lynch, Lehman Brothers), programs for the state to enter their capital were adopted and implemented. Therefore governments developed countries are concerned that these investments will provide adequate benefits in the future.
The emergence of Basel III standards began with the introduction of additional requirements for capital adequacy of banks (share capital, Tier 1 capital, Tier 2 capital, buffer capital, total capital).
The agreement is represented by two documents published on December 15, 2010 on the official website of the Bank for International Settlements:
International System for Liquidity Risk Assessment, Standards and Monitoring; A global regulatory system that helps improve the sustainability of banks and banking systems.
The new Agreement tightens the requirements for the composition of Tier 1 capital by excluding from it the amount of deferred taxes and securitized assets. In addition, Basel III recommends increasing the share of Tier 1 capital and share capital (Table 1).
Basel III establishes the need for credit institutions to form net profit additional backup buffer. Buffer capital will allow banks, in the event of a systemic crisis and a reduction in the capital adequacy ratio below the minimum allowable, to receive additional liquidity without the sanction of the regulator. However, after the crisis, credit institutions are obliged to restore this capital.
At the same time, Basel III introduces regulations aimed at limiting financial leverage (leverage - the ratio of debt and equity capital), which is acceptable for financial intermediaries. In particular, we will talk about revising current and long-term liquidity standards.
New standard current liquidity it is planned to introduce in 2015, and the updated long-term liquidity standard - three years later.
The first assumes that bank short-term liabilities for a period of up to 30 days will have to be covered by liquid assets 100%.
The second standard regulates the risk of a bank losing liquidity as a result of placing funds in long-term assets, which must also be covered by stable liabilities by at least 100%.
The concept of not only reserve bank capital appears, but also capital that can be additionally introduced by the regulator for countercyclical regulation.
If the regulator believes that a country is experiencing a credit boom or overheating of the economy, it may increase capital adequacy requirements, according to which banks will be required to form a special “countercyclical” reserve during periods of potential credit bubbles.
Basel III establishes that in case of non-compliance with the standards, credit institutions do not have the right to pay dividends to shareholders, as well as bonuses and other bonuses to their managers.
The gradual transition to new standards will begin in 2013 and will continue over the next six years (until January 1, 2019). (Table 1).
Comparative characteristics Basel I, II, III agreements
table 2
III. Basel Accords in Russia
For the first time in Russia, the Basel agreements were reflected in the Instruction of the Bank of Russia No. 1 of April 30, 1991 “On the procedure for regulating the activities of commercial banks,” which is associated with the advent of Basel I (the document became invalid on April 1, 2004). Currently Basel 1st century. Russia has been applied on a full scale.
In 2004, the Bank of Russia determined the procedure for credit institutions to form reserves for possible losses and organize the management of various types of risks****. Taking into account the level of development of the Russian banking sector, the Bank of Russia set the following option for implementing Basel II as a goal:
Simplified Standardized Approach for assessing credit risk within the first component of the Agreement (approaches to calculating capital adequacy - Minimum Capital Requirements, Pillar1); the second component is the procedures for supervising capital adequacy by banking supervisors (Supervisory Review Process, Pillar 2); the third component is requirements for banks to disclose information about capital and risks in order to strengthen market discipline (Market Discipline, Pillar 3).
Presumably, Basel II was supposed to be fully implemented in Russia by 2012. However, a more precise timing depends on the ability of the Russian banking system to fully recover from the crisis.
According to experts, the main problems and limitations in the implementation of Basel II century. Russia is associated with the following.
Lack of a comprehensive risk management system.
It is difficult to assess clients' risks based on progressive world standards. Risk assessment based on Russian methodology is not perfect: there is a relatively small number of national rating agencies, as well as borrowers who have received credit ratings from international rating agencies; the underdevelopment of internal rating systems in most commercial banks, significant differences in the definitions of default, overdue debt and credit losses used in banking practice; insufficient statistical data on losses due to credit and operational risks at the disposal of banks wishing to switch to advanced approaches to risk assessment; a relatively small amount of data on the frequency of defaults and migration of external ratings of market debt obligations and internal ratings of bank loans; lack or insufficient number of studies on the impact of economic and industry cycles on the levels of losses and risks in the banking sector; lack of financial, human and information resources necessary to implement more advanced approaches, both among the banks themselves and among regulators; uncertainty regarding the scope of powers of national supervisory authorities in terms of interpretation and specification of certain provisions of Basel II falling within their competence.
