Basel 3

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Basel iii Compliance ProfessionalsAssociation (BiiiCPA)
1200G Street NW Suite800Washington, DC 20005-6705USA Tel:
202-449-9750Web: www.basel-iii-association.com
Dear Member,
Todaywewill start from the disclosurerequirementson thecomposition
of banks' capital.
Composition of capital disclosure requirements- Rulestext
June2012
TheBasel Committeeon Banking
Supervisionhaspublisheda set of
disclosurerequirementson the
composition of banks' capital.
During the financial crisis, market
participantsand supervisorswere
hampered in their effortsto undertake
detailed assessmentsof banks' capital
positionsand make cross-jurisdictional
comparisons.
Thesource of this difficultywas
insufficientlydetailed disclosureby
banksand a lack of consistencyin
reporting betweenbanksand across
jurisdictions.
Thislackofclaritymayhavecontributed
touncertaintyduring the financial crisis.
Thedisclosurerequirementsaim toimprove market disciplinethrough
enhancingboth transparencyand comparability.
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
www.basel-iii-association.com

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Composition of capital disclosure requirements
Introduction
During the financial crisis, many market participantsand supervisors
attempted to undertake detailed assessmentsof thecapital positionsof
banksand comparisonsof their capital positionson a crossjurisdictional
basis.
Thelevel of detail of thedisclosureandthelack of consistencyin theway
that it wasreported typically madethis taskdifficult and oftenmade it
impossibletodo withanyaccuracy.
It is often suggestedthat lack of clarity on thequalityof capital
contributedtouncertaintyduring thefinancial crisis.
Furthermore, the interventionscarried out by the authoritiesmay have
been more effectiveif capital positionsof the banksweremore
transparent.
Toensurethat banksback their risk exposureswithahigh qualitycapital
base,Basel III introduceda set of detailed requirementsto raise the
qualityand consistencyof capital in thebankingsector.
In addition, Basel III establishedcertainhigh level disclosure
requirementstoimprove transparencyof regulatory capital and enhance
market disciplineand noted that more detailed Pillar 3 disclosure
requirementswouldbe forthcoming.
This document setsout thesedetailed requirements.
Toenablemarket participantsto compare thecapital adequacyof banks
acrossjurisdictionsit is essential that banks disclosethefull list of
regulatorycapital itemsand regulatory adjustments.

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In addition, toimproveconsistencyandeaseofuseofdisclosuresrelating
tothe composition of regulatory capital, and tomitigatethe risk of
inconsistent formatsunderminingtheobjectiveof enhanced disclosure,
theBasel Committeehas agreed that internationally-activebanksacross
Basel member jurisdictionswill be required to publish their capital
positionsaccordingtocommon templates.
Therequirementsare set out in thefollowing5sections:
Section 1:Post 1January 2018disclosure template
Acommon templateisestablishedthat banksmust usetoreport the
breakdown of their regulatory capital whenthe transitionperiod for the
phasing-in of deductionsendson 1January 2018.
It is designed tomeet the Basel III requirement todiscloseall regulatory
adjustments,includingamountsfallingbelow thresholdsfor deduction,
andthusenhanceconsistencyand comparability in thedisclosureof the
elementsof capital betweenbanksand acrossjurisdictions.
This template may beused in advanceof 1January 2018in certain
circumstances, whichare set out in Section 1.
Section 2: reconciliation requirements
A3 step approachfor bankstofollowis establishedtoensurethat the
Basel III requirement toprovidea full reconciliation of all regulatory
capital elementsback tothepublishedfinancial statementsismet in a
consistent manner.
This approach is not based on a common template becausethe starting
point for reconciliation, the bank‟sreportedbalancesheet, will vary
betweenjurisdictionsdue to the application of different accounting
standards.

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Section 3: main features template
A common template is established that banks must use to meet the Basel
III requirement to provide a description of the main features of regulatory
capital instrumentsissued.
Section 4: other disclosure requirements
This section setsout what banks must doto meet theBasel III
requirement to provide the full termsand conditionsof regulatorycapital
instrumentson their websitesand the requirement toreport the
calculationof any ratiosinvolving componentsof regulatorycapital.
Section 5: template during the transitional period
This section requiresbanks to usea modified version of the post 1
January 2018templatein Section 1duringthetransitional phase.
This template isestablishedtomeet theBasel III requirement for banks
todisclosethecomponentsof capital that arebenefiting from the
transitional arrangements.
Implementation date and frequency of reporting
National authoritieswill giveeffect tothedisclosurerequirementsset out
in this document by nolater than 30June2013.
Banks will be required to comply withthe disclosurerequirementsfrom
thedateofpublicationoftheirfirstset offinancialstatementsrelatingtoa
balancesheet date on or after30June2013(with theexceptionof thePost
1January2018template set out in Section 1).
Furthermore, except asrequired in paragraph 7, banksmust publish this
disclosurewith the same frequencyas,and concurrent with, the
publication of their financial statements,irrespectiveof whetherthe
financial statementsare audited(ie disclosurewill typically be quarterly
or half yearly).

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In the caseof themain featurestemplate(Section 3) and provision of the
full terms and conditionsof capital instruments(Section 4), banksare
requiredtoupdatethesedisclosureswheneveranewcapitalinstrument is
issuedand includedin capital and wheneverthere is a redemption,
conversion/ write-downor other material changein thenature of an
existingcapital instrument.
Under Pillar 3, large banksare required tomake certain minimum
disclosureswithrespect tocertaindefinedkeycapitalratiosandelements
on a quarterlybasis,regardless of the frequencyof financial statement
publication.
Thedisclosureof key capital ratios/elementsfor thesebankswill
continueto be required under Basel III.
Banks‟ disclosures required by this document must either be included in
banks‟published financial statementsor, at a minimum, these statements
must provide a direct link tothe completed disclosure on their websitesor
on publicly availableregulatory reports.
Banks must alsomake availableon their websites, or through publicly
availableregulatoryreports, an archive (for a suitableretention period
determined bytherelevant national authority) of all templatesrelatingto
prior reportingperiods.
Irrespectiveof thelocation of thedisclosure (published financial reports,
bank websitesor publicly available regulatory reports), all disclosures
must be in the format required bythis document.
Section 1:Post 1January 2018disclosure template
Thecommon template that theBasel Committeehasdevelopedisset out
in Annex 1, alongwith an explanationof itsdesign.

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Thetemplateis designedto capture thecapital positionsof banksafter
thetransition period for the phasing-inof deductionsendson 1January
2018andmust beusedbybanksforreportingperiodsonorafterthisdate.
If a jurisdictionpermitsor requires itsbankstoapplythe full Basel III
deductionsin advanceof 1January 2018(ie doesnot phase-inthe
deductionsor acceleratesthephase-in period of deductions),it canpermit
orrequire itsbankstousethetemplateinAnnex 1asanalternativetothe
transitional templatedescribed in Section 5 from the date of applicationof
at least the full Basel III deductions.
In such casesthe relevant banksmust clearlydisclosethat theyare using
thistemplatebecausetheyarefullyapplying the Basel III deductions.
Section 2: Reconciliation requirements
This section setsout a common approach that banksmust followto
complywiththerequirement of paragraph 91of theBasel III rules
text, which statesthat banks should disclose“a full reconciliationof all
regulatorycapital elementsback tothebalancesheet in theaudited
financial statements.”
This requirement aimsto addressthe problem that at present there is a
disconnect in manybanks‟disclosurebetweenthenumbersused for the
calculationof regulatory capital and thenumbersusedin thepublished
financial statements.
Banks are required totake a 3 step approach toshowthe link between
their balancesheet in their publishedfinancial statementsand the
numbersthat are used in the compositionof capital disclosuretemplate
set out in Section1.
The3 stepsrequire banks to:
Step 1: Disclosethereported balancesheet under the regulatoryscope of
consolidation.

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Step 2: Expand thelinesof thebalancesheet under the regulatoryscope
of consolidation to displayall of thecomponentsthat areused in the
composition of capital disclosure template.
Step 3: Map eachof the componentsthat aredisclosedin Step 2 tothe
composition of capital disclosure templateset out in Section 1.
The3 step approach outlinedbelow is designed to offer the following
benefits:
Thelevel of disclosureis proportionate, varying withthecomplexityof the
balancesheetofthereportingbank (iebanksarenot subjecttoafixed
template that is designedtofit themost complex banks.
Abank can skip a step if there is nofurther information addedby that
step).
Market participants and supervisors can trace the origin of the elements
of the regulatory capital back to their exact location on the balance sheet
under the regulatory scopeof consolidation.
Theapproach is flexibleenough to be used under anyaccounting
standard: firms are required tomap all the componentsof theregulatory
capital disclosure templatesback to the balance sheet under the
regulatoryscope of consolidation, regardlessof whether the accounting
standardsrequire the sourceto be reportedon the balancesheet.
Step 1:Disclose the reported balance sheet under the regulatory
scope of consolidation
Thescope of consolidationfor accountingpurposesand for regulatory
purposesare oftendifferent.

