Presentation provided at the Annual ICC Banking Commission Meeting by Krishnan Ramadurai on 11 April 2019.

1. Leading The Way In Global Trade
WELCOME

2. Source: Cinetropolis
Basel III Reforms: The good, the bad and the ugly
Basel III Reforms: The good, the bad and the ugly
Krishnan RAMADURAI
Head of Capital Management, Global Trade & Receivables Finance, HSBC

3. “A key objective of the revisions in this [Basel III: Finalising post-crisis
reforms] document is to reduce excessive variability of risk-weighted
assets (RWAs).”
Basel Committee on Banking Supervision1
Levelling the playing field
Accord seeks to reduce variability in RWA treatments across banks
1. BCBS, Basel III: Finalising post-crisis reforms, December 2017, Bank for International Settlements
Basel III Reforms: The good, the bad and the ugly

4. BASEL III Reforms touches upon the ‘RWA’ aspect which was not covered in the earlier version of the accords
Levelling the playing field
Equity / capital
Risk Weighted Assets (Credit,
market & operational)
Liquidity Coverage Ratio
Net Stable Funding Ratio
Leverage Ratio
BASEL III BASEL III Reforms
Basel III Reforms: The good, the bad and the ugly

5. High level changes
Credit Risk
• All corporates (with group consolidated turnover > €500m) and banks to be on FIRB approach
• Revised standardised approach including broadly revised risk weights and additional due diligence requirements
• Introduction of parameter input floors for the IRB approach
• Unconditionally cancellable commitments carry 10% CCF (which can be waived with national discretion if
certain conditions are met)
• All exposures (except repo transactions) under the FIRB approach are to be on a maturity of 2.5 years (which
can also be changed to residual maturity based on national discretion)
Operational Risk
• Replacement of existing approaches by a new standardised approach
• Fundamental assumption that operational risk is related to size
• Use of the ‘unadjusted business indicator’ as a measure of operational risk exposure combined with collection and
analysis of historical loss data
BAD
BAD
Capital Floors
• RWA (using through internal approaches) floored by a percentage of RWA as determined through the standardised
approaches
• Introduction in 2022 at 50% and then phase-in over five years with a 5% increase each year and 2.5% increase in
2027 to reach 72.5% eventuallyUGLY
Basel III Reforms: The good, the bad and the ugly

6. Credit risk standardised
risk weights
PSE (under own
rating)
PSE (under Sovereign
rating)
Basel III Reforms: The good, the bad and the ugly
0% 20% 50% 100% 150% 100%
20% 50% 100% 100% 150% 100%
20% 50%
(20% ST)
50%
(20% ST)
100%
(50% ST)
150% 50%
(20% ST)
20%
(0%)
30% 50% 100% 150% 50%
20% 30%
(50%)
50%
(100%)
100% 150% 40/75/150%
(100%)
20% 20%
(50%)
20%
(100%)
50%
(100%)
150% 20/50/150%
(100%)
20% 50% 75%
(100%)
100%
(150%)
150% 100%
MDB
Bank
Bank (Short-Term)
Corporate
Sovereign
AAA to AA A+ to A-
BBB+ to
BBB-
BB+ to B- Below B- Unrated
*Basel III where different in brackets

7. Limitation on minimum values of IRB credit risk parameters
BASEL III BASEL III Reforms Remarks
This is equivalent to 69% - 86% increase in
RWA for tenors up to 3 months
ADV: No floor
No impact, as no banks are expected to have
modelled values less than 10%
ADV: No floor
No impact, as no banks are expected to have
modelled values less than 15%
ADV: No floor
FOU: LC @ 20%
Non Fin GTE @ 20% (PRA)
ADV: No floor
FOU: LC @ 20%
Non Fin GTE @ 20% (PRA)
Indirect impact since a large part of the
portfolio moves from ADV to FOU which will
get floored to 20% CCF for LC and non-
financial GTE (PRA)
PD floor (Single entity)
LGD – secured by
other physical assets
LGD – Secured by
receivables
CCF for LC / Non –
financial GTE
0.03% 0.05%
BAD
BAD
ADV: 10%
ADV: 15%
+67%
Basel III Reforms: The good, the bad and the ugly