The first component, which is associated not with the analytical activities of banking personnel, but with the structure of the balance sheet, is being implemented most successfully in Russia. The capital adequacy level of the Russian banking system is quite high. However, it should be noted that not a single bank is interested in reducing the capital adequacy ratio, since the Bank of Russia can revoke its license.
Due to the fact that there is a lot of subjectivity in the reporting of Russian banks, such a phenomenon as “drawn” capital has arisen. Any bank, within the framework of the current instructions of the Bank of Russia*****, can increase its own capital by reducing reserves for possible loan losses.
Thus, a bank may rely on its own professional judgment about the risks of loans and justify its assessments of credit risk (for example, roll over a loan until it becomes a net loss) or set favorable rate reserve within the range officially specified by the regulator.
It can be concluded that it is necessary to tighten prudential supervision of internal banking risk assessment methods, which will lead to a real reflection of the level of capital adequacy of Russian banks.
Basel II practically began to be implemented in the second half of 2009, only after the main phase of the crisis had been overcome. The latest changes aimed at implementing Basel II requirements came into force on July 1, 2010.
As for Basel III, quantitative tightening of regulatory requirements will most likely not affect Russian banks. The Bank of Russia's current capital adequacy requirements, for example, range from 10 to 11 percent, which is comparable to the maximum capital adequacy requirements under Basel III. This is explained by the fact that the Bank of Russia, when setting standards, initially proceeded from an understanding of the higher risks of the Russian economy.
However, in addition to quantitative characteristics (minimum requirements for equity capital), Basel III involves the introduction by banks of new requirements related to the organization of banking supervision of compliance with capital adequacy standards and compliance with market discipline. To achieve these standards, Russian banks do not yet have sufficient tools and practices.
As for countercyclical supervision, it is designed to create additional reserves in the banking sector during a period of excessive credit expansion. Currently, the level of development of the national banking system is not high enough to implement this component of the Basel Agreement.
* Currently, 27 states are member countries of the Basel Committee: Australia, Argentina, Belgium, Brazil, Great Britain, Germany, Hong Kong, India, Indonesia, Spain, Italy, Canada, China, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia Arabia, Singapore, USA, Turkey, France, Switzerland, Sweden, South Africa, Japan. The European Commission takes part in the work as an observer.
** The risk of the Bank experiencing financial losses/losses due to changes in the market value of financial instruments of the trading portfolio, as well as exchange rates foreign currencies and/or precious metals. A distinctive feature of market risk from other banking risks is its dependence on market conditions. Market risk includes stock risk, currency risk and interest rate risk.
*** The risk that the Bank may incur losses as a result of fraudulent actions of bank employees or third parties, technical failures, unregulated business processes, etc.
**** Regulations dated January 5, 2004 No. 246-P “On the procedure for creating a banking/consolidated group by the parent credit organization consolidated statements»;
Regulations dated March 26, 2004 No. 254-P “On the procedure for the formation by credit institutions of reserves for possible losses on loans, on loan and equivalent debt.”
***** Regulations dated March 26, 2004 No. 254-P “On the procedure for credit institutions to form reserves for possible losses on loans, on loan and similar debt”;
Regulations dated March 20, 2006 No. 283-P “On the procedure for credit institutions to form reserves for possible losses.”
, a study by the Department of Strategic Analysis and Development of Vnesheconombank.
