Australia: Blog: More Basel III

Last Updated: 19 September 2011

Canadian implementation of Basel III capital rules (Issuance of non-viability contingent capital)

15 September 2011

To meet Basel III's minimum requirements to qualify as Tier 1 or Tier 2 capital (Tiered Capital), all non-common instruments issued by deposit-taking institutions must include a provision whereby the instrument is either written off or converted into common equity upon the occurrence of a trigger event at the point of non-viability. On August 16, 2011, the Canadian regulatory authority (OSFI) that supervises banks and other federally-regulated deposit-taking institutions (DTIs) released its final advisory (the Advisory) outlining its expectations with respect to the issuance of Non-Viability Contingent Capital (NVCC) that would qualify as Tiered Capital for Basel III purposes.

In the Advisory, OSFI sets out ten principles that will govern inclusion of NVCC instruments in regulatory capital as well as the process under which OSFI would assess whether such instruments qualify as additional Tiered Capital. The principles are explained in detail and include a requirement that the NVCC instrument be converted into common shares upon the occurrence of a trigger event. Specific trigger events are listed and include circumstances where, in the opinion of the Superintendant of Financial Institutions (the Superintendant), the DTI is no longer viable but its viability would be restored if all contingent capital instruments were converted. Conversion should result in a loss to the holders of the NVCC instrument as well as a dilution in the value of the common shares of the DTI. Conversion must be automatic and immediate without the need for further approvals and should not result in or cause a cross default of other instruments. Other Advisory principles address NVCC instruments originated by DTI foreign subsidiaries and DTI foreign parents and confirm that the NVCC instruments must meet all other criteria for inclusion under their respective tiers as specified in Basel III.

The Advisory strongly recommends that DTIs seek confirmation of capital quality from OSFI prior to issuing NVCC instruments and sets out extensive information requirements in connection with any confirmation request. These requirements include delivery of an external legal opinion and an accounting opinion as well as a description of the rationale for the specified conversion method and capital projections demonstrating that the DTI will be in compliance with its internal target capital ratios.

In assessing whether a DTI has ceased, or is about to cease, to be viable and that, after the conversion of all contingent capital instruments it is reasonably likely that the DTI's viability will be restored or maintained, the Superintendant will consider a number of relevant facts and circumstances including (i) whether the DTI's assets are sufficient to provide adequate protection to depositors and creditors, (ii) whether the DTI has lost the confidence of depositors, creditors and the public, and (iii) whether the DTI's regulatory capital is eroding in a manner that would detrimentally affect depositors and creditors.

The decision of whether to maintain a DTI as a going concern where it would otherwise become non-viable will be made by the Superintendant in consultation with other governmental and regulatory authorities including Canada Deposit Insurance Corporation, the Bank of Canada and the federal Department of Finance. The Advisory notes that the conversion of NVCC instruments would likely be used along with other public sector intervention, including liquidity assistance, to maintain a DTI as a going concern.

The Advisory allows DTIs to continue to issue capital instruments that do not comply with the NVCC requirements but otherwise meet the Basel III criteria for inclusion as additional Tiered Capital until January 1, 2013. After that date, all such capital instruments that do not meet the NVCC requirements will be considered non-qualifying capital instruments and will be phased out beginning January 1, 2013 at the rate of 10 per cent each year for 10 years.

Prepared by

Mary E. Kelly;
Partner, Lawyer
Norton Rose OR LLP

Basel III in China

21 July 2011

Further to the Guidelines for Implementing New Regulatory Standards in the PRCBanking Industry (the Guidelines, as to which see our blog entry of 4th May 2011) the China Banking Regulatory Commission (CBRC) has recently published the Administrative Measures on Leverage Ratio of Commercial Banks (the Measures). The Measures will take effect from 1 January 2012.

The leverage ratio refers to the ratio of tier one capital to the adjusted on-and off-balance sheet assets. Consistent with the Guidelines, the Measures require the leverage ratio to be 4% at a minimum, on both a consolidated and non-consolidated basis. Further, the Measures require systemically important banks to satisfy the leverage ratio requirement by the end of 2013, while non-systemically important banks must achieve the same by the end of 2016.

In addition to the above, the Measures set out detailed requirements as to the calculation and administration of the leverage ratio. If any of the relevant commercial banks is not able to fulfil the leverage ratio requirements, CBRC may require that bank to increase its tier one capital or reduce its on-and off-balance sheet assets. For any severe breach of the Measures by commercial banks, CBRC may, inter alia, order suspension of the relevant business, prohibit the distribution of dividends, order a change of directors (or senior management personnel) and impose administrative penalties as provided under the Measures.