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This factor often explains much of the difference between the numbers
used in the calculation of regulatory capital and the numbers used in a
bank‟spublished financial statements.
Therefore,akeyelement in anyreconciliationinvolvesdisclosinghowthe
balancesheet in thepublishedfinancial statementschangeswhen the
regulatoryscope of consolidation is applied.
Step 1is illustrated inAnnex 2.
If the scope of regulatory consolidation and accounting consolidation is
identical for a particular banking group, it would not need to undertake
Step 1.
The banking group could simply state that there is no difference between
the regulatory consolidation and the accounting consolidation and move
toStep 2.
In additiontoStep 1, banks are required to disclosethe list the legal
entitiesthat are included within accountingscope of consolidationbut
excludedfrom the regulatoryscope of consolidation.
This will better enablesupervisorsand market participantstoinvestigate
therisksposedby unconsolidatedsubsidiaries.
Similarly, banks arerequiredtolist thelegal entities included in the
regulatoryconsolidationthat are not included in the accountingscope of
consolidation.
Finally, if some entitiesare included in both the regulatoryscope of
consolidationand accounting scope of consolidation, but themethod of
consolidationdiffersbetweenthese twoscopes, banks are required to list
theselegal entitiesseparatelyand explain thedifferencesin the
consolidationmethods.

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Regardingeach legal entitythat isrequired to bedisclosedbythis
paragraph, banksmust alsodiscloseitstotal balancesheet assetsand
total balancesheet equity (asstated on the accountingbalancesheet of
thelegal entity) and a description of the principleactivitiesof the entity.
Step 2: Expand the linesof the regulatory balance sheet to
display all of the components used in the definition of capital
disclosure template
Many of the elementsused in the calculationof regulatory capital cannot
bereadily identifiedfrom theface of thebalancesheet.
Therefore,banksshould expand therowsof theregulatory-scope balance
sheet such that all of the componentsused in thecompositionof capital
disclosuretemplate(described in Section 1) are displayed separately.
For example, paid-inshare capital maybe reported asone lineon the
balancesheet.
However,someelementsof thismay meet therequirementsfor inclusion
in Common EquityTier 1(CET1) and other elementsmay onlymeet the
requirementsforAdditional Tier 1(AT1) or Tier 2 (T2), or may not meet
therequirementsfor inclusionin regulatorycapital at all.
Therefore, if the bank hassome paid-in capital that feedsintothe
calculationof CET1 and some that feedsintothe calculationofAT1, it
should expand the„paid-in sharecapital‟lineof thebalancesheet in the
followingway(alsoillustrated inAnnex 2(step 2)):
In addition, asillustratedabove, each element of theexpanded balance
sheet must be given a referencenumber/letter for usein Step 3.

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Asanotherexample,oneoftheregulatoryadjustmentsisthedeductionof
intangibleassets.
While at first it mayseem asif thiscan be taken straight off the face of the
balance sheet, there are a number of reasonswhy this is unlikely to be the
case.
Firstly, the amount on the balancesheet may combine goodwill, other
intangiblesand mortgage servicesrights.
MSRsare not to bededucted in full (theyare instead subject to the
threshold deduction treatment).
Secondly, the amount tobe deducted is net of any relateddeferred tax
liability.
This deferred tax liability will be reported on the liabilitysideof the
balancesheet and is likely tobe reportedin combination withother
deferred tax liabilitiesthat havenorelationto goodwill or intangibles.
Therefore, thebank should expand thebalancesheet in the following
way:

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It is important to note that banks will only need to expand elementsof the
balance sheet to the extent that thisis necessary to reach the components
that are usedin thecomposition of capital disclosure template.
So, for example, if all of the paid-incapital of thebank met the
requirementstobeincludedin CET1,thebank wouldnot needtoexpand
thisline.
Thelevel of disclosureis proportionate, varying withthe complexityof
thebank‟sbalancesheet and itscapital structure.
Step 2 is illustratedinAnnex 2.
Step 3: Map each of the componentsthat are disclosed in Step 2
to the composition of capital disclosure templates
When reportingthedisclosuretemplate, describedin Section1and
Section 5, the bank isrequired to usethereference numbers/ lettersfrom
Step 2 toshow the source of every input.
For example, thecomposition of capital disclosure templateincludesthe
line“goodwill net of relateddeferred tax liability”.
Next to thedisclosureof this item in thedefinitionof capital disclosure
templatethebank shouldput “a–d” toillustratehowthesecomponentsof
thebalancesheet under theregulatory scope of consolidation have been
used to calculatethisitem in the disclosuretemplate.
Additional comments on the 3 step approach
TheBasel Committeeconsidered requiringbanks touse a common
templatetodisclosethereconciliationbetweenbanks‟balancesheetsand
their regulatorycapital.

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However,it doesnot feel that this wouldbe possibleat thisstage given
that banksbalancesheetsare not reported in a common wayacross
jurisdictionsdue to the application of different accountingstandards.
Withina singlejurisdiction, theuse of a common templatemay be
possible.
Therefore,therelevant authoritiesmaydesignacommon templatethat is
consistent withthe 3step approach set out above and require banksuse
thisin order toachievegreaterconsistencyin thewaythe3stepapproach
is implementedwithin their jurisdiction.
Section 3: Main features template
Basel III requiresbanks todisclosea descriptionof the mainfeaturesof
regulatorycapital instrumentsissued.
While bankswill alsobe required tomake availablethe full termsand
conditionsof their regulatory capital instruments(see section 4), the
length of thesedocumentsmakes the extractionof the key featuresa
burdensome task.
Theissuingbank is better placedtoundertake thistask than market
participantsandsupervisorsthat want anoverviewof thecapital structure
of the bank.
Basel II Pillar 3 guidancealreadyincludesa requirement that banks
providequalitativedisclosure that setsout “Summary information on the
termsand conditionsof themain featuresof all capital instruments,
especiallyin thecaseof innovative, complex or hybrid capital
instruments.”
However,the BaselCommitteehasfound that thisBasel II requirement
is not met in a consistent waybybanks.

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Thelackof consistencyinboth thelevelof detail providedandtheformat
of the disclosuremakes the analysisand monitoringof this information
difficult.
To ensure that banksmeet the Basel III requirement to disclose the main
features of regulatory capital instruments in a consistent and comparable
way, banks are required tocompletea „main featurestemplate‟.
This template representsthe minimum level of summarydisclosurethat
banksare required toreport in respect of each regulatory capital
instrument issued.
Thetemplateis set out inAnnex 3of thisreport, along witha description
of each of the itemstobe reported.
Somekey pointstonote about thetemplate are:
- It hasbeen designed to be completed by banksfrom when theBasel
III frameworkcomesintoeffect on 1January 2013.
It thereforealsoincludesdisclosurerelatingto instrumentsthat are
subjecttothetransitional arrangements.
- Banks are required toreport each regulatorycapital
instrument, includingcommon shares, in a separatecolumnof the
template, such that the completed templatewouldprovide a „main
featuresreport‟that summarisesall of theregulatorycapital
instrumentsof thebankinggroup.
- Thelist of main featuresrepresentsa minimum level of required
summarydisclosure.
In implementingthisminimum requirement, each BaselCommittee
member authorityisencouraged toadd tothis list if therearefeatures
that it isimportant todisclosein the context of thebanks they
supervise.

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- Banks are required tokeepthecompleted main featuresreport
up-to-date, such that the report isupdated and made publicly
availablewhenevera bank issuesor repaysa capital instrument and
wheneverthere isa redemption, conversion/ write-downor other
material changein thenature of an existingcapital instrument.
- Given that thetemplate includesinformation on theamount
recognisedin regulatory capital at the latest reporting date, themain
featuresreport should either be included in the bank‟spublished
financial reportsor, at a minimum, thesefinancial reportsmust
providea direct link towherethe report can be found on the bank‟s
websiteor publicly availableregulatoryreporting.
Section 4: Other disclosure requirements
In additiontothedisclosurerequirementsset out in Sections1to 3, and
aside from thetransitional disclosurerequirementsset out in Section 5,
theBaselIII rulestext makesthefollowingrequirementsinrespectof the
composition of capital:
Non-regulatory ratios
Banks whichdiscloseratiosinvolvingcomponentsof regulatory capital
(eg“Equity Tier 1”, “Core Tier 1” or “TangibleCommon Equity” ratios)
must accompanysuch disclosureswitha comprehensive explanationof
howtheseratiosarecalculated.
Full termsand conditions
Banks are required tomake availableon their websitesthe full terms and
conditionsof all instrumentsincludedin regulatory capital.
Therequirement for banksto make available the full termsand
conditionsof regulatorycapital instrumentson their websiteswill allow
market participantsand supervisorstoinvestigatethe specificfeaturesof
individual capital instruments.

