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Established in 2006 as a Community of Reality

Welcome to the Neno's Place!

Neno's Place Established in 2006 as a Community of Reality


Neno

I can be reached by phone or text 8am-7pm cst 972-768-9772 or, once joining the board I can be reached by a (PM) Private Message.

Established in 2006 as a Community of Reality

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Established in 2006 as a Community of Reality

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    Understanding Deutsche Bank's Challenges With Basel III Compliance

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    Understanding Deutsche Bank's Challenges With Basel III Compliance Empty Understanding Deutsche Bank's Challenges With Basel III Compliance

    Post by dry Thu 13 Jun 2013, 5:42 am

    Understanding Deutsche Bank's Challenges With Basel III Compliance
    Jun 4 2013, 11:35  |  about: DB


    Deutsche Bank (DB) raised a lot of concerns towards the end of 2011 when it reported that it had a pro-forma Basel III core Tier 1 capital ratio of 6.6% – one of the lowest among all the banking groups included in the list of global systemically important banks (G-SIBs) by the Financial Stability Board (FSB) then. But the largest German bank has come a long way since then to notch up a capital ratio figure of 8.8% by the end of Q1 2013 – a milestone it achieved by cutting down on its risk-weighed assets by selling its non-core business units as well as by playing around with the asset classes it holds to benefit the most from current Basel III provisions. [1]
    And to top it off, the bank also gave in to investor pressure to finally issue fresh equity worth €3 billion in late April. With the latest round of stock issuance, Deutsche Bank’s capital ratio jumped to 9.5% – hitting the minimum level mandated for it by the FSB (see The Basel III Challenge For Banks: Why Extra Capital Requirements?). The bank is now among the best capitalized G-SIB, along with UBS (UBS), BNP Paribas (BNPZY.OB), HSBC (HBC) and Morgan Stanley (MS). [2]
    But, going by the capital shortfall estimate provided by Germany’s financial regulator BaFin about the country’s largest banks earlier this week, it seems that Deutsche Bank’s efforts to shore up its balance sheet are not yet over. [3] So, what more can we expect from Deutsche Bank on the Basel III readiness front in the near future?
    Understanding Deutsche Bank's Challenges With Basel III Compliance Saupload_transWe maintain a $54 price estimate for Deutsche Bank’s stock, which is about 15% ahead of the current market price. A large part of this price difference can be attributed to the negative sentiment towards European banks due to the weak economic outlook for the region.
    The German banking industry was a laggard compared to other countries in terms of Basel III readiness until quite recently – something that is made amply evident by the fact that BaFin estimated the capital shortfall among the largest German banks to be around €32 billion ($42 billion) late last year. (ref:3) But the banks, including Deutsche Bank and its closest rival in the country Commerzbank (CRZBF.PK) , have responded to the situation quite well by tightening their purse strings, retaining all their earnings, undertaking several divestments and reallocating their capital towards assets that are viewed more favorably under the Basel III norms.
    Most importantly, both Deutsche Bank and Commerzbank shed their inhibitions towards raising more capital from the equity market by going ahead with their share issuance plans. The effectiveness of all these steps is visible as the shortfall for German banks has shrunk to €14 billion ($18 billion) in less than a year.
    Now coming to Deutsche Bank, the German banking giant was placed in "Bucket 4" by the FSB as part of its classification of the G-SIBs, which means that the bank will be subject to an additional capital requirement of 2.5% over and above the minimum base requirement of 7% – a total of 9.5%. Once the Basel III norms kick in, Deutsche Bank will be allowed to hand out dividends only if its balance sheet shows a capital ratio of 9.6% or above. As Deutsche Bank’s current capital ratio of 9.5% is greatly subject to the underlying calculation of its risk-weighed assets value, any change implemented by the Basel committee in this regard could negatively impact the ratio figure.
    In such an event (and also given the demand for an increase in capital by BaFin) Deutsche Bank will be forced to withhold dividends yet again in the future – choosing to retain all its earnings. This will show a marked impact on Deutsche Bank’s share value as can be understood by making changes to the chart below which captures the bank’s dividend payout ratio as adjusted for any share


    http://seekingalpha.com/article/1479721-understanding-deutsche-bank-s-challenges-with-basel-iii-compliance?source=google_news
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    Understanding Deutsche Bank's Challenges With Basel III Compliance Empty Fed’s Raskin Seeks to Clarify Bank Rules by Hastening Basel III