This article presents an analysis of the new requirements for the volume and structure of bank capital and liquidity in accordance with Basel III. When applying capital adequacy standards in accordance with Basel III, additional risk coverage is provided for over-the-counter forward transactions and derivative transactions financial instruments(PFI) based on the risk of changes in value loan portfolio by lowering the counterparty's credit rating (credit valuation adjustment, CVA). At the same time, the restriction used when calculating the amount of equity capital on the inclusion of revaluation results from transactions with derivative funds, depending on the terms of the transactions, is canceled. The authors have attempted to characterize the possible difficulties and consequences of their application in the form of two options for the development of the Russian banking system.
Basel III
banking risk
capital adequacy standards
liquidity
backup buffer
financial leverage
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The crisis in the global banking system that is taking place today increasingly dictates the need to solve the problem in terms of minimizing risks and effectively regulating the financial and credit system.
The scope of banking risk management at the present stage is regulated international standards banking activities "International Convergence of Capital Measurement and Capital Standards", commonly known as the "Basel Accords". The latter consist of a number of provisions: “Basel I”, “Basel II”, “Basel 2.5”, “Basel III”.
Today, a pressing issue in financial and credit regulation is the application of the new Basel III rules, which are an addition to the already existing Basel II standard, the acceleration of the adoption of which was facilitated by the 2008 crisis, which revealed the problem of creating uniform standards in the field of banking regulation.
It should be noted that the Basel Agreements are advisory in nature and form the basis of relevant legislative and regulatory acts developed and implemented by the Central Banks of individual states.
The application of Basel standards in Russia is currently incomplete. In particular, this concerns the rules and regulations of Basel II, as a result it can be noted that the completion of the implementation of Basel II will occur simultaneously with the implementation of Basel III standards, the final full transition is planned to be completed by 2019.
General characteristics of International financial standards Basel III
Turning to the characteristics of the Basel III standards, it can be noted that the main objective of these provisions is to tighten general rules on capital and liquidity, and serves the purpose of greater stability of the banking sector. Basel III is focused on increasing attention to risk assessment procedures - credit, market and operational, systemic supervision of the financial and banking system, as well as ensuring market discipline. The combination of these elements can be called risk-based supervision, which, according to the Basel Committee on Banking Supervision, will be able to ensure financial stability. This is a new postulate of banking supervision designed to coordinate the entire financial system.
Structurally, the Basel III standards are divided into two main parts. The first characterizes the requirements for the structure of bank capital in relation to risk, the second part covers techniques and methods for controlling the liquidity risk of banks.
The main elements of Basel III include:
New procedure for calculating regulatory capital;
Assessing counterparty risk for over-the-counter derivatives transactions (CVA);
Requirements for the presence of a capital preservation buffer;
Requirements for the presence of a countercyclical buffer;
Standard for assessing the adequacy of basic capital (CET I);
Standard for assessing the adequacy of fixed capital (TIER I);
Short-term liquidity ratio (LCR);
Net Stable Funding Rate (NSFR);
Financial leverage (Leverage) - the standard for covering assets with capital without taking into account risk.
Particular attention is paid to the requirements for tightening the form of Tier 1 fixed capital (TIER I), which consists of ordinary shares and retained earnings, its value should be increased from the current 4% (Basel II requirements) to 6% of assets, taking into account the weighted average measure risk. The amount of Common Equity Tier 1 capital should also be increased to 4.5%. The document provides for the mandatory presence of a capital conservation buffer (Conservation Buffer) in the amount of at least 2.5% of risk-weighted assets. It should be noted that while maintaining the norm for the total amount of capital required (8%), additional requirements are imposed on its structure. Thus, the role of Tier 1 fixed capital (TIER I) increases significantly while the share of Tier 2 capital decreases.
Basel III sets increased standards for the amount of reserve and stabilization capital that each bank must have, and also introduces two special capital buffers - a capital conservation buffer (2.5% of assets) and a countercyclical buffer. The countercyclical buffer is introduced in case of overheating of the economy during periods of credit boom and can range from 0 to 2.5%.
It is assumed that by 2019, the total capital and capital conservation buffer should collectively be 10.5% (reservation rate).
The table contains a forecast of changes in capital requirements over 5 years.