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An additional related requirement isthat all banksmust maintain a
RegulatoryDisclosuressection of their websites, whereall of the
information relatingto disclosureof regulatory capital is made available
tomarket participants.
In caseswheredisclosurerequirementsset out in this document are met
via publicationthrough publicly availableregulatory reports, the
regulatorydisclosuressection of thebank‟swebsiteshould provide
specific linksto therelevant regulatoryreportsthat relateto thebank.
This requirement stemsfrom the supervisory experiencethat, in many
cases,thebenefit of Pillar 3 disclosuresisseverely diminished by the
challengeof findingthedisclosurein the first place.
Ideallymuch of the information that wouldbe reported in theRegulatory
Disclosuressectionof the websitewouldalsoincluded in thepublished
financial reportsof thebank.
TheBasel Committeehasagreed that, at minimum, thepublished
financialreportsmust direct userstotherelevant sectionof their websites
wherethe full set of required regulatorydisclosureisprovided.
Section 5: Template during the transitional period
TheBaselIII rulestext statesthat: “During the transition phasebanks
are required todisclosethespecific componentsof capital, including
capital instrumentsand regulatoryadjustmentsthat are benefitingfrom
thetransitional provisions.”
Thetransitional arrangementsfor Basel III phasein the regulatory
adjustmentsbetween1January 2014and 1January 2018.
Theyrequire20% of theadjustmentstobemadeaccordingtoBaselIII in
2014,withthe residual subject to existingnational treatment.
In 2015thisincreasesto40%, and soon, until thefull amountof theBasel
III adjustmentsare applied from 1January 2018.

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Thesetransitionalarrangementscreatean additional layer of complexity
in thedefinitionof capital in theperiod between1January 2013and 1
January2018,especiallyduetothefactthat existingnationaltreatmentsof
theresidual regulatory adjustmentsvary considerably.
This complexitysuggeststhat there wouldbe particular benefits in
settingout detaileddisclosurerequirementsduring thisperiod to ensure
that banksdonot adopt different approachesthat make comparisons
betweenthem difficult.
This section of thecomposition of capital disclosure rules text aimsto
ensure that disclosure during the transitional periodisconsistent and
comparable acrossbanksin different jurisdictions.
Banks will be required tousea modified version of the Post 1January 2018
Disclosure Template, set out in Section 1, in a way that captures existing
national treatmentsfor the regulatory adjustments.
Theuse of a modified version of the Post 1January 2018Disclosure
Template, rather than thedevelopment of a completelyseparate set of
reporting requirements, should help to reducesystemscostsfor banks.
Thetemplateis modified in justtwoways:
(1)An additional column indicatesthe amountsof the regulatory
adjustmentsthat will be subjectto theexistingnational treatment;and
(2)Each jurisdictionwill insert additional rowsin four separate placesto
indicatewherethe adjustment amountsreported in the added column
actuallyaffect capital during thetransition period.
Themodificationstothetemplateareset out inAnnex 4,alongwithsome
examplesof how thetemplate will workin practice.
Banksarerequiredtousethetemplate for all reportingperiodsonor after
theimplementationdate set out inparagraph5, and banksarerequiredto

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report thetemplatewith the same frequencyasthepublicationof their
financial statements(typically quarterly or half yearly).
Annex 1
Post 1January 2018 Disclosure Template
Key pointsto note about the template set out in thisAnnex are:
- Thetemplateis designedtocapture thecapital positionsof banks
after the transition period for the phasing-in of deductionsendson 1
January 2018(thetemplatefor banks to usetoreport their capital
positionsduring this transitional phase is set out in Section 5).
- Certainrowsarein italics. Theserowswill be deletedafter all the
ineligiblecapital instrumentshave beenfully phased out (ie from 1
January 2022onwards).
- Thereconciliationrequirementsincluded in Section 2result in the
decompositionof certain regulatoryadjustments.
For example, thedisclosuretemplatebelowincludestheadjustment
„Goodwill net of relatedtax liability‟.
Therequirementsin Section 2 will lead tothedisclosureof both the
goodwill component and the relatedtax liabilitycomponent of this
regulatoryadjustment.
- Regardingthe shading: Each dark grey row introducesa new section
detailing a certain component of regulatorycapital.
Thelight greyrowswithnothickborderrepresent thesum cellsin the
relevant section.

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Thelight grey rowswithathick border showthemain componentsof
regulatorycapital and the capital ratios.
- Also providedbelowisatablethat setsout anexplanationof eachline
of the template, withreferencesto the appropriateparagraphsof the
Basel III text.

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Set out inthefollowingtableisanexplanationofeachrowof thetemplate
above.
Regardingthe regulatoryadjustmentsbanksare required toreport
deductionsfrom capital aspositive numbersand additionsto capital as
negativenumbers.
Forexample,goodwill (row8) shouldbereportedasapositivenumber, as
shouldgainsduetothechangeintheowncredit riskofthebank (row14).
However,lossesdue to the changein theowncredit risk of thebank
should be reported asa negativenumber astheseareaddedback in the
calculationof Common Equity Tier 1.

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41. In general, to ensure that the common templates remain comparable
across jurisdictions there should be no adjustments to the version banks
usetodisclosetheir regulatory capital position.
However,the followingexceptionsapplyto take account of language
differencesand toreduce the reportingof unnecessaryinformation:

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- Thecommon template and explanatorytableabove can be translated
bythe relevant national authoritiesintothe relevant national
language(s) that implement the Basel standards.
Thetranslated version of the template will retain all of the rows
includedthe templateabove.
- Regardingthe explanatorytable, thenational version can reference
thenational rulesthat implement therelevant sectionsof Basel III.
- Banks arenot permitted to add, deleteor changethedefinitionsof
anyrowsfrom thecommon reportingtemplateimplementedin their
jurisdiction.
This will prevent adivergence of templatesthat could underminethe
objectivesof consistencyand comparability.
- This national version of the templatewill retain thesame row
numberingused in the first column of thetemplateabove, such that
market participantscan easily map thenational templatestothe
common version above.
However,the common template includescertainrowsthat reference
national specific regulatory adjustments(row 26, 41, and 56).
Therelevant national authorityshould insert rowsafter each of these
toproviderowsfor bankstodiscloseeach of the relevant national
specific adjustments(withthetotalsreported in rows26, 41and 56).
Theinsertion of anyrowsmust leavethe numberingof the remaining
rowsunchanged, eg rowsdetailingnational specific regulatory
adjustmentstocommon equityTier 1couldbelabelledRow26a,Row
26b etc, toensure that the subsequent row numbers arenot affected.
- In caseswherethenational implementation of Basel III applies a
more conservativedefinition of an element listedin thetemplate

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above, national authoritiesmay choosebetweenone of two
approaches:
Approach 1: in thenational version of thetemplatemaintain thesame
definitionsof all rowsasset out in the templateabove, and require
banksto report the impact of the more conservativenational definition
in thedesignatedrowsfor national specific adjustments(ie row 26,
row 41,row 56).
Approach 2: in thenational version of the templateusethedefinitions
of elementsasimplementedinthat jurisdiction, clearlylabellingthem
asbeing different from the Basel III minimum definition, and require
banksto separatelydisclosethe impact of each of thesedifferent
definitionsin thenotestothe template.
Theaim ofbothapproachesistoprovideall theinformationnecessary
toenablemarket participantstocalculate thecapital of bankson a
common basis.

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Annex 2
Illustration of the 3 step approachto reconciliation
Step 1
Under Step 1banksare requiredto taketheir balancesheet in their
publishedfinancial statements(numbersreported themiddlecolumn
below, in a balancesheet that isprovidedfor illustrative purposes) and
report thenumberswhenthe regulatory scopeof consolidationis applied
(numbersreported in the right hand column below of the illustrative
balancesheet).
If there are rowsin the balancesheet under theregulatory scope of
consolidationthat are not present in thepublishedfinancial
statements,banksare required toadd theseand givea value of zero in
themiddlecolumn.

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Step 2
Under Step 2banksare required toexpandthe balancesheet under the
regulatoryscope of consolidation (revealedin Step 1) to identify all the
elementsthat are used in the definitionof capital disclosuretemplate set
out inAnnex 1.
Set out below are some examplesof elementsthat may need to be
expanded for a particular banking group.
Themore complex the balancesheet of thebank, themore itemswould
need to be disclosed.
Each element must be given a referencenumber / letter that can be used
in Step3.

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Step 3
UnderStep 3banksarerequiredtocompleteacolumnaddedtothepost 1
January 2018disclosure templatetoshow the source of everyinput.
For example, thePost 1January 2018DisclosureTemplateincludesthe
line“goodwill net of related deferred tax liability”.
Next to thedisclosureof this item in thetemplate thebank wouldbe
requiredto put “a–d” toshow that row 7 of the template hasbeen
calculatedasthedifferencebetweencomponent “a” of thebalancesheet
under the regulatory scopeof consolidation, illustratedin step 2, and
component “d”.

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Annex 3
Main featurestemplate
Set out below isthetemplate that banksmust usetoensure that the key
featuresof all regulatory capital instrumentsare disclosed.
Banks will be required to completeall of theshaded cellsfor each
outstandingregulatory capital instrument (banks should insert “NA” if
thequestion is not applicable).

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Thistemplate wasdeveloped in a spreadsheetthat will be made available
tobanks on theBasel Committee‟swebsite.
Tocompletemost of thecellsbankssimplyneed toselect an option from
a drop down menu.
Usingthe referencenumbersin theleft column of the tableabove, the
followingtable providesa more detailedexplanation of what banksare
requiredto report in each of the grey cells,including, whererelevant, the
list of optionscontainedin thespreadsheet‟sdrop down menu.