Prepared by

Sun Hong, Partner
Joyce Zhou, Associate
Norton Rose LLP, Shanghai

Commission delivers CRD IV package

21 July 2011

The European Commission has published its proposals for the CRD IV package which fundamentally overhauls the substantive prudential rules applicable to institutions. The proposals are intended to replace the Capital Requirements Directive (Directives 2006/48/EC and 2006/49/EC).

The proposals consist of two parts: a new draft Regulation and a new draft Directive.

Draft Regulation

The proposed Regulation contains the detailed prudential requirements for credit institutions and investment firms and covers:

  • Capital. The Commission proposes increases to the amount of own funds banks need to hold as well as the quality of those funds. It also harmonises the deductions from own funds in order to determine the amount of regulatory capital that is prudent to recognise for regulatory purposes.
  • Liquidity. The Commission proposes a liquidity coverage ratio (LCR) the exact composition and calibration of which will be determined after an observation and review period in 2015.
  • Leverage ratio. The Commission proposes that a leverage ratio be subject to supervisory review. The leverage ratio will be closely monitored prior to its possible move to a binding requirement on 1 January 2018.
  • Counterparty credit risk. The Commission proposes changes to encourage banks to clear over-the-counter derivatives on central counterparties.
  • Single rule book. The Regulation is directly applicable to Member States and sets out a single set of capital rules.

Draft Directive

The proposed Directive covers areas of the current Capital Requirements Directive such as the requirements for access to the taking up and pursuit of the business of banks, conditions for their exercise of freedom of establishment and the freedom to provide services, and the definition of competent authorities and the principles governing prudential supervision.

The proposed Directive also includes four new elements:

  • Enhanced governance. The Commission proposes new rules aimed at increasing the effectiveness of risk oversight by boards, improving the status of the risk management function and ensuring effective monitoring by supervisors of risk governance.
  • Capital buffers. The Commission introduces a capital conservation buffer identical for all banks in the EU and a countercyclical capital buffer to be determined at the national level.
  • Enhanced supervision. The Commission seeks to reinforce the supervisory regime by requiring the annual preparation of a supervisory programme for each supervised institution on the basis of a risk assessment, greater and more systematic use of on-site supervisory examinations, more robust standards and more intrusive and forward-looking supervisory assessments.
  • Sanctions. The Commission introduces requirements that will ensure that all supervisors can apply sanctions that are truly dissuasive but also effective and proportionate - for example administrative fines of up to 10 per cent of an institution's annual turnover.

The Directive also seeks to reduce to the extent possible reliance by credit institutions on external credit ratings. This includes requiring that all banks' investment decisions are to be based not only on ratings but also on their own internal credit opinion.

Basel III measures

The Commission has not simply copied and pasted Basel III into EU law. However, it does feel that the proposal delivers a faithful implementation of Basel III into EU law. The Commission argues that Basel III is not law but a configuration of an evolving set of internationally agreed standards that now need to fit in with existing EU (and national) laws and arrangements. Another reason given as to why the Commission cannot copy and paste Basel III into EU law is that the Basel capital adequacy agreements apply to 'internationally active banks', in the EU it has always applied to all banks as well as investment firms. The Commission believes that this wide scope is necessary in the EU where banks authorised in one Member State can provide their services across the EU's single market and as such are more than likely to engage in cross-border business. Also, the Commission feels that applying the internationally agreed rules only to a subset of European banks would create competitive distortions and the potential for regulatory arbitrage.

In addition to implementing Basel III the CRD IV package contains a number of additions. In the proposed Directive the requirements concerning enhanced governance, enhanced supervision, sanctions and reduction on reliance on credit ratings are additional measures. In the proposed Regulation the concept of the single rule book, the creation of a single set of harmonised prudential rules which banks throughout the EU must respect is also new.


The Commission proposes that the CRD IV package will follow the timelines agreed by the Basel Committee: entry into force of the new legislation on 1 January 2013 and full implementation on 1 January 2019.

Further client briefings and webcasts will be published on the proposals during the course of the summer.