8. BASEL III BASEL III Reforms Remarks
A 67% increase in LGD from 27% to 45%
(illustrative) will also increase RWA by 67%
A 25% increase in LGD from 32% to 40%
(illustrative) will also increase RWA by 25%
Good for entities on FOU at 45% (and cases on
ADV with LGD worse than 40%) as they move to
40%
ADV: No floor
FOU / STD:
0% for UC
20% for NUC
75% for revolving
ADV: 50% of FOU
FOU / STD:
10% for UC
40% for NUC
50% for revolving
No impact, as no banks are expected to have
modelled values less than 15%
FOU: Residual maturity
(PRA, HKMA)
FOU: 2.5 years
Requires clarity. Regulators have the discretion to
move to residual maturity
Limitation on minimum values of IRB credit risk parameters
LGD for Banks
Drawdown factor for
commitments
LGD for Large
Corporates*
Maturity
20% - 40% 45%
BAD
BAD
30% - 40% 40%
GOOD / BAD
UGLY
*Large corporates are defined as entities with group consolidated turnover >€500m
Basel III Reforms: The good, the bad and the ugly

9. Pre/Post Basel IV: Example F-IRB LGD (Receivables)
Basel III Reforms: The good, the bad and the ugly
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 160% 170% 180% 190% 200%
LGD
VTL
Current F-IRB (25% haircut, 35% LGD) New F-IRB (40% haircut, 20% LGD)

10. Capital output floor
Source: PWC
Basel III Reforms: The good, the bad and the ugly

11. March 2019
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Basel III Reforms Impact: Western Europe
Pre-Regulation Common Equity Tier (CET) 1 Ratio Post-Regulation Common Equity Tier (CET) 1 Ratio
Source: McKinsey
Basel III Reforms: The good, the bad and the ugly

12. • By 2027, the SA floor will reach 72.5%.
For all unrated corporates (especially low
risk and / or short term exposures), this
may mean a substantial multiplier in
RWA
• The numbers in red highlight the
instances where the floor will be hit for
unrated corporates
• It is not yet clear whether the floor will
apply at a branch / subsidiary level or at a
holding company level
• Depending on the internal
implementation on different banks, the
pricing required to meet returns for
specific deals might come out much
higher if SA floor is implemented at a
deal level
March 2019
PD /
Maturity 1m 3m 6m 1y 2y 3y 4y 5y
0.05% 5% 6% 7% 10% 15% 20% 25% 30%
0.10% 11% 12% 13% 17% 23% 30% 36% 43%
0.20% 19% 21% 23% 27% 35% 43% 51% 60%
0.30% 26% 28% 30% 35% 44% 53% 62% 71%
0.40% 32% 34% 36% 41% 51% 61% 71% 80%
0.50% 37% 39% 41% 46% 57% 67% 77% 88%
0.75% 47% 49% 52% 57% 68% 79% 90% 101%
1.00% 55% 57% 59% 65% 76% 88% 99% 110%
1.50% 66% 68% 71% 77% 88% 100% 111% 122%
2.00% 75% 77% 79% 85% 96% 108% 119% 130%
3.00% 88% 89% 92% 98% 109% 120% 131% 142%
4.00% 98% 100% 102% 108% 119% 129% 140% 151%
5.00% 107% 109% 112% 117% 128% 139% 149% 160%
6.00% 116% 118% 121% 126% 137% 147% 158% 168%
7.00% 125% 127% 129% 134% 145% 155% 166% 176%
8.00% 133% 134% 137% 142% 153% 163% 173% 184%
9.00% 140% 142% 144% 149% 160% 170% 181% 191%
Basel III Reforms: The good, the bad and the ugly
Product pricing impact
Impact of Floors : Potential Risk Weights of low risk and/or short-term exposures