Has your jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?
Banking & Finance (2nd edition)
On May 2013, the Bank of Israel issued a series of guidelines under the PBC Rules, to be used to implement the global regulatory framework for more resilient banks and banking systems issued by the Basel Committee on Banking Supervision in the Basel III framework. The implementation of the Basel III Rules in Israel was principally defined in PBC Rule 202 which adopts the Basel III Rules in Israel, and sets forth the necessary adjustments to the then-existing PBC Rules, which dealt with capital requirements and calculations for Israeli banking institutions, as well as the introduction of additional new rules such as the requirement s for liquidity coverage ratios (dealt with in greater detail below).
The regulatory capital requirements set forth by the Bank of Israel in the PBC Rules are based on four underlying principles:
- The banking institution should have a proper process in place which will enable the estimation of its general capital adequacy in relation to its risk profile as well as a strategy to maintain its capital levels.
- The Supervisor of Banks shall review and estimate the internal capital adequacy and strategy of the banking institutions as well as their ability to monitor the regulatory required capital ratios in order to ensure compliance therewith. The Supervisor of Banks shall apply its supervisory authorities and powers where it shall not feel comfortable with the findings of such review.
- The Supervisor of Banks expects the banking institutions to be in a situation in which their capital levels shall be above the minimal regulatory requirements and it will be able to require that banking institutions maintain higher capital levels than those minimally required according to the PBC Rules.
- The Supervisor of Banks shall interfere, in early stages, in order to prevent a decrease in the capital levels below the minimum requirements which are applicable in connection with the risk profile of a specific banking institution and it will require remedial actions where the capital levels are not maintained or their previous levels are not recovered.
The PBC Rules set forth very elaborate and detailed guidelines and instructions as to the processes and procedures which should be implemented by the banking institutions in order to assess and maintain their capital requirements.
The PBC Rules in connection with the Basel III minimal capital requirements generally apply to banking institutions in Israel (other than foreign banks) and to credit card companies. The capital requirements differentiate between the total regulatory capital requirements and the Tier 1 capital requirements for banking institutions of which the balance sheets comprise 20% or more of the total balance sheet assets of banking institutions in Israel (currently the two largest banks in Israel; such are required to maintain 13.5% and 10% ratios, respectively), and those whose balance sheets are smaller (which are currently required to maintain 12.5% and 9% ratios, respectively). The Supervisor of Banks is authorized to set forth higher minimal ratios for specific banks.
The EU implemented the Basel III framework via the CRR / CRD IV, which contain a number of discretions for Member States in relation to national implementation. For example, additional capital buffers with regard to Global Systemically Important Institutions (G-SII) and Other Systemically Important Institutions (O-SII) may be prescribed.
The Basel III framework has been transposed into the Law to the extent that it has been incorporated in EU Directive 2013/36/EU (Access to the Activity of Credit Institutions and the Prudential Supervision of Credit Institutions and Investment Firms).
The Basel III requirements as to regulatory capital are included in Directive 2013/36/EU on capital requirements (Capital Requirements Directive IV) and the Capital Requirements Regulation. The Capital Requirements Directive was implemented in Finland through the enactment of the Finnish Act on Credit Institutions, which also mirrors the regulatory capital requirements of the Capital Requirements Regulation.
When the sufficiency of own funds in relation to the total risk exposure cannot be assured, the FFSA may impose an additional own fund capital requirement for a maximum of three years at a time.
The minimum capital requirement for credit institutions is EUR 5 million.
In addition to the core capital and consolidated core capital a credit institution must, in accordance with the Capital Requirements Regulation, have an additional amount for additional capital requirements. The total additional capital requirement consists of:
- a fixed additional capital amount;
- a fluctuating additional capital amount;
- a fluctuating systemic risk buffer; and
- additional capital requirements imposed on G-SIIs and O-SIIs.
The fixed additional capital amount is 2.5% of the total risk weight. The maximum of the fluctuating additional capital amount is 2.5% of the total risk weight determined by the FFSA for each credit institution separately. The fluctuating systemic risk buffer is determined by the FFSA and set between 1-5% of the consolidated risk weight. A systemic risk buffer of up to 3% may be set if the systemic risk for Finnish credit institutions is higher than in other EU member states. The same may be done if it can be assessed on the basis of at least three indicators that the systemic risk in Finland is higher than the long-term average. A systemic risk buffer of between 3% and 5% may be set if the systemic risk is found to be clearly higher in Finland than in other EU member states, or clearly higher than the long-term Finnish average.