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Annex 4
Disclosuretemplate during the transition phase
Thetemplatethat banksmust useduringthetransitionphaseisthesame
asthe Post 1January 2018disclosure template set out in Section 1except
for the followingadditions(all of whichare highlighted in the template
belowusing cellswithdotted borders and capitalisedtext):
- Anew column hasbeen added for banksto report the amount of each
regulatoryadjustment that is subject totheexistingnational treatment
during thetransitionphase(labelledasthe “pre-BaselIII treatment”).
Example1: In 2014bankswill be required to make 20% of theregulatory
adjustmentsin accordancewith BaselIII.
Considera bank with“Goodwill, net of related tax liability” of $100mn
and assume that thebank isin a jurisdiction that doesnot currently
requirethis tobe deducted from common equity.
Thebank willreport$20mnin thefirst ofthetwoemptycellsinrow8and
report $80 mn in thesecond of thetwocells.
Thesum of thetwocellswill thereforeequal thetotal BaselIII regulatory
adjustment.
- While thenew column showsthe amount of each regulatory
adjustment that issubject to the existingnational treatment, it is
necessarytoshowhow this amount isincludedunder existing
national treatment in the calculationof regulatory capital.
Therefore,new rowshave been added in each of thethree sectionson
regulatoryadjustmentstoalloweach jurisdictionto set out their
existingnational treatment.

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Example2:Assume that thebank describedinthebullet point aboveisin
a jurisdictionthat currentlyrequiresgoodwill to be deductedfrom Tier 1.
This jurisdictionwill insert a new row in betweenrows41and 42, to
indicatethat duringthe transition phasesome goodwill will continuetobe
deductedfrom Tier 1(in effectAdditional Tier 1).
The$80mn that thebank had reportedin the last cell of row 8, will then
need to be reported in this new row insertedbetweenrows41and 42.
In additiontothe phasing-inof some regulatoryadjustmentsdescribed
above, the transitionperiod of Basel III will in some casesresult in the
phasing-out of previousprudential adjustments.
In thesecasesthe new rowsadded in eachof thethree sectionson
regulatoryadjustmentswill be used by jurisdictionsto set out theimpact
of thephase-out.
Example3: Consider a jurisdictionthat currentlyfilters out unrealised
gainsand losseson holdingsofAFSdebt securities and consider a bank
in that jurisdictionthat hasan unrealised lossof $50mn.
Thetransitional arrangementsrequire this bank torecognise20% of this
loss(ie $10mn) in 2014.
This meansthat 80% of this loss(ie$40mn) is not recognised. The
jurisdictionwill thereforeincludea row betweenrows26and 27that
allowsbanks to add back thisunrealisedloss.
Thebank will then report $40mn in this row asan additiontoCommon
EquityTier 1.
- Totake account of the fact that the existingnational treatment of a
BaselIII regulatory adjustment may be toapplya risk weighting,
jurisdictionswill alsobeabletoaddnewrowsimmediatelypriortothe
row on risk weightedassets(row 60).

37
Theserowswill need to be defined by each jurisdictiontolist theBasel
III regulatory adjustmentsthat are currentlyrisk weighted.
Example4: Consider a jurisdictionthat currentlyrisk weightsdefined
benefit pension fund net assetsat 200% and in 2014a bank has$50mn of
theseassets.
Thetransitional arrangementsrequire this bank todeduct 20% of the
assetsin 2014.
This meansthat the bank will report $10 mn in the first empty cell in row
15and $40 mn in the second emptycell (the total of the two cellstherefore
equalsthe total Basel III regulatory adjustment).
The jurisdiction will disclose in one of the inserted rows between row 59
and 60 that such assetsare risk weighted at 200% during the transitional
phase.
Thebank will thenbe required to report a figure of $80mn ($40mn *
200%) in that row.

38

39

40

41
MAS Consults on Proposed Review of Risk-based Capital
Framework for Insurance Business
Singapore, 22June 2012
TheMonetaryAuthority of Singapore (MAS) today releaseda
consultationpaper on the review of theRisk-BasedCapital (RBC)
frameworkfor insurancebusiness.
TheRBC frameworkwasfirstintroducedin Singaporein 2004.It adoptsa
risk-focusedapproachtoassessingcapital adequacy and seeksto reflect
therelevant risksthat insurancecompaniesface.
MAS is reviewingthe framework, given evolving market practicesin the
insuranceindustry and in international accountingand regulatory
standards.
Thereview aimstoimprove the comprehensivenessof the riskcoverage
and risk sensitivityof the framework, and is not expected to result in a
significant overhaul to the current framework.

42
1.TheRBC frameworkfor insurancecompanieswasfirst introducedin
Singapore in 2004.
It adoptsarisk-focusedapproachtoassessingcapitaladequacyandseeks
toreflect the relevant risks that insurancecompanies face.
Theminimum capital prescribed under theframeworkservesasa buffer
toabsorblosses.
TheRBC framework alsoprovidesclearerinformation on the financial
strengthofinsurersandfacilitatesearlyandeffectiveinterventionbyMAS,
if necessary.
2.Whilst theRBC frameworkhasserveduswell, MAS is embarkingona
review (“RBC 2”) of theframework in light of evolving market practices
and global regulatory developments.
Thereview will takeintoaccount therevisedInsuranceCore Principles
andStandards issued by the InternationalAssociation of Insurance
Supervisorslast year.
3.Arisk-focusedapproach to capital adequacycontinuesto be
appropriateand relevant in the supervisionof insurers.
As such, theRBC 2 review is not expected to result in a significant
overhaul to thecurrent framework.
Rather, the review aimsto improve the comprehensivenessof the risk
coverageand the risk sensitivityof the framework, aswell asdefining
more specifically, MAS supervisoryapproach withrespect tothesolvency
intervention levels.
4.Section2 of thepaper detailsthe proposed review in the areasof
requiredcapital.

43
This toucheson theexpansion of the current framework toaddressmore
risk types, the introduction of target criteria for risk calibration, the
diversificationbenefits from correlationsbetweenrisk types, and the
usageof internal models.
5.Section3 elaborateson the componentsof availablecapital. These
includethe treatment for negative reservesand aggregateprovisionsfor
non-guaranteedbenefits.
In addition, it isenvisaged that there will be some degreeof convergence
with Basel III global capital standards, asMAS seeksto improve the
alignment of capital standardsbetweenthebanking and insurance
industries.
6.Section4 setsout thetwoexplicit solvencyintervention levels,the
Prescribed Capital Requirement aswell asthe Minimum Capital
Requirement.
Having clear and transparent solvencyintervention levelsisuseful for
insurers.
MAS expectationson the type of correctivecapital actionstobe takenby
insurers,and theurgencywhichtheseactionsshouldbe taken, will be
referencedagainst thesesolvencylevels.
7.Section5 setsout theproposed approach withregardstorisk-free
discount rate, and consultson an alternativeapproachtothederivationof
theprovision for adverse deviation (or risk margin).
8.TheRBC 2review will not just focussolelyonthequantitativeaspects
of capital requirements.
It alsoseeksto enhanceinsurers‟risk management practices.As
such, the scopeof the review includesqualitativeaspectson
EnterpriseRisk Management, asoutlinedin Section 6.

44
1.9MAS hopestowork closelywiththeindustryon thereview, aswasthe
casewhenthe RBC framework wasfirst developed.
We anticipatethat the industry will be involvedthrough workgroup
participation, quantitativeimpact studiesand consultation feedback.
COMPONENTSOF REQUIRED CAPITAL
1.TheRBC frameworkrequiresinsurerstohold capital againsttheir risk
exposuresknown asthe Total Risk Requirements(“TRR”).
Risksarisingfrom an insurer‟sassetsand liabilitiesare groupedin to
threedistinct components:
- Component 1(C1) requirement relatestoinsurancerisksundertaken
byinsurers.
C1requirement for general insurancebusinessis determined by
applying specificrisk chargeson an insurer’spremium and claims
liabilities.
Riskchargesapplicableto different businesslinesvary withthe
volatilityof theunderlying business.
The requirement for life insurance business is calculated by applying
specific risk margin to key parameters affecting policy liabilities such
asmortality, morbidity, expensesand policy termination rates.
- Component 2(C2) requirement relatestorisksinherent inaninsurer‟s
asset portfolio, such asmarket risk and credit risk.
It is calculatedbased on an insurer's exposure tovariousmarkets
includingequity, debt, property and foreign exchange.
TheC2 requirement alsocapturesthe extent of asset-liability
mismatchpresent in an insurer’sportfolio.

