FRANKFURT (MNI) – The following is the second part of the annex of
a press release on capital and liquidity reforms issued Monday by the
Bank for International Settlements, in Basel, Switzerland.

B. Transition to the leverage ratio

The Committee agreed to divide the transition period into the
following milestones:

–The supervisory monitoring period commences 1 January 2011. The
supervisory monitoring process will focus on developing templates to
track in a consistent manner the underlying components of the agreed
definition and the resulting ratio.

–The parallel run period commences 1 January 2013 and runs until 1
January 2017. During this period, the leverage ratio and its components
will be tracked, including its behaviour relative to the risk based
requirement. Bank level disclosure of the leverage ratio and its
components will start 1 January 2015. The Committee will closely monitor
disclosure of the ratio.

Based on the results of the parallel run period, any final
adjustments would be carried out in the first half of 2017 with a view
to migrating to a Pillar 1 treatment on 1 January 2018 based on
appropriate review and calibration.

IV. Regulatory buffers, provisions, and cyclicality of the minimum

Regulatory buffers

The Committee has issued for consultation a countercyclical buffer
proposal, with comments due by 10 September 2010. A fleshed out version
of the conservation buffer proposal was already issued as part of the
December 2009 consultative package and remains unchanged. The two
proposals will be finalised jointly by the end of this year.

The capital conservation buffer should be available to absorb
banking sector losses conditional on a plausibly severe stressed
financial and economic environment. The countercyclical buffer would
extend the capital conservation range during periods of excess credit
growth, or other indicators deemed appropriate by supervisors for their
national contexts. Both buffers could be run down to absorb losses
during a period of stress.

Mitigating cyclicality of the minimum

The December 2009 proposal included possible approaches to address
any excess cyclicality of the minimum requirement. The Committee,
through its quantitative impact study (QIS), has collected data to
assess the impact of these approaches, the purpose of which is to adjust
for the compression of probability of default (PD) estimates in the
internal ratings based approach during benign credit conditions by using
PD estimates for a banks portfolios in downturn conditions. This work
also will be informed by the findings of the Committees Capital
Monitoring Group on the cyclicality of the minimum requirement. The
output would be a set of supervisory tools to assess the adequacy of
banks capital buffers in relation to the differing ratings
methodologies used by banks.

Forward looking provisioning

While capital focuses on unexpected losses, the Committee also has
developed a concrete proposal to operationalise the expected loss
approach to provisioning proposed by the IASB. The Committee sent a
comment letter to the IASB on 30 June 2010 in which it spelled out its
proposed approach. The Committee has been in close dialogue with the
IASB on this topic.

V. Systemic banks, contingent capital and a capital surcharge

In addition to the reforms to the trading book, securitisation,
counterparty credit risk and exposures to other financials, the Group of
Governors and Heads of Supervision agreed to include the following
elements in its reform package to help address systemic risk:

–The Basel Committee has developed a proposal based on a
requirement that the contractual terms of capital instruments will allow
them at the option of the regulatory authority to be written-off or
converted to common shares in the event that a bank is unable to support
itself in the private market in the absence of such conversions. At its
July meeting, the Committee agreed to issue for consultation such a
gone concern proposal that requires capital to convert at the point of
non-viability.

–It also reviewed an issues paper on the use of contingent capital
for meeting a portion of the capital buffers. The Committee will review
a fleshed-out proposal for the treatment of going concern contingent
capital at its December 2010 meeting with a progress report in September
2010.

–Undertake further development of the guided discretion approach
as one possible mechanism for integrating the capital surcharge into the
Financial Stability Boards initiative for addressing systemically
important financial institutions. Contingent capital could also play a
role in meeting any systemic surcharge requirements.

VI. Global liquidity standard

A. Liquidity coverage ratio (LCR)

Governors and Heads of Supervision also agreed on the Basel
Committees concrete proposals to recalibrate the stress scenarios to
achieve a conservative bank level and plausibly severe system wide
shock. The Committee also made revisions to the definition of qualifying
liquid assets subject to the overall requirement that such assets remain
prudently liquid in periods of stress. The goal is to achieve a
calibration and definition that penalises imprudent liquidity profiles,
while minimising system level distortions. Specifically, Governors and
Heads of Supervision endorsed the Committees following revisions to the
December proposal. The Committee will review the impact of these changes
to ensure that they deliver a rigorous overall liquidity standard.

–Retail and SME deposits: Lower the run-off rate floors to 5%
(stable) and 10% (less stable), respectively (from 7.5% and 15%). These
numbers are floors and jurisdictions are expected to develop additional
buckets with higher run-off rates as necessary.

–Operational activities with financial institution counterparties:
Introduce a 25% outflow bucket for custody and clearing and settlement
activities, as well as selected cash management activities. These
activities will be clearly defined in the final rule and would require
specific supervisory approval before the funds specifically related to
those activities could be considered “operational” (ie not all funds
from the counterparty would qualify). The bank that has deposited the
operational deposits would receive a 0% inflow recognition for those
deposits, as those funds would be expected to remain at the other bank
during a time of stress. The Committee also is in the process of
discussing the treatment of cooperative and savings bank networks and
will provide a concrete proposal for consideration at the September 2010
BCBS meeting.

–Deposits from domestic sovereigns, central banks, and public
sector entities (PSEs):

For unsecured funding, treat all (both domestic and foreign)
sovereigns, central banks and PSEs as corporates (ie with a 75% roll-off
rate), rather than as financial institutions with a 100% roll-off rate.

For secured funding backed by assets that would not be included in
the stock of liquid assets, assume a 25% roll-off of funding.

–Secured funding: Only recognise roll-over of transactions backed
by liquidity buffer eligible assets.

–Undrawn commitments: Lower retail and SME credit lines from 10%
to 5%. Treat sovereigns, central banks, and PSEs similar to
non-financial corporates, with a 10% run-off for credit lines and a 100%
run-off for liquidity lines.

–Inflows: Rather than leave it to bank discretion to determine the
percentage of “planned” net inflows, establish a concrete harmonised
treatment in the standard that reflects supervisory assumptions.

–Definition of liquid assets: All assets in the liquidity pool
must be managed as part of that pool and are subject to operational
requirements. The December 2009 proposal outlined that the assets must
be available for the treasurer of the bank, unencumbered, and freely
available to group entities. The Committee will finalise these
operational requirements by the end of this year.

As part of the narrow definition of liquid assets, allow the
inclusion of domestic sovereign debt for non-0% risk weighted
sovereigns, issued in foreign currency, to the extent that this currency
matches the currency needs of the bank’s operations in that
jurisdiction.

–Introduce a “Level 2″ of liquid assets with a cap that allows up
to 40% of the stock to be made up of these assets.

–Include (with a 15% haircut) government and PSE assets qualifying
for the 20% risk weighting under Basel II’s standardised approach for
credit risk, as well as high quality non-financial corporate and covered
bonds not issued by the bank itself (eg rated AA- and above), also with
a 15% haircut.

–Utilise both ratings and additional criteria as outlined in the
December proposal (bid-ask spreads, price volatility, etc) to determine
eligibility.

Develop standards for review at the September 2010 BCBS meeting for
jurisdictions which do not have sufficient Level 1 assets to meet the
standard.

[TOPICS: M$$EC$,MT$$$$,MGX$$$,M$$CR$,M$X$$$]