Minimum requirements for capital composition and the period for their implementation (in % of January 1 of the corresponding year)
Note that Basel III adds two new standards - the short-term liquidity ratio (LCR) and long-term liquidity (net stable funding) (NSFR). The short-term liquidity ratio serves the purpose of ensuring that the bank maintains an appropriate level of high-quality liquid assets that can be converted into cash to maintain liquidity within 30 calendar days under stress scenarios and force majeure conditions. The value of this indicator for the bank today should be at least 60%, and by 2019 - 100%. The Net Stable Funding Ratio (NSFR) is used to ensure that long-term assets cover a bank's minimum stable liabilities for one year. The value of this indicator must be at least 100%. LCR has been included in the list of mandatory standards since January 1, 2015, and NSFR since January 1, 2018.
Another indicator of a bank’s stability in stressful situations is the leverage ratio, calculated as the ratio of Tier 1 capital to risky assets. The value of this indicator should be at least 3%.
Analysis of the practice of applying the Basel Accords in Russia
Speaking about the practice of applying Basel III standards in Russia, it can be noted that their goal is, first of all, to bring banking regulation and supervision of the Russian Federation into line with international standards. In addition to increasing the stability of banks in stressful situations, this will allow Russian banks to increase their credit ratings and be full participants in international financial relations.
The Basel III standards came into force in Russia on January 1, 2014, in accordance with them, the minimum limits for the adequacy of basic and fixed capital for credit institutions in the amount of 5 and 5.5% (for fixed capital since 2015 - 6%). The level of requirements for the adequacy of the total capital of credit institutions in the amount of 10% is maintained as the minimum value of the standard.
When applying capital adequacy standards in accordance with Basel III, additional risk coverage is provided for over-the-counter futures transactions and transactions with derivative financial instruments (DFIs) based on taking into account the risk of changes in the value of the loan portfolio due to a decrease in the credit rating of the counterparty (credit valuation adjustment, CVA) . At the same time, the restriction used when calculating the amount of equity capital on the inclusion of revaluation results from transactions with derivative funds, depending on the terms of the transactions, is canceled. For analytical purposes, the CVA indicator must be submitted to the Bank of Russia with reporting as of February 1 of each reporting year.
Capital adequacy standards and the procedure for their calculation have been adjusted in accordance with Basel III. The coefficient applied to operational risk changes from 10 to 12.5.
As noted, according to Basel III, the minimum capital adequacy ratio should be 8%, but each regulator can increase it at its own discretion. Thus, the Central Bank of the Russian Federation plans to increase it to 10%, but the final figure may be different. At the same time, we cannot ignore the fact that Russia is more than 1 year behind the standards implementation schedule.
Thus, to comply with Basel III regulations, Russian banks need changes in the balance sheet structure in order to meet short-term liquidity and capital structure requirements. Also, the commercial banking sector needs to develop measures for banks to achieve established indicators, organize and carry out measures to reduce the cost of applicable regulation and emerging risks.
Pros and cons of implementing Basel III provisions for Russia
Based on what was stated earlier, a logical question arises: to what extent will all of the above Basel III recommendations improve the stability of the Russian banking system? The answer to this question, according to the author, can be twofold.
Under normal business conditions, in a situation where financial institutions are able to assess and predict their risks, a much lower level of capital is required for the sustainable operation of banks. But in a situation where the risks are assessed incorrectly, the “safety cushion” recommended by Basel III will clearly not be enough to maintain stability and liquidity. For example, if a retail bank did not even work with mortgage loans, which collapsed the financial system in 2007-2009, then it could easily face a sharp increase in the percentage of loan defaults.
Thus, it can be assumed that Basel III protects the banking system from small cyclical risks, but only cyclical ones. It is doubtful that it will be able to protect against systemic debt crises, such as the one in Greece in 2010.
The disadvantages of the introduction of new standards include the following.
First, according to experts, banks may need up to $1 trillion in equity injections over the next 8 years. It is not entirely clear why such injections will be made in conditions of stagnation in the global economy.