    Post by dry Thu 13 Jun 2013, 5:54 am

    Fed’s Raskin Seeks to Clarify Bank Rules by Hastening Basel III
    By Joshua Zumbrun & Mark Niquette - Jun 6, 2013 7:30 AM 
    Federal Reserve Governor Sarah Bloom Raskin said regulators must complete new international capital rules because delays may be harming financial institutions by leaving them unsure how to plan for the future.
    Lending decisions and funding plans today are shaped by perceptions of business conditions in the future, and those conditions include the details of the final regulatory capital framework,” Raskin said today in prepared remarks for a speech in Columbus, Ohio. “It seems obvious to me that uncertainty over that framework is weighing on the balance sheets of banks that will be affected by the rules.”
    Raskin, who did not discuss the outlook for the economy or monetary policy, called for regulators to hasten the implementation of new capital rules known as Basel III, adopted by the Basel Committee on Banking Supervision, and designed to improve the quality and quantity of regulatory capital. Both the European Union and the U.S. missed a January 2013 deadline to begin phasing in the standards.
    “While it is important to get it right, this goal must be balanced with the costs imposed by delay,” Raskin said. “At a moment when the economy finally seems to be gaining some traction, I believe that finalizing a capital rule will minimize uncertainty related to capital requirements as well as promote safer and sounder banks.”
    Bank Rules
    The Basel committee brings together regulators from 27 nations, including the U.S., U.K. andChina, to coordinate rules for banks.
    U.S. banking regulators said in November that they were delaying implementation of new capital rules because “many industry participants have expressed concern” the rules would go into effect before they understood or were able to adapt to them, according to a release from the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
    “There is significant justification for both higher levels, and higher quality, of capital,” Raskin said in the speech at Ohio Bankers Day, sponsored by the Ohio state banking regulator. “At the same time, however, for community banks in particular, more and better capital should be achieved without significantly increasing the complexity of capital calculations.”
    Raskin, a former state banking regulator who was appointed to the central bank by PresidentBarack Obama in 2010, praised the benefits of community banks, calling them “vital and competitive players in a highly diverse landscape for financial services.”
    Liquidity Rules
    Global rule makers have also clashed with lenders over the severity of the Basel III capital and liquidity rules, which were set out in 2010 as part of an overhaul of international banking regulation standards in the wake of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.
    The pace of implementation of Basel III “has been adjusted intentionally to support banks on the mend,” International Monetary Fund Managing Director Christine Lagarde said in a speech in Frankfurt in March, “but delays also reflect difficulties in agreeing on the way forward, and pushback from industry, averse to changing outmoded and dangerous business models.”
    Raskin, 52, said that capital and liquidity rules need not be flawless, and that regulators will have to maintain vigilance supervising the activities of financial institutions.
    “We have to resist the temptation to believe we can create a perfectly sensitive risk-based regime that gives the illusion of safety,” said Raskin. “Such a regime would not be a meaningful surrogate for effective on-site supervision, and the effort to try to create an ever-more refined system would distract us from some of the important policy questions that lie ahead for our financial system.”

    http://www.bloomberg.com/news/2013-06-06/fed-s-raskin-seeks-to-clarify-bank-rules-by-hastening-basel-iii.html
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    Understanding Deutsche Bank's Challenges With Basel III Compliance Empty : Final Guideline For Basel III Implementation Now In Effect

    Post by dry Thu 13 Jun 2013, 6:03 am

    Introduction
    The Office of the Superintendent of Financial Institutions ("OSFI") issued the 'final' version of its Capital Adequacy Requirements Guideline (the "Final Guideline") in response to the reforms adopted by the Basel Committee on Banking Supervision ("BCBS") in December 2012. These reforms, commonly known as "Basel III", are intended to strengthen global capital adequacy rules and encourage greater resilience in the banking sector. The Final Guideline came into effect on January 1, 2013, with the exception of provisions governing Credit Valuation Adjustment, which come into effect on January 1, 2014. Capitalized phrases used in this bulletin and not otherwise defined are terms of art in the Final Guideline, which is accessible here.

    In implementing Basel III, OSFI has made a number of important changes to the previously issued version of the guideline which will affect the way that Canadian banks and other deposit taking institutions ("DTIs") determine capital adequacy. This bulletin provides a brief overview of some of the changes implemented in the Final Guideline, including changes with respect to structured products as well as the calculation of market risk.
    Capital Adequacy: General Concepts
    Banks and other DTIs are required by the OSFI to maintain, on a continuous basis, a minimum asset to capital ratio. There are two calculations used to establish an institution's capital adequacy: the assets to capital multiple, and a risk-based capital ratio. The former provides an overall assessment of the sufficiency of an institution's capital; the latter is used to weigh assets according to their vulnerability to credit risk, operational risk, and market risk.

    The assets to capital multiple is calculated by dividing an institution's total assets (including items considered "off-balance sheet") by the total of its adjusted net Tier 1 Capital and adjusted Tier 2 Capital (as defined in Chapter 2 of the Final Guideline). For a more detailed discussion of Tier 1 and Tier 2 capital, refer to Davis' previous bulletin of May 2012 on this subject. As a general rule, total assets should be no greater than 20 times capital, though there are exceptions to this standard ratio (see Final Guideline, Chapter 2).