Credit institutions will have to reach the buffer requirement of 1% by the beginning of January 2019 and any higher requirement imposed by the FFSA by 1 July 2019.
The maximum additional capital requirement for G-SIIs is 3.5%, and for O-SIIs up to 2% of the total risk weight.
The provisions of the Capital Requirements Directive IV (CRD IV) have been transposed into French law by means of Ordinance n° 2014-158 of 20 February 2014, Decree n° 2014-1316 of 3 November 2014, and several ministerial orders of 5 November 2014.
- Minimum paid up capital requirements depend on categories of licenses as follows :between € 1 million and € 5 million depending on the banking license granted for credit institu-tions and finance companies;
- between € 50 000 and € 3 800 000 depending on the services provided for Investment com-panies ;
- € 40 000 for payment institutions;
- € 350 000 for electronic money institutions.
Basel III framework with respect to regulatory capital is implemented in Turkey applicable to all banks irrespective of their type under the (i) the Regulation on Own Funds of Banks (“Regulation on Own Funds”); (ii) the Regulation on Capital Maintenance and Cyclical Capital Buffer; (iii) the Regulation on Calculation of Banks’ Liquidity Coverage Ratios; (iv) the Regulation on Measurement and Evaluation of the Capital Adequacy of Banks (“CM Regulation”) and (v) numerous communiques and guides on risk calculation and reduction methods with regards to credit, securitisation, operational, currency, market and country risks in line with Basel III framework.
In line with Basel III, the statutory capital adequacy standard ratio for equity capital of banks is 8%. Note that the BRSA has announced a higher target capital adequacy ratio of 12% and banks are expected to achieve and maintain a capital adequacy ratio that is higher than 12%. Additionally, banks shall maintain a minimum Tier I capital adequacy ratio of 6% and a minimum core capital (i.e. Common Equity Tier I capital) adequacy ratio of 4,5%. The BRSA is authorized to increase such ratios taking into consideration internal systems, assets and financial conditions of banks and to impose different capital adequacy ratios to different banks.
Furthermore, pursuant to the Regulation on the Internal Systems of Banks and Internal Capital Adequacy Assessment Process, banks in Turkey are also required to implement an Internal Capital Adequacy Assessment Process in order to internally calculate the capital adequate to cover the risks faced by banks and might be faced in the future by taking into consideration that bank’s risk profile, risk appetite and activities, and the volume and complexity of its transactions.
Basel Committee on Banking Supervision Regulatory Consistency Assessment Programme (“RCAP”) assessment team also determined and announced in its March 2016 report on assessment of Basel III risk-based capital regulations that Turkey is in compliance with the Basel risk-based capital standards with all underlying components following the last updates in the legislation took place in 2016 .
Switzerland implemented the Basel III capital framework with effect as of 1 January 2013.
Building up on these rules, special requirements apply for systemically important banks (SIBs), subject to certain phase-in provisions. SIBs must hold sufficient capital that absorbs current operating losses to ensure continuity of service (going concern requirement). The going concern requirement fully applicable in 2020 consists of:
- a minimum requirement of 8% of RWA and 3% of leverage exposure, and
- a buffer of (i) 4.86% of RWA and 1.5% of the leverage exposure, leading to a so-called base re-quirement of 12.86% of RWA and 4.5% of leverage exposure, and (ii) an additional buffer sur-charge, which reflects the systemic importance.
In general, this requirement for systemically important banks must be met by CET1 capital, with up to 3.5% of RWA and 1.5% of the leverage exposure of the minimum requirement and up to 0.8% of RWA in the buffer permissible to be held in additional tier 1 capital instruments that would be converted into common equity or written down if the CET1 ratio falls below 7%. The gone concern requirement does not include any countercyclical buffers, which have to be held on top.