45
- Component 3(C3) requirement relatestoasset concentrationrisks in
certain typesof assets,counterpartiesor groupsof counterparties.
C3 chargesare computed based on an insurer‟sexposure in excessof
theconcentrationlimitsasprescribed under theInsurance(Valuation
and Capital) Regulations2004.
2.Thefollowingparagraphsset out whereenhancementsare expected.
Inclusion of New Risk Types
3.Thecurrent RBC framework alreadycapturesmost of thematerial risks
suchasmarket risk, credit risk, underwritingrisk and concentration risk.
For riskswhicharenot specificallyquantified under RBC, theyare
consideredqualitativelyunder MAS riskbased supervision and MAShas
thepowersunder theInsuranceAct to imposeadditional capital
requirementsif necessary.
For theRBC 2 review, MAS is reviewingthe risk coveragein linewith
evolvingglobal regulatoryand market developments.
Spread risk
4.Thecurrent RBC framework takesintoaccount thecredit risk of
corporatebondsbut doesnot capture credit spread risk.
In MASannual stresstesting exercise, insurerswerefound to be
susceptibleto credit spread shocks.
This is not surprisinggiven that insurershold a high proportion of
corporatebonds.
MAS proposestoexplicitlycapture credit spread risk under the RBC 2
framework.

46
This is similar tothe credit spread shocksappliedduring stresstesting.
Spreadrisk resultsfrom thesensitivityof thevalueof assetsandliabilities
tochangesin the level or in the volatility of credit spreadsover the
risk-freeinterestrate.
Proposal 1
MAS proposestoincorporate an explicit risk chargetocapture spread
risk within the RBC 2 framework.
Liquidity risk
5.Liquidityrisk is the exposureto lossin theevent that insufficient liquid
assetsareavailablefrom theassetssupportingthepolicyliabilities,to
meet thecash flow requirementsof policyholder obligations,or assets
may be available,but can onlybeliquidatedtomeet policyholder
obligationsat excessivecost.
6.However, wedonot proposeto imposean explicit riskchargefor
liquidityrisk asthereis nowell-establishedmethodology toquantify
capital requirementsfor liquidityrisk. MAS will continueto assessthe
robustnessof insurers‟liquidityrisk management through supervision.
Proposal 2
MAS proposesnot toimposean explicit risk chargefor liquidityrisk.
MAS will workwiththe industry toconduct liquiditystress-testing, and
assessthesoundnessof theinsurer’sliquidityriskmanagement practices
aspart of MASrisk-basedsupervision.
Operational risk
7.Operational risk refersto the risk of lossarisingfrom complex
operations,inadequate internal controls,processesand information

47
systems, organisationchanges,fraud or human errors, (or unforeseen
catastrophesincludingterrorist attacks).
Operationalriskisrecognisedasarelevant andmaterialriskthat needsto
be addressed in a supervisory framework.
Currentlythere is noexplicit risk chargefor operational risk under the
RBC framework,though operational risk is assessed aspart of MAS
ongoing supervisionof insurers.
However,both Basel II and a number of major jurisdictionshave
explicitlyintroduced capital requirementsfor operational risk in their
capital framework.
8.Methodologiestoquantify operational risk continuetoevolve
globally.
Theinsuranceindustry alsodoesnot presently collect sufficient
operational risk data.
Assuch, MAS intendstostart off withasimplified andpragmaticmethod
toquantify the operational risk charge, and refineitsmethodology in
futureasmore databecomesavailableand practicesaremoreestablished
internationally.
Theproposed method is broadly similar to some of the approachesused
in other jurisdictionssuch asthe European EconomicArea (under the
standardisedformula approachof SolvencyII) andAustralia.
9.MAS proposestoput a cap on the amount of operational risk charge
such that it will not be larger than 10% of an insurer’stotal risk
requirements.
This is based on our observation on banks‟operational risk charge asa
percentageof the total capital requirements.

48
There is noevidenceto suggest that an insurer’soperational risk would
bevastlydifferent from that experiencedby a bank.
Proposal 3
MAS proposestoincorporate an explicit risk chargetocapture
operational risk within the RBC 2 framework, calculated as:
x% of the higher of the past 3 years‟ averagesof (a) earnedpremium
income;and (b) grosspolicyliabilities,subject to a maximum of 10%of
thetotal risk requirements.
Where x = 4% (except for investment-linkedbusiness, wherex = 0.25%
giventhat most of themanagement of investment-linkedfund is
outsourced)
Consultation Question 1
Is thisformula or baseschosen appropriate?Should webe usingwritten
premium or net policyliabilitiesinstead?Should there be differencesin
theformula for different types of insurers,for example, direct life, direct
general and reinsurers?
What type of data can theinsuranceindustrystart tocollect in order to
build up sufficient data tobetter quantifyor model operational risks?
Insurancecatastropherisk
2.10While concentration risk is coveredunder the existingframework(as
C3 risk requirements), it is onlyconfined to asset concentration risk.
TheRBC framework doesnot capture insurancecatastropherisk, whichis
theriskthat acatastrophecausesaone-timespikein claims experience,
with a corresponding impact on claims and/ orliabilities.

49
Such claimsexperiencecan havea significant impact on an insurer’s
solvency, particularlyif the insurer hasa concentration of riskswrittenin
a particular area or businessline.
Recent natural catastrophesin the region have shown that insurance
catastropheriskis a real and relevant risk toinsurershere whichwrite
risksin theregion.
11.ThereareafewoptionstoexplicitlyaddressthisriskundertheRBC 2
framework.
Oneoption wouldbe to require insurersto construct a catastrophe
scenario that ismost relevant to them and hasthe greatest
impact, benchmarked to some target criteria (e.g. 1in 200year
event), and work out thecapital that hasto be set asidetomeet that
event net of reinsurancearrangements.
This is similar totheapproach of allowingthe useof internal models (As
adoptedunder SwissSolvency Test in Switzerland).
The second option (As adopted in Bermuda and in European Economic
Area under Solvency II) would be for the regulator to prescribe a number
of man-madeand natural catastrophescenarios.
An explicit risk chargeis then computedaccordinglyfrom a combination
of thesescenarios.
Thethird option wouldbetoget theinsurerstostresstest on anumber of
standardisedcatastrophescenarios, and additional capital requirements
wouldonly beimposed for the insurersthat are more vulnerable.
This would, however, be lesstransparent.
12.As a target, MASis of the view that it wouldbe appropriate to adopt
thefirst option, whichis similar to allowingthe use of internal models.

50
This option wouldensure that the catastrophescenario constructed by
each insurer is relevant toitsown businessand circumstances.
However,werecognisethat insurerswouldneed time to build their own
catastrophicrisk modeling capabilities.
As such, for a start, MAS proposestoadopt the second option to begin
imposingspecific risk chargesfor catastropherisks.
Under this option, MAS intendsto work with theindustryassociations,
reinsurancebrokers and the other risk institutes/ academiain Singapore
todesign relevant standardisedcatastrophicscenariosto derive explicit
risk chargesfor insurance catastropherisk.
2.13For the life business, theexplicit insurancecatastropherisk charge
can be derived based on a pandemicevent.
It is noted that a few major jurisdictionshave used 1.5deathsper 1,000in
derivingtheinsurancecatastropherisk charge for itslife business.
We propose to adopt a similar approach.
Proposal 4
MAS proposestoincorporate an explicit insurancecatastropherisk
chargein the RBC 2 framework.
This would be done through prescribing a number of man-made and
natural catastrophe scenarios, with an explicit risk charge computed
accordinglyfrom a combination of thesescenarios.
MAS intendsto work with the industryassociations,reinsurancebrokers
andtheother risk institutes/ academiain Singapore to design relevant
standardisedcatastrophic scenarios.

51
For life business, theexplicit insurancecatastrophicrisk charge can be
derivedbased on a pandemicevent.
14.Currently, the offshoreinsurancefund of reinsurersis subjectto
either a simplified solvencyregime (in thecaseof locallyincorporated
reinsurers)or exemptedfrom anycapital or solvencyrequirements
altogether(in the caseof reinsurancebranches).
MAS will, in consultation withtheaffectedplayers, be reviewingthe
capitaltreatment oftheoffshoreinsurancefundforall reinsurers,whether
locallyor foreign incorporated, under RBC 2.
There will be a separate consultation paper on this.
Target Criteria for Calibration of Risk Requirements
15.TheRBC frameworkrelies on the Fund SolvencyRatio(“FSR) and
theCapitalAdequacy Ratio (“CAR”) asindicatorsof solvencyat thefund
and company level respectively.
Theseratiosprovidea snapshot of theinsurer‟sfinancial condition at a
point in time, without any considerationof theconfidencelevel and time
horizon.
Under RBC 2, MASintendstorecalibratethe riskrequirementsbasedon
a specified risk measure, confidencelevel and timehorizon.
16. There are 2 common risk measuresused internationally:
- Valueat Risk(“VaR”) – this is the expectedvalue of lossat a
predefined confidencelevel (e.g. 99.5%).
Thus, if the insurer holds capital equivalent toVaR, it will have
sufficient assetstomeet its regulatory liabilitieswith probability of a
confidencelevel of 99.5% over a one year timehorizon; and

52
- Tail Valueat Risk(“tVaR”) – thisis theexpectedvalueof theaverage
losswhereit exceedsthe predefinedconfidence level (eg 99.5%).
It isalsoknownastheconditionaltail expectation(“CTE”), expected
shortfall or expected tail loss.
If an insurer holdscapital equivalent totVAR, it will have sufficient
assetsto meet the averagelossesthat exceed thepredefined
confidencelevel (of say99.5%).
17.TheVaR approach, whileit hasitslimitations,isagenerallyaccepted
risk measure for financial risk management.
It iseasiertocalibratetherisksunder aVaR approach comparedtousing
tVaR. However, VaR, unlike tVaR, tendsto underestimate the exposureto
tail events.
18.On balance,MASproposestoadopt theVaR measureasit iseasierto
calibrate.
Tail VaR can be consideredunder the internal model approach(see
paragraphs2.25 and 2.26), if insurersdeem it tobe more appropriate for
their businessor risks.