View  Commission wants stronger and more responsible banks in Europe

View CRD IV - Frequently asked questions

View Commission proposal for a Directive

View Impact assessment for proposed Directive

View Commission proposal for a Regulation (Part 1)

View Commission proposal for a Regulation (Part 2)

View Commission proposal for a Regulation (Part 3)

View Impact assessment for proposed Regulation

View  Citizens' summary on EU proposal for stricter capital requirements and better corporate governance for banks and investment firms

Measures for globally systemically important banks agreed by the Group of Governors and Heads of Supervision

1 July 2011

The Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, has agreed on a consultative document setting out measures for global systemically important banks. The measures include the methodology for assessing systemic importance, the additional required capital and the arrangements by which they will be phased in. The GHOS has sent the consultative document to the Financial Stability Board (FSB) for review. The FSB is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions. The measures will be issued for consultation around the end of July 2011.

View the press release

China Banking Regulatory Commission issues new guidelines in respect of Basel III

4 May 2011

On 27 April, 2011 the China Banking Regulatory Commission (CBRC), the PRCregulator for banking financial institutions, issued official guidelines for implementing Basel III requirements in its Guidelines for Implementing New Regulatory Standards in the PRC Banking Industry (the CBRC Guidelines).

The CBRC Guidelines expressly set out detailed requirements on capital adequacy ratios, a leverage ratio, liquidity requirements and provision ratios that PRC banks should comply with and also provide for different transition periods within which the requirements must be satisfied.

Generally speaking, the requirements and the timelines to satisfy such requirements as provided in the CBRC Guidelines are stricter than that under Basel III. A brief summary of the CBRC Guidelines is set out below.

Capital adequacy ratios

First, the calculation mechanism for capital adequacy ratios has been changed to be more sophisticated.

Secondly, different capital adequacy ratios are set out by referring to different classes of regulatory capital of banks. The capital adequacy ratios in respect of core tier one capital shall be 5 per cent, the adequacy ratio for tier one capital shall be 6 per cent and the overall capital adequacy ratio shall satisfy 8 per cent.

In addition, a regulatory requirement for two capital buffers has also been introduced by the CBRC Guidelines: a 2.5 per cent reserve excess capital conservation buffer and a 0-2.5 per cent countercyclical capital buffer.

Last but not least, an additional capital requirement of 1 per cent is imposed on systemically important banks. CBRC will definite the term "systemically important banks" and set out assessment methods and a continuous assessment framework in its future regulations. Such assessment will likely take into account the size, interconnectedness, complexity and substitutability of the banks. Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communications shall definitely fall within the ambit of systemically important banks.

Leverage ratio

As a supplement to capital adequacy ratios, a leverage ratio is introduced, which requires that the tier one capital should take up at least 4 per cent of the adjusted on-and off-balance sheet assets of the relevant bank.

Liquidity requirements

CBRC aims to establish a multi-dimensionally liquidity risk control standards and will set out various ratios for supervisory purposes. The CBRC Guidelines provide that the liquidity coverage ratio and the net stable finance ratio must not be lower than 100 per cent.

Provision ratios

The loan provision ratio (being the ratio of loss reserve against the amount of loans) shall be 2.5 per cent, or the provision coverage ratio (being the ratio of loss reserve against the amount of bad debts) shall be 150 per cent, whichever is higher.

Transition period

To facilitate the implementation of the requirements set out in the CBRC Guidelines, CBRC will update and issue a series of banking regulations in 2011 and commence the implementation of the Chinese version of Basel III from 2012. The systemically important banks are required to satisfy the new regulatory requirements by the end of 2013 while the non-systemically important banks must achieve the same by the end of 2016 (note that in respect of the provision ratios, the deadline for certain banks which encounter significant difficulties may be postponed to the end of 2018).

Prepared by

Hong Sun, Partner
Joyce Zhou, Associate
Norton Rose LLP, Shanghai

A Swedish approach to a Swiss finish

7 March 2011

The Swedish Financial Supervisory Authority (Finansinspektionen) has recently issued a statement in which it comments that the large Swedish banks should be prepared for Sweden to introduce the new rules quicker than in accordance with the timetable suggested by the Basel Committee. The capital requirements for the large Swedish banks are expected to reach 15 to 16 per cent in a few years, out of which at least 10 to 12 per cent will be required to be Tier 1 Capital. These figures are approximate, in particular as the Tier 2 assessment is individual - partly depending on stress tests - and as the size of the contra cyclical buffer, per definition, will vary over time.