Secondly, capital gains will lead to an increase in its value, i.e. banks will have to double their profits. One of the main tools for increasing profitability will naturally be an increase in interest rates on loans. Even a slight increase credit rate, say +0.3%, may lead to negative trends in the country’s unhealthy and unstable economy.
Thirdly, the banking system will most likely face a series of mergers and acquisitions, which we can already observe today in the conditions of the modern Russian banking system. Mergers entail a reduction in the number of banks and reduce the level of competition in banking sector thereby violating the stability of the system itself (since the fewer players, the less stable the entire system).
conclusions
Thus, the issue of meeting Basel III requirements takes on particular significance in the realities of the modern Russian economy, in which, against the backdrop of international economic sanctions and the instability of the foreign policy situation, many banks are faced with the impossibility of meeting the requirements for the equity capital adequacy standard to finance potential defaults on loan debt . The innovations are aimed at increasing the capital intended to finance outstanding overdue debt (in other words, Tier 1 capital, which is raised in addition to its own value, also through the formation of a conservation buffer), while the requirements for Tier 2 capital, on the contrary, have decreased.
Thus, we can assume two options for the development of the Russian banking system. In an optimistic scenario, we will be able to observe an increase in the share of net profit of banks, which forms the increase in equity capital. Such a scenario for the development of events is possible by revising the very concept of banking activity - through the diversification of activity, the liquidation of unprofitable divisions, products, and market segments.
In the pessimistic version, it is assumed that the lack of financing of the gaps between the actual and standard values of capital will be compensated through the growth of acquisition transactions or the merger of unstable and failing banks with other banks. large banks, which will certainly have a negative impact on customer loyalty to the financial sector and will cause an outflow of attracted capital.
As follows from the above, international requirements for the general level of bank capital adequacy have almost doubled. There is no doubt that the immediate introduction of such requirements will entail an irreparable blow to the activities of banks, since in fact 10% of equity capital would have to be allocated to the formation of reserves, and would entail additional emissions from banks. Thus, in order to avoid the above risks, the Basel Committee on Banking Supervision decided to gradually implement the requirements.
Reviewers:
Tupchienko V.A., Doctor of Economics, Professor of the Department of Business Project Management, National Research Nuclear University MEPhI, Moscow;
Putilov A.V., Doctor of Technical Sciences, Professor, Dean of the Faculty of Management and Economics of High Technologies, Federal State Autonomous Educational Institution of Higher Professional Education "National Research Nuclear University "MEPhI", Moscow.
Bibliographic link
Yarmyshev D.V., Gavrilov S.I. IMPLEMENTATION OF INTERNATIONAL BASEL III STANDARDS: GENERAL PREREQUISITES AND CONSEQUENCES FOR THE RUSSIAN BANKING SYSTEM // Basic Research. – 2015. – No. 9-1. – pp. 196-199;URL: http://fundamental-research.ru/ru/article/view?id=38994 (access date: 02/01/2020). We bring to your attention magazines published by the publishing house "Academy of Natural Sciences"
Since 2016, Russian banking regulation has been brought into line with Basel standards (the so-called Basel III), approved by the Basel Committee on Banking Supervision. Discussions about the appropriateness of such innovations flared up every now and then in the economic community, but general public were unclear. What lies behind these standards and how will this affect the functioning of banking market in the coming year, Albert Bikbov, an economic observer for the online publication Realnoe Vremya, tried to highlight it.
What is the Basel Committee?
The Basel Committee on Banking Supervision is a committee of banking supervisors established by the governors of the central banks of the Group of Ten (G-10) countries in 1975. It includes senior representatives of banking supervisors and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the UK and the US. The Committee usually meets at the Bank for International Settlements in Basel, where its permanent secretariat is located.
The formation of such a transnational body was a reaction on the part of the banking community and supervisory authorities to cases of large losses and bankruptcies of banks, hedge funds and institutional investors observed in the 70-80s. Standards, rules and methods for preventing such “financial storms” were needed. The most famous documents of the committee are the Basel I, Basel II and Basel III standards.