53
Tail event analysis can alsobe doneduring the annual industry wide
stresstestingexerciseor the insurer’sown risk and solvencyassessment
(seeSection 6).
19.MASalsoproposesto adopt atime horizon of one year, and a
confidencelevel of 99.5%.
This correspondsto an investment grade credit ratingand is used
commonlyby mostof the other major jurisdictions.
20.There will be a changein the approach in derivingmost of the
asset-relatedrisk requirementsunder RBC 2.
Instead of applying a fixedfactor on themarket value (e.g. 16%on the
equitymarket valuefor equityrisk requirement) asper current
approach, wewill now applya shocktotheNet Asset (Assetsless
Liabilities)and measure the impact of the shock.
Theshockiscalibratedat aVaR of99.5%confidencelevelover aoneyear
period.
Thenew risk requirement will be equivalent tothe amount of changein
Net Asset for each respectiverisk.
21. For insurance riskrequirements,theapproach will be similar.
For life business, thecurrent insurancerisk requirement is computed by
applying prescribed loadingson best estimateassumptionssuch as
mortality, lapseand expense.
Underthenewapproach, thebestestimateassumptionswillbeloadedup
bysome prescribed factorswhich will be calibratedat a VaR of 99.5%
confidencelevel over a one year period whichis theproposed target
criteria.

54
For general business, prescribedfactorswill still be applied tothe
premium and claimsliabilities,though the factorswill now be calibrated
at the new target criteria.
22.MASwill consult separatelyon thedata and methodology to beused
for calibration, aswell ason the recommended calibrationfactorsor
shockscenariosto be used to achievetheproposed new target criteria.
Proposal 5
MAS proposestorecalibrate riskrequirementsusing the Valueat Risk
(“VaR”) measure of 99.5% confidencelevel over a one year period.
MAS will be engagingthe industry on the calibrationexercise,and target
tofinalisethe calibrationfactors/shock scenariosby 1Q 2013.
Data would need tobe collectedfor thispurpose. Therecommended
calibration factorsor scenarioswill be consulted prior toitsfinalisation.
Diversification Benefits
23.UnderRBC, thetotalriskrequirementsareobtainedbysummingthe
C1, C2 and C3 risk requirements.
Withinthe C1or C2 risk requirements, theunderlying risk requirements
are alsoadded together, without allowingfor anydiversification effects
withthehelp of correlationmatrices.
Some major jurisdictions such as the European Economic Area (under
Solvency II), Australia and Bermuda have moved towards allowing for
diversification effects when combining various risk modules, and even
withinsub-modules,using prescribedcorrelationmatrices.
Thishastheeffectofreducingtheoverall regulatorycapitalrequirements.

55
Thelevel of sophistication of the correlation matricesvaries,and isbased
tosome degree, on judgment.
24.MASlooked intothepossibility of recognisingdiversification
benefitswhenaggregatingthe risk requirementsunder RBC 2.
However,dependenciesbetween different riskswill vary asmarket
conditionschangeand correlation hasbeen shown toincrease
significantlyduringperiodsof stressor whenextreme eventsoccur.
In the absenceof any conclusivestudiestoshowotherwise,MAS
proposesnot totake intoaccount diversificationeffectsfor the
aggregation of risk requirementsunder RBC 2.
This approach is consistent with the capital framework for banks, where
wedonot allowfor any diversificationbenefitswhenrisksare combined.
Proposal 6
MAS proposesnot toallowfor diversificationbenefitswhenaggregating
thecapital risk requirements.MASis, however, prepared toconsider
diversification benefits if theindustry is be able tosubstantiate, with
robust studiesand research conducted on thelocalinsuranceindustry,
that there are applicablecorrelationswhichcan relied on during normal
and stressed times.
Use of Internal Model
25.MAS intendstoallowinsurerstousepartial or full internal modelsto
determinetheregulatory capital requirementsin thelonger run, in line
with international best practices.
Theinternal modelswill have tobe calibratedat the same target criteria
asthe standardised approach, and be subject toMASapproval.

56
2.26 The useof internal model will be looked at under thenext phaseof
thereview, after thestandardised approachhasbeen rolledout.
This will allowthe larger and more complex insurerstime to prepare
themselvesfor a more sophisticated and tailoredapproach.
MAS wouldalsobeabletocheckthereasonablenessoftheinternalmodel
assumptionsand resultsagainst the experienceof the standardised
approach.
Proposal 7
MAS proposestoallowtheuseof partial or internal model in thenext
phaseof the RBC 2 review, after the implementationof the standardised
approach.
Theinternal model, whichwill be subject to approval by MAS, will have
tobe calibratedat thesame level asthestandardised approach.
COMPONENTSOF AVAILABLE CAPITAL
3.1The amount of capital available tomeet the TRR is referred to as
“financial resources” (“FR”) under the RBC framework.
FR comprisesthreecomponents, namely Tier 1resources,Tier 2
resourcesand the provision for non-guaranteedbenefits.
- Tier 1resourcesarecapital resources of thehighest quality.
Thesecapital instrumentsare ableto absorblosseson an on-going
basis.
Theyhavenomaturitydateand, if redeemable,can onlyberedeemed
at the option of the insurer.

57
Theyshouldbeissuedandfullypaid-upandnon-cumulativein nature.
Theyshould be ranked junior to policyholders, general creditors,and
subordinateddebt holdersof theinsurer.
Tier 1resourcesshould neither besecurednor coveredby aguarantee
of the issuer or relatedentityor other arrangement that may legallyor
economicallyenhancethe seniority of theclaimsvis-à-visthe
policyholders.
Tier 1resourcesaregenerallyrepresentedby the aggregateof the
surplusesof an insurer’sinsurancefunds.
Alocallyincorporatedinsurer may add toits Tier 1resources its
paid-upordinaryshare capital, its surplusesoutside of insurance
fundsand irredeemableand noncumulativepreferenceshares.
- Tier 2 resourcesare onlyapplicableto locallyincorporatedinsurers
and consist of capital instrumentsthat are of a lowerqualitythanthat
of Tier 1resourcesbut may be availabletoserveasa buffer against
lossesincurredby theinsurer.
Examplesof theseinstrumentsincluderedeemableor cumulative
preferencesharesand certain subordinateddebt.
Tier 2 resourcesin excessof 50% of Tier 1resourceswill not be
recognisedasFR.
- Theallowancefor provision for non-guaranteedbenefitsis applicable
onlyto insurerswhomaintain a participatingfund.
As the allowancefor provision for non-guaranteedbenefitsis only
availabletoabsorblossesof the participatingfund, theallowanceis
adjustedto ensure that theunadjustedcapital ratio10of the insurer is
not greater than itsadjusted ratio.

58
Alignment with Basel III
2.Asanintegratedsupervisoroverseeingbankingand insuranceentitiesin
Singapore, MASseekstoensure a level playing field acrossthefinancial
sectorsby havinga consistent regulatory and supervisoryframeworkfor
theregulatedfinancial institutions.
TheTier 1and Tier 2 capital componentsare largely aligned betweenthe
existingRBC frameworkforinsurersandthecapitaladequacyframework
forbanksunderBaselIII, withtheexceptionofsurplusesintheinsurance
fundsor balancein the surplusaccount, whichare insurance-specific in
nature.
However,Basel III hasstrengthened the“equity-like” characteristics
needed for a hybrid capital instrument tobe included in Tier 1regulatory
capital (i.e. capital of the highest quality).
Besides having to showgreater capacitytoabsorb losses,these hybrid
capital instrumentsalsoneed to have featuresthat clearlyenablethe
instrument toundergoa principlewritedown or toconvert intocommon
equityin the event of a bank stress.
3.Toalign withthecapital adequacyframeworkfor banks, MAS proposes
toincorporatethesameBaselIII features(i.e. equityconversion orwrite-
downonbreachof regulatorycapitalrequirements)asconditionsfor a
capital instrument tobe approved by MASasa Tier 1resource
(“Approved Tier 1Resource”).
Proposal 8
MAS proposestoincorporate the same Basel III features(i.e. equity
conversion or write-downon breach of regulatory capital requirements)
for theApproved Tier 1resource.