For systemically important banks operating internationally (G-SIBs), such as Credit Suisse or UBS, addi-tional requirements for loss-absorbing capacity apply. In addition to the above-mentioned going concern requirement, they must issue sufficient qualifying debt instruments to allow for restructuring without re-course to public resources (gone concern requirement, see below at Question 25.). Similar rules apply to domestically systemically important banks (D-SIBs), with certain quantitative alleviations and qualitative specialities (mainly driven by the legal nature of some of the existing D-SIBs).
Furthermore, Swiss capital requirements provide for a supplemental counter-cyclical buffer of up to 2.5% of a bank's risk-weighted assets. Since 30 June 2014, the counter-cyclical buffer is set at 2% of a bank's risk-weighted assets pertaining to mortgage bonds that finance residential property in Switzerland. Effec-tive July 1, 2016, Switzerland introduced the option of an extended countercyclical buffer, which is based on the BIS countercyclical buffer that could require banks to hold up to 2.5% of RWA in the form of CET1 capital.
The CRR is directly applicable in Germany and Directive 2013/36/EU, ie the Capital Requirements Directive (CRD IV) has been implemented in Germany without significant deviation.
Yes, Basel III framework is implemented via EU regulations, in particular via the CRR and CRD IV di-rective. There are no major deviations and the banks in the Slovak Republic shall maintain own funds prescribed by CRR.
MAS is a member of the Basel Committee on Banking Supervision. The Basel III framework has been duly implemented via MAS Notice 637.
The FSA has implemented the Basel III framework with respect to regulatory capital for banks with international operations, and applies a more simplified capital adequacy regulation to banks without international operations.
Oman has implemented Basel III requirements. The regulatory capital will consist of the sum of Tier 1 (“T1”) Capital: going-concern capital and Tier 2 (“T2”) Capital: gone-concern capital. The T1 Capital will consist of Common Equity Tier 1 capital (“CET 1”) and Additional Tier 1 (“AT1”). The minimum capital requirements for Omani banks are: a) CET1 must be at least 7.0 per cent. of risk weighted assets at all times, b) T1 Capital must be at least 9.0 per cent. of risk weighted assets at all times and c) Total Capital (T1 Capital plus T2 Capital) must be at least 12.0 per cent. of risk weighted assets at all times.
Yes, the National Bank of Georgia has implemented the major requirements of Basel III framework with respect to regulatory capital which are set out in the By-law on the Requirements with respect to Capital Adequacy of Commercial Banks approved by the Decree N100/04 of the President of the National Bank of Georgia. There are no major deviations, e.g., with respect to certain categories of banks. According to Article 1.4 of the By-law, the rules under the By-law are based on the Basel framework and in case any rule or definition is not provided by the By-law, the bank shall adhere to the standards established by the Basel Committee, regulation (EU) 575/2013 and directive (EU) 2013/36.
As Liechtenstein is part of the EEA, EU legislation, which is transposed into the EEA Agreement is either directly applicable or is transposed into Liechtenstein law. Further, the Liechtenstein FMA regularly fol-lows guidance by European regulators (such as the European securities and markets authority ESMA or the European banking authority EBA).
Although the CRD framework is pending to be transposed into the EEA agreement, Liechtenstein has implemented and fully complies with the CRD IV/CRR framework, which reflects the Basel II standards. The CRD has been transposed into national law and the CRR (EU) No 575/2013 as well as the associated implementing and delegated acts are legally binding and applied accordingly.
The rules governing capital adequacy are prescribed by CRD IV (transposed into Luxembourg as part of the Financial Sector Law, please see the answer to Question 11. above) and Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (the "CRR Regulation"), the latter being directly applicable in Luxembourg. The discretions left to Member States regarding regulatory capital requirements under the CRR are addressed in CSSF Regulation 18-03 (the "Regulation 18-03").
In addition to the own funds (capital) regime set out in the CRR Regulation, the capital buffer requirements under CRD IV were implemented into Luxembourg law by way of an amendment of the Financial Sector Law.
We are not aware of any major deviations from CRR and CRD IV in Luxembourg; it is of note in this respect that the Luxembourg legislator generally tends to closely follow the wording of the implemented EU acts.
Basel III framework regarding regulatory capital was implemented in Portugal through European legislation.
