NEDBANK CAPITAl - Nedbank Group Limited

isk and BALANCE SHEET management reportGlobal regulatory developments and thechanging landscape of bankingThe measures taken by the Basel Committee in July 2009 tostrengthen the international Basel II framework, as well as thefar-reaching proposals released in December 2009, are thecommittee’s comprehensive response, under the mandate ofthe group of 20 leading economies, to address the lessons of theglobal financial crisis.The Basel Committee’s proposals aim to strengthen global capitaland liquidity regulations with the goal of promoting a moreresilient banking sector. The objective of the reform package is toimprove the banking sector’s ability to absorb shocks arising fromfinancial and economic stress, whatever the source, thus reducingthe risk of spillover from the financial sector to the real economy.Through its reform package the Basel Committee also aims toimprove risk management and governance as well as strengthenbanks’ transparency and disclosures. Moreover, the reformpackage also includes the committee’s efforts to strengthen theresolution of systemically significant crossborder banks and thefinancial regulatory system.The new Basel requirements and proposals are discussed in moredetail below.The first response package was released in July 2009 andincluded improvements to Basel II’s Pillars 1, 2 and 3.• Enhancements to Pillar 1− Securitisation (implementation end 2009).− Market trading risk (implementation end 2010).• Enhancements to Pillar 2 Internal Capital Adequacy AssessmentProcess (ICAAP) (implementation July 2009)− Bankwide governance and risk management.− Principles for sound liquidity risk management.− Principles for risk concentrations.− Sound remuneration practices (risk-based).− Valuation and liquidity risks of financial instrument fair-valuepractices.− Principles for sound stress-testing practices.− Off-balance-sheet exposures and securitisation activities.− Reputational risk and implicit support.• Enhancements to Pillar 3 (public disclosure/market discipline)− Securitisation exposures (implementation end 2009).The second response package, which includes only proposals atthis stage, was released in December 2009. The objectives of theproposals in this package are as follows:• Raising the quality, consistency and transparency of the capitalbase, while also harmonising the other elements of a bank’scapital structure.• Strengthening risk coverage.In addition to the trading book and securitisation reformsannounced in July 2009, the new proposals includestrengthening of the capital requirements for counterpartycredit risk exposures arising from derivatives, repurchaseagreements (repos) and securities financing activities. Thestrengthened counterparty credit risk capital requirements willalso increase incentives to move over-the-counter derivativeexposures to central counterparties and exchanges, andgenerally improve counterparty credit risk management. Theinterconnectivity of large financial institutions is also a keyfocus area as reflected by, for example, introducing a multiplier(1,25) to the asset value correlation for these exposures heldby banks.• Introducing a leverage ratio as a supplementary measure to theBasel II risk-based framework.The leverage ratio will help contain the buildup of excessiveleverage in the banking system. To ensure comparability thedetails of the leverage ratio will be harmonised internationally,fully adjusting for any remaining differences in accounting.• Reducing procyclicality and promoting countercyclical capitalbuffers.The key objectives are:− Dampen any excess cyclicality of the minimum capitalrequirement.− Promote more forward-looking credit provisions basedon ‘expected losses’, rather than the current ‘incurredloss’ provisioning model under the International FinancialReporting Standards.− Conserve capital to build buffers that can be used in stressby the introduction of a framework linking the amount ofearnings a bank is allowed to distribute to shareholders tothe bank’s capital ratios.− Protect the banking sector from periods of excess creditgrowth by requiring banks further to increase capital buffersavailable when selected macroeconomic indicators suggestthat credit volumes have grown excessively.• Introducing a global liquidity framework.This would consist of a stressed liquidity coverage ratio, alonger-term structural stable funding ratio and a common setof monitoring metrics to assist in identifying and analysingliquidity risk trends. These complement the Basel Committee’s‘Principles for sound liquidity risk management and supervision’issued in September 2008.128NEDBANK GROUP ANNUAL REPORT 2009