59
This meansthat instrumentsthat qualifiesasApproved Tier 1resource
must:
(a)Automaticallyconvert toordinaryshare capital, asand whentheinsurer
needstoabsorblosses, andinanycase,whentheinsurer breachesits
regulatorycapital requirement;
(b)Be subjecttowritedown aslong aslossespersist, asand whenthe
insurer needstoabsorb losses,and in anycasewhentheinsurer breaches
itsregulatorycapital requirement.
Thelimitson the amount ofApproved Tier 1resource that can be
recognised, asset out in the existingInsurance(Valuation and Capital)
Regulations2004, will remain unchanged.
Treatment of Negative Reserves
4.For life business, policy liability isderived policy-by-policy by
discountingthebest estimatecash flowsof future benefit payments,
expensepaymentsand receipts,withallowancefor provision for adverse
deviation.
It is possiblefor the discountedvaluetobe negativewhen theexpected
present valueof thefuture receipts(like premium and charges) exceed
theexpected presentvalue of thefuture outgo(such asbenefit payments
and expensepayments), resultingin a negative reserve.
5.However, regulation 20(4) of the Insurance(Valuation and Capital)
Regulations2004statesthat “Aregisteredinsurer shall not value the
liability in respect of any liabilitytobe lessthan zero, unlessthere are
moneysduetotheinsurerwhenthepolicyisterminatedonvaluationdate,
in whicheventhevalueof the liabilityin respect of that policymay be
negativeto the extent of the amount due to the insurer.”

60
Thismeansthat negativereservesarenotrecognisedunlessoneexpectsa
recoveryof monies (for example, surrender penaltyin thecaseof
investment-linkedpolicies).
6.Practiceswithregards totreatment of negative reservesdiffer
internationally.
Under SolvencyII, theEuropean EconomicArea is considering
recognisingnegative reservesasTier 1capital, whileCanadarecognises
part of thenegative reservesasTier 2capital.
7.MAS current positionof not recognisingnegativereservesasaform of
capital is a conservativeone becauseit isakin to assuminga 100%lapse
on all thepolicies,such that future premium receiptsand chargesare not
recognised.
In practice, thelapserate wouldnot be 100%. Therefore, there is scopeto
reconsider the current position given that under RBC 2, an insurer’snet
asset valuewill be shocked for insurancerisk, and specifically, lapse
risk, at a 1-in-200year level.
8.Hence, MAS wouldlike to consult on recognisinga part of the
negative reservesasfinancial resources.
We propose for thistobe in the form of a positivefinancial resource
adjustment, rather than asTier 1or Tier 2capital.
As the amount of negative reservesare currentlysizeablein some life
insurers,MASwill need tocarefullyreview and establish a frameworkfor
calibratingthe level of negative reservesthat may be recognised.
Proposal 9
MAS proposestoallowa part of thenegativereservesto be recognisedas
a form of positivefinancial resourceadjustment under Financial
Resources.

61
MAS will consult further on the amount tobe recognised.
Treatment of Aggregate of Allowancesfor Provision for Non-
Guaranteed Benefits
9.When assessingthe qualityof capital resources,insuranceregulatorsare
requiredunder international standardsto give consideration toits
characteristics,including“theextent towhichtheresourceis availableto
absorb losses,theextent of the permanent and/ or perpetual nature of the
capital and theexistenceof anymandatory servicingcostsin relationto
thecapital”.
10.Under the current RBC framework,ashighlightedin Paragraph
3.1,an insurer maintainingany participatingfund isallowedto count as
financial resources,the aggregate of allowancesfor provision for
non-guaranteedbenefits (“APNGB”), subject tothe unadjustedcapital
ratio of the insurer remainingbelowtheadjusted ratio.
However,astheseallowancesdo not meet the qualities requiredof a
capital instrument, MAS will be reclassifyingAPNGB asa form of
positivefinancial resource adjustment (“FRA”), instead of a capital item.
Proposal 10
MAS proposestoclassifyAggregate ofAllowancesfor Provision for
Non-GuaranteedBenefits,whereapplicable, asa form of positive
financial resource adjustment, rather than asa capital item.
Thisappliestoaninsurermaintaininganyparticipatingfund, andsubject
tothe conditionthat theunadjusted capital ratioremainsbelow the
adjustedcapital ratio, where:
Adjusted capital ratio, in relation to theinsurer, meanstheratio of the
financialresourcesof theinsurer (excludingthefinancialresourcesofany
participatingfund) tothetotal risk requirement (calibrated at 99.5% VaR

62
overaone-yearperiod) oftheinsurer(excludingsuchrequirement arising
from anyparticipatingfund); and
Unadjusted capital ratio, in relation to theinsurer, meansthe ratioof the
financialresourcesof theinsurer(includingthefinancial resourcesof any
participatingfund) tothetotal risk requirement (calibrated at 99.5% VaR
overaone-year period) of theinsurer(includingsuchrequirement arising
from anyparticipatingfund).
SOLVENCY INTERVENTION LEVELS
1.Currently, under the Insurance(Valuation and Capital) Regulations
2004, insurershave tomaintaina minimum CapitalAdequacy Ratio
(“CAR”) of 100%.
Registered insurersare alsorequired to notify MASabout theoccurrence
or potential occurrenceof any event that wouldresult in thefinancial
resourcesof the insurer beinglessthan 120%, alsoknown asthe financial
resourceswarningevent.
In practice, wewouldexpect insurersto have capital management plans
in placeand hold a target CAR of more than 120%. In fact, all insurers
generallyhold at leasta CAR of 150%.
2.InternationalstandardsoncapitaladequacyprescribedbytheIAIS set
out twotransparent triggersfor supervisoryintervention whenassessing
thecapital adequacyof an insurer:
a) Prescribed Capital Requirement (“PCR”), which is the higher solvency
control level above which the insurance regulator would not intervene on
capital adequacygrounds.
ThePCR iscalibratedsuch that the assetsof the insurer will exceed the
policy liabilitiesand other liabilitieswitha specifiedlevel of safetyover a
definedtime horizon; and

63
b) Minimum Capital Requirement (“MCR”), whichis thelowersolvency
control level at which, if breached, the insuranceregulator wouldinvoke
itsstrongest actions,in the absenceof appropriatecorrectiveaction bythe
insurer.
3.Globally, major jurisdictionsare moving towardsmeetingthe
internationalstandardsof having a PCR and a MCR.
MAS believesthat havingsuch transparent and clearsolvency
intervention levelswouldbe most useful for insurersto better understand
MAS expectationson the type of correctivecapital actionsrequired, and
the urgencywhichtheyshould be taken.
Prescribed Capital Requirement
4.Many insuranceregulatorsof major jurisdictionshavetargeted a
confidencelevel of 99.5% in settingregulatorycapital requirements.
This correspondsto an implied credit ratingof at least an investment
grade.
MAS intendsto calibratethe PCR of a soloinsurer16tothe VaR of the
insurer’sfundstoa confidencelevel of 99.5% over a one year period.
If an insurer’scapital fallsbelow its PCR, it will need to submit a planto
restore itscapital position within 3 months.
As a countercyclical measure, MASwill havethe flexibilityand discretion
toallowinsurersmore timetorestore itscapital position, for example,
during periodsof market stresses.
For avoidanceof doubt, PCR needsto bemaintained at both the
company level, aswell asat an insurancefund level.

64
Proposal 11
PCR is thehigher supervisoryintervention level at whichthe insurer is
requiredto hold sufficient financial resourcestomeet the total risk
requirementswhichcorrespondstoa VaR of 99.5% confidencelevel over
a one-year period.
An insurer whichbreachesitsPCR will need to submit a plan on howto
restore itscapital position within 3 months.
If the PCR ismet, MASwill not normally interveneon capital adequacy
grounds.
This doesnot precludeMASfrom requiring an insurer to maintain
financialresourcesabovethePCR if thereare othersupervisoryconcerns.
As a countercyclical measure, MASwill havetheflexibilityand discretion
toallowinsurersmore timetorestore itscapital position, for
example,during periodsof market stresses.
PCR needstobe maintainedat both the company level, aswell asat an
insurancefund level.
Minimum Capital Requirement
4.5As for MCR, MASplansto calibratea soloentity MCR tothe VaR of
theinsurer’sfundstoa confidencelevel of 90% over a one year period.
Thiscorrespondstoan implied credit ratingof B- and representsa 1in 10
year event.
During the calibration stage, the MCR may be expressed as a percentage
of the total risk requirementsrequired under PCR for ease of computation
and future monitoring.

65
For avoidanceof doubt, MCR needsto be maintainedat both the
company level, aswell asat an insurancefund level.
4.6 MAS intendsto take its strongest enforcement actionsif the MCR is
breached.
Suchactionswouldincludestoppingnewbusiness,withdrawaloflicence,
or directing a transfer of portfolio toanother insurer.
Proposal 12
MCR is the lowersupervisoryintervention level at whichthe insurer is
requiredto hold sufficient financial resourcestomeet the total risk
requirementswhichcorrespondstoa VaR of 90% confidencelevel over a
one-year period.
If an insurer breachesitsMCR, MAS may choose to invoke the strongest
supervisory action (such as stopping new business, withdrawal of licence
etc).
MCR willbecalibratedasafixedpercentageof thePCR. Thispercentage
will be determinedafter quantitativeimpact studiesare done.
MCR needsto be maintainedat both thecompanylevel, aswell asat an
insurancefund level.
VALUATION OF ASSETSAND LIABILITIES
5.1An insurerneedstodeterminethevalue of itsassetsand liabilities
beforecomputingitssolvencyrequirements.
ValuationrulesfortheRBC frameworkarespecifiedwithintheInsurance
(Valuation and Capital) Regulation 2004and the relevant Notices.