Tomas Gärdfors

Benchmark issue of Contingent Convertible (CoCo) bonds by Credit Suisse

21 February 2011

Credit Suisse last week placed one of the first issues of capital instruments in the form of contingent convertible bonds following the publication of the Basel III rules in December 2010 and January 2011 - US$ 2 billion 7.875 per cent Tier 2 Buffer Capital Notes due 2041. This placing came only a few days after Credit Suisse had agreed to issue contingent capital in the form of approximately CHF 6 billion of Tier 1 Buffer Capital Notes to Qatar Holdings and the Olayan Group of Saudi Arabia in exchange for cash or for outstanding capital notes issued in 2008.

The notes qualify as contingent capital, meaning they convert into equity if Credit Suisse's core Tier 1 capital ratio falls below 7 per cent under the Basel III definition, and are expected to count towards the capital buffer that will be required of large Swiss banks under the proposed new Swiss capital adequacy rules, thereby allowing Credit Suisse to transition to the new Swiss regulatory standards ahead of time.

We understand the key terms of the notes to be:

  • issued by a Guernsey entity and guaranteed on a subordinated basis by Credit Suisse Group
  • subordinated with a 30-year maturity
  • minimum denomination of US$100,000
  • redeemable by the issuer from August 2016
  • resettable coupon every 5 years from August 2016
  • interest payments are not discretionary or deferrable
  • automatically convert into ordinary shares if Credit Suisse's reported consolidated risk-based capital ratio falls below 7 per cent
  • automatically convert if the Swiss regulator determines that Credit Suisse requires public sector support to prevent it from becoming insolvent or unable to pay its debts
  • expected rating of BBB+ from Fitch Ratings
  • expected to be listed on the Luxembourg Stock Exchange's Euro MTF Market

We understand that the placing has been received well by asset managers, who took about two-thirds of the offer, while the rest was bought by private banks on behalf of their clients. The notes were issued outside the US . This placing is an important one for the market which has been asking itself whether (1) high-trigger contingent capital can be raised and (2) such capital can be raised at a reasonable cost. It remains to be seen whether the placing will spur other banks to consider issuing CoCos and whether a sustainable market will develop in these types of capital instruments.

Tak Matsuda

Leonie von Schweinitz

Canadian treatment of non-qualifying capital instruments - (Basel III capital rules)

16 February 2011

On February 4, 2011, the Canadian regulatory authority that supervises banks and other deposit-taking institutions (OSFI) issued an Advisory that provided some guidance as to how long Canadian banks have before certain forms of capital are no longer eligible for inclusion as regulatory capital under the Basel III banking rules. The Advisory also set out OSFI's expectations with respect to how existing non-qualifying capital instruments are to be wound down.

Beginning in 2013, recognition of non-qualifying capital instruments for regulatory capital purposes will be capped at 90 per cent, with the cap reducing by 10 per cent annually to zero by 2023. As the cap reduces, a bank will no longer have the capital benefit of any instruments held by it in excess of the amount permitted by the cap. OSFI has provided extensive guidance as to how this reduction in non-qualifying capital instruments is to be achieved. In particular, banks will have to redeem the non-qualifying instruments or convert them to a form of capital, such as common equity, that complies with the regulations. In the Advisory, OSFI encourages the banks to manage their capital within the applicable caps by redeeming these instruments only at their regular redemption dates or otherwise using existing provisions or rights (such as conversion rights) rather than relying on "regulatory event" language which would permit early redemption.

Canada's major banks have begun responding to the new guidelines. To date, The Toronto-Dominion Bank and Canadian Imperial Bank of Commerce have indicated that early "regulatory event" redemption of certain capital trust notes may be necessary in 2022, the final year of the phase-in period. Royal Bank of Canada and The Bank of Nova Scotia have said that they do not expect it will be necessary to invoke "regulatory event" early redemption clauses for any of their securities.

At the same time OSFI introduced the Advisory, it also circulated a draft advisory with respect to Non-Viability Contingent Capital (NVCC). To meet Basel III's minimum requirements to qualify as Tier 1 or Tier 2 capital, the terms and conditions of all non-common instruments must include a provision whereby the instrument is either written off or converted into common equity upon the occurrence of a trigger event at the point of non-viability. The draft advisory sets out the proposed principles that would govern inclusion of NVCC instruments in regulatory capital as well as the process under which OSFI would assess whether such instruments qualify as additional Tier 1 or Tier 2 capital. Comments on the draft advisory can be made any time before March 19, 2011. While OSFI hopes to issue the draft in final form as soon as possible, no time frame for its completion has been specified.

Please find a more detailed explanation of the Advisory.

Mary E. Kelly , Partner, Ogilvy Renault LLP

Leading Canadian law firm, Ogilvy Renault, will join Norton Rose Group on 1 June 2011.