    To calculate an institution's risk-based capital ratio, it is first necessary to determine the total of its "risk-weighted assets", (rather than "total assets" as used to establish the asset to capital multiple). An institution's total risk-weighted assets are determined by multiplying the capital requirements for market risk and operational risk by 12.5 and adding the resulting figures to the risk-weighted assets for credit risk. To calculate the risk-capital ratio, the institution's total capital is divided by its risk-weighted assets. The resulting percentage gives some idea as to the relative capital strength of the institution, taking into account the risks to which its various assets are exposed. The minimum risk-based capital ratio permitted by the Final Guideline is 8%.
    Final Guideline: Basic Changes
    The Final Guideline departs from previous versions both in structure and content. Most immediately apparent is the consolidation of the guideline, formerly made up of two volumes (a simplified approach to capital adequacy calculations applicable to certain institutions in one volume; the remaining calculation approaches in the other, following the format of Basel II), into one. The numbers from the original BCBS text are no longer used to order the document, but rather paragraphs and sections are numbered sequentially. A new chapter (Chapter 4 - Settlement and Counterparty Risk) has been added, made up of what were Annex 3 and Annex 4 to Chapter 3 - Credit Risk - Standardized Approach, as well as sections of what was previously Chapter 8 (now Chapter 9) - Market Risk. This new Chapter 4 focuses to a significant extent on the rules surrounding credit derivative instruments, possibly on account of the rapid growth of the global CDS market at the time Basel III was in development, and the role credit derivatives played in the financial crisis.
    In addition:

    • the Final Guideline has been revised to include the Basel III minimum and target capital levels, as well as the asset to capital multiple calculation described above. The standards for calculation of capital instruments have been made more onerous, as have been the requirements with respect to mandated regulatory adjustments. For credit risk, new risk weights have been introduced for use in calculations made under the standardized approach. Notably, the use of unsolicited ratings for assets that constitute sovereign exposures (subject to certain conditions) is now permitted.
    • The most significant changes with respect to settlement and counterparty risk (chapter 4) are the introduction of a new capital charge for credit valuation adjustment instability and new capital requirements for exposure to central counterparties. The range of eligible guarantors in the context of mitigating credit risk has been limited, and greater detail has been given with respect to determination of the materiality threshold for equity exposures which may be excluded from the internal ratings based ("IRB") calculation of credit risk.
    • Finally, regarding structured products, changes have been included which incorporate the Basel III requirement for 50/50 deductions to move to a 1250% risk-weight, which is discussed in greater detail below.

    Final Guideline: Specific Changes
    In the move from Basel II to Basel III, the method for calculating operational risk is unchanged. Similarly, the Basel II standards are still used in the Final Guideline as the basis for establishing market risk; there are however several noteworthy adjustments relevant to the calculation of market risk.
    Calculation of Market Risk
    Previously, a 50% deduction from regulatory capital was a required adjustment for exposure to structured products. Basel III has introduced a new approach. Going forward, most securitization exposures will be risk-weighted at 12.5:1 or 1250%. Equity exposures determined under the PD/LGD approach (see Chapter 6 of the Final Guideline), and significant investments in commercial and equity exposures, as well as major investments in commercial entities, will also be subject to the 1250% risk-weight. Chapter 7 permits certain exceptions: the most senior exposure in a securitization, exposures in a second-loss position or better in some ABCP programs, and eligible liquidity facilities, are all exempt from the 1250% risk-weight requirement.

    Securitization exposures subject to the 1250% risk-weight include credit-enhancing interest-only strips (net of any increase in equity capital resulting from securitized transactions), investments in securitization exposures with short term ratings below A-3/P-3/R-3 or which are unrated, and below-investment-grade retained securitization exposures. Originating banks and entities divided by credit risk calculation methods (i.e. the standardized approach or the model approach) have different categories of securitization exposures to which the 1250% risk-weight applies.

    The calculation of market risk, as discussed in "Chapter 9 - Market Risk" of the Final Guideline, also reflects the shift to a 1250% risk-weight as described above. Institutions are required to monitor the level of risk against which capital requirements are applied. The capital requirement in the context of market risk is determined either by adding the sum of all capital charges for market risk, as calculated using the standardized approach, or by the measure of market risk derived from the model approach (or a mixture of the two). It is in the calculation of the capital charges where the 1250% risk-weight is relevant. Incorporation of this new risk-weight into the calculation has the potential to greatly affect the capital requirements of which institutions must be mindful.
    New Application of Dealer Exception
    A further important change to "Chapter 9 - Market Risk" was made with respect to the new application of the dealer exception. Generally, positions held in an institution's own eligible regulatory capital instruments are deducted from total capital. As well, positions in other institutions' eligible regulatory capital instruments, or in intangible assets, will be treated the same way as assets held in the banking book. A dealer exception to these rules may now be granted when an institution demonstrates to OSFI that it is an 'active market maker'. The exception applies to holdings of other DTI capital and would allow that institution to treat those holdings as being held in the trading book. It should be noted however, that this exception will apply only to positions in other financial institution's regulatory capital instruments, and only on positions which are not in excess of the 10% limit on non-significant investments in capital of banks, financial, and insurance entities as described in Chapter 2 of the Final Guideline.
    Conclusion
    While retaining much of the content of Basel II, the Final Guideline introduces several important changes of which banks and other DTIs must be aware. Although the changes from the preliminary guideline may appear minor, the Basel III scheme on the whole is a departure from the now-familiar approach of Basel II. It is important that banks and DTIs in Canada be both fully aware of the Final Guideline and comfortable with the Basel III regime.
    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

    http://www.mondaq.com/canada/x/239088/Financial+Services/Final+Guideline+For+Basel+III+Implementation+Now+In+Effect

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