The main goal of Basel I is to limit credit risks (losses from borrower default, etc.) by developing a number of supervisory principles.
The first global document was the development in 1988 of the first Capital Adequacy Agreement (Basel I) by the Basel Committee on Banking Supervision. Initially, the agreement was considered as a recommendation, but since 1992 it has become a mandatory norm for the G-10 countries. Currently, more than 100 countries (including Russia) have fully or partially joined Basel I.
The main goal of Basel I is to limit credit risks (losses from borrower default, etc.) by developing a number of supervisory principles. The main document in the document is the definition of capital adequacy. The minimum amount of bank capital adequacy, which is sometimes called normative (regulatory) capital, is set at 8% of the amount of assets and off-balance sheet items determined taking into account credit risk.
According to the provisions of Basel I, the total amount of regulatory capital, which is checked for adequacy, consists of two levels of capital.
Level 1 is share capital and declared reserves.
Level 2 is additional capital, or second-tier capital, which includes low-quality capital, hidden reserves available to the bank in accordance with the laws of the country, etc. The second tier capital in total should not exceed the amount of the first tier capital.
But further practice has shown that meeting the requirement of the minimum permissible amount of capital cannot ensure the reliability of the bank and the entire banking system. Basel I defined capital requirements formally, without taking into account the real (economic) need of banks for it.
Since 1993, taking into account criticism from the banking community and the opinions of a number of economists, Basel I has been revised, and in 2004, updated framework approaches - Basel II - were published.
Basel II has three main components: minimum capital structure requirements, supervisory process, and market discipline.
Basel II maintains capital adequacy requirements at 8%. At the same time, market and operational risks are taken into account along with credit risk.
The second component is the supervisory process. The basic principles of the supervisory process, risk management, as well as transparency of reporting to banking supervisory authorities as applied to banking risks are examined.
The third component is market discipline. Complements minimum capital requirements and supervisory process. Market discipline is stimulated by establishing a number of standards for information openness of banks, standards for their relations with supervisory authorities and the outside world.
But life, as always, makes its own adjustments: the global financial crisis of 2008 clearly showed the failures of regulating the activities of banks. So Basel II had to be revised again.
Basel III
The emergence of Basel III standards began with the introduction of additional requirements for capital adequacy of banks (share capital, first-tier capital, second-tier capital, buffer capital, total capital).
Basel III tightens the requirements for the composition of Tier 1 capital by excluding from it the amount of deferred taxes and securitized assets.
Basel III establishes the need for credit institutions to form an additional reserve buffer at the expense of net profit. Buffer capital will allow banks, in the event of a systemic crisis and a reduction in the capital adequacy ratio below the minimum allowable, to receive additional liquidity without the sanction of the regulator. However, after the crisis, credit institutions are obliged to restore this capital.
At the same time, Basel III introduces regulations aimed at limiting financial leverage (leverage - the ratio of debt and equity capital), which is acceptable for financial intermediaries. In particular, we will talk about revising current and long-term liquidity standards.
The gradual transition to new standards began in 2013 and will continue over the next 6 years (until January 1, 2019).
Basel II - albeit in a rather modified form - was introduced in Russia only recently.
Adventures of Basel in Russia
For the first time in Russia, the Basel agreements were reflected in the Bank of Russia instruction No. 1 dated April 30, 1991 “On the procedure for regulating the activities of commercial banks,” which is associated with the advent of Basel I (the document became invalid on April 1, 2004). Currently, Basel I in Russia has been applied on a full scale. Basel II - albeit in a rather modified form - was introduced in Russia only recently. But not completely - a whole wave of reasons prevented it.
There is also a relatively small number of national rating agencies, as well as borrowers who have received credit ratings from international rating agencies; and the underdevelopment of internal rating systems in most commercial banks, significant differences in the definitions of default, overdue debt and credit losses used in banking practice; and insufficient statistical data on losses due to credit and operational risks at the disposal of banks wishing to switch to advanced approaches to risk assessment; and the relatively small amount of data on default rates and migration of external ratings of market debt obligations and internal ratings of bank loans; and the lack or insufficient number of studies examining the impact of economic and industry cycles on loss and risk levels in the banking sector; and the lack of financial, human and information resources necessary to implement more advanced approaches, both from the banks themselves and from regulators; and uncertainty regarding the scope of powers of national supervisory authorities in terms of interpretation and specification of certain provisions of Basel II falling within their competence.