Basel accords in China

16 February 2011

According to market information, the China Banking Regulatory Commission ("CBRC") which is the governmental regulator of banking financial institutions1 in PRC, has been considering the measures that it may take to accord with Basel III requirements.

As early as September 2010, it is understood that CBRC circulated a draftImplementation Requirements Chart of Four New Supervisory Instruments (the "Draft"), to certain banks in PRC setting out detailed requirements on capital base, leverage ratio, liquidity requirements and provision ratio and asking for comments from those banks. In October 2010, CBRC conducted a study on the possible impact of the Draft by collecting the relevant real data of 78 banking financial institutions in order to calculate the various ratios. The 78 institutions include China Development Bank, the "big five" state-owned banks, twelve joint-stock commercial banks, ten city commercial banks, fifteen foreign-invested banks incorporated in China, fourteen rural commercial banks and other banking financial institutions.

The Draft itself and relevant study information mentioned above are not publicly available. However, according to various sources of information, it is believed the overall requirements set out by CBRC in the Draft are generally speaking equivalent to, or even stricter than, the requirements under Basel III rules.

The final ratios and requirements to be promulgated by CBRC are still subject to further comments from the banks and ongoing studies of CBRC in respect of the selected industry data. The market is expecting formal rules to be issued during the first half of 2011, at the soonest.

Hong Sun
Of Counsel


  1. Financial institutions in China generally include banking financial institutions (which primarily refer to banks) and non-banking financial institutions (which include, amongst others, securities companies, trust companies and insurance companies). Non-banking financial institutions may be subject to the regulation of different governmental authorities. For instance, securities companies are regulated by the China Securities Regulatory Commission and insurance companies by the China Insurance Regulatory Commission. This note relates to banking financial institutions regulated by CBRC.

OSFI provides framework for implementation of Basel III

03 February 2011

The Canadian regulatory authority that supervises banks and other deposit-taking institutions (OSFI) recently sent a letter to its affected institutions setting out a proposed framework for implementation within Canada of the Basel III Capital Adequacy and Liquidity Requirements.

It is anticipated that a new capital guideline, reporting requirements and possible disclosure guidance will be in place before the end of 2012 for implementation in 2013. By that time, deposit-taking institutions will be expected to have in place internal capital plans and targets that will enable them to meet the Basel III bank capital rules. Affected institutions are encouraged to maintain and enhance earnings retention policies and avoid actions that weaken their capital bases so as to meet the 2019 Basel III capital requirements early in the transition period.

OSFI is also considering the implications on its institutions of a migration from the current Assets-to-Capital Multiple test to the Basel III internal leverage ratio. However, it will not take any significant action on that front until the Basel III leverage ratio has been substantially finalized.

Finally, OSFI will need to amend its liquidity guideline to reflect enhanced guidance on sound practices for liquidity risk management and introduce new minimum qualitative standards for liquidity risk. OSFI intends to immediately begin an internal review of liquidity reporting requirements and start a public consultation process in 2011. However, it may wait until the end of the applicable Basel III observation periods and the completion of any revisions to the liquidity rules before taking significant steps to implement the proposed Basel III qualitative standards. OSFI also noted in its letter that some further deliberations as to whether the implementation is likely to have material unintended consequences on Canadian deposit-taking institutions may be necessary before such implementation.

Mary E. Kelly , Partner, Ogilvy Renault LLP

Leading Canadian law firm, Ogilvy Renault, will join Norton Rose Group on 1 June 2011.

Basel Committee issues final elements of the reforms to raise the quality of regulatory capital

31 January 2011

The Basel Committee on Banking Supervision (BCBS) has issued a press release that sets out the minimum requirements it has developed to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss.

These requirements were endorsed by the BCBS's oversight body, the Group of Governors and Heads of Supervision, at its meeting on 10 January 2011. The BCBS reports that members of its oversight body agreed that under certain conditions, including a peer review process and disclosure, the proposal's objective could be met through a statutory resolution regime if it produces equivalent outcomes to the contractual approach.

The BCBS states that in order for an instrument issued by a bank to be included in Additional (i.e. non-common) Tier 1 or Tier 2 capital, it must meet or exceed minimum requirements set out in the annex attached to the press release. These requirements are in addition to the criteria set out in the Basel III capital rules which were published in December 2010.

View  Basel Committee issues final elements of the reforms to raise the quality of regulatory capital, 13 January 2011

Simon Lovegrove
Of counsel

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.

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