In this regard, Directive 2013/36/EU, of the European Parliament and of the Council (CRD IV) was transposed into national law through Decree-Law 157/2014, of 23 October, which amended the Legal Framework of Credit Institutions and Financial Companies (Decree-Law 298/92, of 31 December). In addition, European implementation of Basel III rules was also executed, at Union level through Regulation (EU) 575/2013 (CRD) – this Regulation has direct application in national law.
The MFSA has implemented the EU CRD IV/CRR package with respect to regulatory capital. No major deviations are to be noted and, in fact, credit institutions are advised to refer to the relevant articles in the CRR, related Regulatory/Implementing Technical Standards and any other Guidelines or any other relevant EU legislation that may be issued from time to time. There are no additional domestic-specific provisions in this respect.
Principle 1 of the Guidelines provides, inter alia, that one of the roles and responsibilities of the board is to approve the reviewed interim financial statements and audited annual statements which present the bank’s financial position in accordance with the applicable international financial reporting standards, public disclosure standards, Basel Committee’s Pillar III disclosure standards (and the equivalent for Islamic Banks), and recommendations of the general assembly on approving the financial statements at year end. Nominate external auditor, and members of Sharia Supervisory Boards in Islamic Banks to be approved by the general assembly.
Indeed, QCB Circular No. 3 of 2014 was issued to regulate Capital Adequacy Ratio – Basel III Framework.
Clause 4.2.4 of the QCB Implementation Instructions – Basel III Framework for Convention Banks regarding the calculation of capital requirements provides, inter alia, that “Banks are required to hold regulatory capital against all of their securitization exposures, including those arising from the provision of Credit Risk Management (CRM) to a securitisation transaction, investments in asset-backed securities, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement, as set forth in the following sections. Repurchased securitisation exposures must be treated as retained securitisation exposures.“
Whereas QCB Circular No. 6 of 2014 regarding Capital Adequacy Ratio – Basel III Framework and IFSB – 15: Revised Capital Adequacy Standards is directed to Islamic banks, and attaches the Implementation Instructions, Basel III Framework for Islamic Banks – Pillar 1 Guidelines for Capital Adequacy.
All the EU regulatory requirements (e.g. Directive 36/2013) and EU level banking sector guidelines (i.e. EBA guidelines) with respect to the bank’s regulatory capital have been implemented.
Our jurisdiction applied Basel III framework with respect to the regulatory capital by adopting several regulations in December 2016. Regulator may determine capital adequacy indicators for the bank that are higher than the ones regulated if the solvency and legality control of the bank determines this necessary for stable and safe banking operations, that is, meeting its obligations towards the creditors. Therefore, there are no differences related to certain bank categories, they depend on solvency and operations of the specific bank.
The majority of the Basel III framework has been implemented and is in force but there are certain aspects, including in relation to changes to the definition of exposure and minimum capital requirements for market risk, that will come into force only in 2022.
Yes, the US has implemented the Basel III framework with respect to regulatory capital. The Basel Committee on Banking Supervision assessed the US Basel III regulations and stated in its December 2014 report that it regards the US regulations implementing the Basel III framework to be largely compliant overall (though some deviations were identified). The US is scheduled next to be assessed in 2020.
Yes, the Capital Requirements Regulation (CRR) is directly applicable in Italy and the provisions of the Capital Requirements Directive IV (CRD IV) have been transposed into Italian law by means of the Legislative Decree no. 72 of the 12 May 2015, which entered into force on the 27 June 2015.
The Circular 285 contains now specific sections dedicated to the transposing provisions of the CRD IV and of the CRR. In implementing the CRD IV and CRR, the Bank of Italy exercised its discretionary power to, inter alia, increase banks’ minimum initial capital from Eur 5 million (as provided by CRD IV) to Eur 10 million. Moreover, the Bank of Italy has provided for an exemption for banks belonging to a group from holding the liquidity requirements individually.
The BoT has generally implemented the Basel III framework with respect to regulatory capital for the commercial banks, excluding branches of foreign commercial banks.
As part of the full implementation of Basel III, Regulation (EU) No 575/2013 (CRR) is directly applicable in Slovenia, whereas Directive 2013/36/EU (CRD IV) has been implemented into Slovenian law by adoption of the Slovenian Banking Act (which entered into force on 13 May 2015). There are no major deviations with respect to certain categories of banks.