But nonetheless central bank strictly insisted on the implementation of the following Basel III standards from January 1, 2016.
The main reason for the implementation of Basel is to improve the quality of risk management in banks, which ensures the stability of the banking system.
Why, in the current difficult conditions, is the Russian Central Bank imposing components of Basel regulation?
Firstly, the main reason for the implementation of Basel is to improve the quality of risk management in banks, which ensures the stability of the banking system and provides real protection of the rights of depositors and creditors. Which is important in our time of crisis.
Secondly, the vast majority of our banks operate on international market, have correspondent accounts in foreign credit organizations. Therefore, following the rules accepted in the international market is the only correct way. So Basel here acts as a business custom. If we do not comply with Basel requirements, then our banks will be treated as partners who do not comply with generally accepted rules, and the cost of borrowing on foreign markets for Russian banks will inevitably increase. And although the argument about foreign borrowing in the light of the sanctions blockade looks somewhat strained, there are Asian and other stock markets...
What are they changing in Russian Basel?
The corresponding draft regulations have already been published on the Bank of Russia website and discussed with the banking community.
According to the new standards, from January 1, 2016, the Bank of Russia is changing capital adequacy requirements. The level of basic capital will be brought to 4.5% versus 5% now. In addition, the Central Bank is changing the general capital adequacy ratio, reducing it by 2 percentage points. - from 10 to 8%.
At a glance Central Bank Russian Federation, the Russian banking system can withstand the introduction of Basel III. It is clear that the implementation of Basel III standards in the current environment has an impact on, as capital and risk assessment requirements increase. Therefore, the Central Bank of the Russian Federation conducted a thorough assessment of the impact of the implementation of Basel on the banking system as a whole, on individual banks and groups of banks.
Moreover, a number of serious mitigations of its own regulation were adopted, because in some respects Russian regulation was stricter than Basel. For example, the total capital adequacy ratio decreased from the Russian 10% to the minimum required by Basel 8%. Easing the regulator's requirements will indeed allow banks to free up some funds that are currently reserved for banking risks. As a result, the banking sector will have the opportunity to increase activity in the credit market.
And thus, taking into account these compensating measures, the effect of the introduction of Basel on the Russian banking system will be neutral.
Relief on loans to small and medium-sized businesses
For loans to small and medium-sized businesses (SMEs), the risk coefficient for “best” loans is set at 75% (each such “preferential” loan should not exceed 50 million rubles and 0.2% of the size of the loan portfolio). This decision should help revive small business lending.
Another relaxation is the lowest risk level for credit operations, including mortgages, is 35%.
Ambiguous mortgage
Another relaxation is that the minimum risk level for credit transactions, including mortgages, is 35%. In Russia, the minimum level was at around 50%. It would seem great - mortgages are stimulated, if not for one “but”: many banks finance mortgages by issuing and further resale (securitization) of mortgage bonds. Banks usually issue two tranches of bonds: they keep the younger one, since it is riskier and should cover maximum losses, and the older one is placed on the market. The junior tranches cover losses on securitized assets in priority order in relation to the senior tranche.
Due to the requirements of Basel III standards, from January 1, 2016, banks will apply a risk ratio of 1250% to the junior tranches of bonds issued under securitization held on their balance sheets instead of the current 100%. The 1250% ratio would make new asset securitizations uneconomic and would hit banks that had been issuing bonds on a systematic basis.
In essence, this is the death of a market with a fairly large potential - the current volume Russian market securitization (bonds at par) as of December 1 is estimated at 0.5 trillion rubles.
But, we repeat, in general, the impact of the introduction of Basel III standards on banking activities is assessed as neutral. And the negative impact on the banking system next year will be in completely different areas.