66
2.Under current valuation rules,assetsare to bevaluedat themarket
value, or the net realisablevalue, in the absenceof market value. Policy
liabilitiesare tobe valuedbased on best estimateassumptions,with
provision for adverse deviation (“PAD”).
Policy liabilitiesfor life insurance are computed using a prospective
discountedcashflow method while that for general insurance consist of
thepremium liabilitiesand the claimsliabilities.
3. We have identifiedtwoareasthat will be reviewedunder RBC 2.
Risk Free Discount Rate
Singapore dollar-denominated liabilities
4.Lifeinsurersare currentlyrequired tocalculatetheir policyliabilities
usinga prospectivediscountedcash-flowmethod, with MASNotice 319
prescribingtheuseof therisk-freediscount rate todeterminethevalueof
policy liabilitiesfor non-participatingpolicies,non-unit reservesof
investment-linkedpolicies,and theminimum condition liabilityof
participatingfunds.
5.For Singaporedollar (“SGD”)-denominatedliabilities, therisk free
discount rateis:
(a)Where the duration of a liability is X years or less, the market yield of
the Singapore Government Securities (“SGS”) of a matching duration as
at valuation date;
(b)Where the duration of a liabilityismore than X yearsbut lessthanY
years, a yield that isinterpolated from the market yield of theX year SGS
and a stablelongterm risk free discount rate (“LTRFDR”); and
(c) Where theduration of a liability isY years or more, a stableLTRFDR.

67
ThestableLTRFDR is to be calculatedaccordingtothe following:
(a)Computetheaveragedailyclosingyield of the X-year SGSsinceits
inception;
(b)Compute the averagedailyyield differential between theX-year and
Yyear SGSsincetheinceptionof theY-year SGS;
(c)Derivean estimatelong-term yield bysumming the valuesobtained
under subparagraphs(a) and (b);
(d)Compute the prevailing averagedaily closingyield of theY-year SGS
over thepast 6-month period;
(e)Allocate 90% weight to theestimatedlong-term yield obtained in
subparagraph(c), and 10% to the prevailingaverage yield under
subparagraph (d).
(f)TheLTRFDR is then obtained by summingthetwovaluesin (e).
Currently, X and Y are 10and 15 respectively.
With effect from 1Jan2013,X andY will be 15and 2018.
5.6 When RBC wasfirst introducedin 2005, the longest datedSGS
availablethen wasthe 15-year SGS(whichwasincepted in 2001).
Recognisingthat the15-year SGSmight not be liquid enough and could
causeunduevolatilityin therisk-freediscount rate aswell aspolicy
liabilitiesat the longer end, the LTRFDR formula wasintroduced.
Theuse of a weightedaverageformula haskept the LTRFDR “sticky”
andvalue of policy liabilitiessteady.
Whilst this isreflectiveof the underlying nature of long-term life
insuranceliabilities,it makesliabilityvalueslesssensitiveto market

68
movement in yields, resulting in short-term earningsvolatilitydueto
differencesin discountingof the assetsand liabilities.
5.7 We now have 20-year (inceptedin 2007) and 30-year SGS(inceptedin
2012) availablein themarket.
With effect from 1January 2013, the 20-year SGS yield will be used in the
derivation of the risk-free discount rate, that is, X and Y will be 15 and 20
years respectivelyin the formula set out in Section
5.5. MASintendsto further enhancethemarket consistencyof the
discount rateby incorporatingtheuseof 30-year SGSyield.
Proposal 13
MAS proposesthe followingtwoapproacheswithregardsto the risk-free
discount rate for SGD-denominated liabilities.
(a) TokeeptothesameLTRFDR formulaassetout in paragraph5.5,but
X and Y will now be20and 30respectively.
This is on the expectationthat the 30-year SGSwill have adequate
liquiditywhenRBC 2 is implemented. This means:
-Durations0toyear 20: Use prevailingyields of SGS
-Durations30 year and above:90% of historical averageyields (since
inception) and 10% of latest6-month averageyield of 30-year SGS
- Durations20 to year 30: Interpolated yields
(b)Toremovethe LTRFDR formula altogether,ie.,
- Durationsup to30Years:Use prevailing yieldsof SGS
- Durations30year and above:Keep theyield flat at theprevailingyield
of 30-year SGS

69
Whichof theaboveapproachesis more appropriate?
Should MASallowfor some illiquiditypremium adjustment in the
risk-freediscount rate for valuing certain portfoliossuch asannuity
business?
8.We alsoconsideredthe feasibilityof using swaprates, instead of SGS,
for discountingpurposes.
Somejurisdictionshavemoved to usingswapratesfor valuing policy
liabilities,and a few insurershaveasked MAS toconsider similar
approachesin Singapore.
Theseinsurershave fed back that theswapcurve, extendingtolonger
durationswithratesdetermined by market forces,wouldprovidea more
accuraterepresentation of risk-freemarket yields, withappropriate
adjustmentsfor credit risk.
9.MAS notesthat the useof swap ratesis typicallyallowedin certain
jurisdictionsbecauseof insufficient supplyof sovereign government
bonds.
In some countries, the bond market maynot be asdeveloped or liquid as
theswapmarket.
In fact, it is noted that whereswapsdonot exist or are not sufficiently
liquidand reliable, the risk-freediscount rate used for valuation should
havereferencetothegovernment yield curve in that currency.
In Singapore, giventhat the government securitiesmarket is still more
liquidand deep than theswapmarket.

70
MAS proposestoretain theuseof SGSyields.
10.It is currentlyprovidedin MAS319that wherean insurer implements
an effectivecash flow hedge or fair valuehedge asdefinedunder FRS39
of theAccounting Standard, the insurermay elect to usethe market yield
oftheSGSofamatchingdurationasat thevaluationdateforvaluingsuch
hedgedSingaporedollar policy liabilities.
For thehedged policyliabilitiesthat have a duration exceedingthe
maximum duration availableon theSGSyield curve, themarket yield for
themaximum duration SGSavailableshall be used.
Where an insurer haselected touse themarket yield of theSGSof a
matchingduration, it shall continueto dosoaslong asthedesignated
liabilitiesremain a hedged liabilityasdefined under FRS39.
MAS may at any timerequire theinsurer to produceall necessary
documentary evidenceon the hedgingof such policyliabilitieswithin
such time asmay be specified by MAS.
For theavoidance of doubt, MASwill be retainingthisflexibilityunder
RBC 2.
Non-SGD denominated liabilities
11.For liabilitiesdenominated in a currency other thanSGD, MAS319
statesthat the risk-freediscount rate tobe used is the market yield of the
foreign government securitiesof similar duration at thevaluation date.
Unlike for SGD-denominated liabilities,thereis nosimilar concept of a
LTRFDR here.
12.In thecaseof non-SGD denominated liabilities, MASproposesto
requireinsurersto followtheregulatoryrequirementspertainingto
discountingasprescribed by the insurancesupervisoryauthority in the
jurisdictionissuingthecurrency.

71
For example, for US-dollar denominatedliabilities,the insurer will
discount itsliabilitiesaccordingtothe discountingrequirementsset by
theNationalAssociation of InsuranceSupervisors(“NAIC”) in US.
For liabilitiesdenominated in currenciesof European EconomicArea
member states,theinsurer will discount itsliabilitiesaccordingto the
discountingrequirementsset by the European Commission under
SolvencyII.
This proposal is premised on the fact that the insuranceregulator in the
jurisdictionissuingthecurrency will be best placed toset thediscount
rate for itshome currency.
Proposal 14
MAS proposesthat insurersfollowtheregulatoryrequirementspertaining
todiscountingasprescribedbytheinsurancesupervisoryauthorityin the
jurisdictionissuingthe currency, for valuingnon-Singaporedollar
denominatedliabilitiesfor both life and general business.
If the relevant foreign supervisoryauthorityhasnot prescribed any basis
for discountingtheliabilitiesdenominatedin that home currency, what
should be the approach taken?
Should the risk-freediscount ratebe themarket yield of theforeign
government securitiesof similar duration, and the yield kept flat for
liabilitiesextendingbeyond the longest availablegovernment securities?
General insurance policy liabilities
5.13MAS319 is currentlyapplicabletoinsurerswritinglife businessonly.

72
For general business, it is stated in guidelinesID 01/04that discounting
ofliabilitiesshouldbecarriedout wheretheimpact ofsuchdiscountingis
material.
Where discountingof liabilitiesis used, thediscount rate adoptedshould
bethegrossredemption yield asat thevaluation date of a portfolio of
government bonds(where applicable) withitscurrencyand expected
payment profile (or duration) similar to the insuranceliabilities
beingvalued.
14.MASproposestoextend thediscountingrequirementsfor life
business(asset out in thepreviousproposals)to general business.
However,thiswouldapply onlyto liabilitieswithdurationsabove 1year.
Proposal 15
MAS proposestoextend the discount rate requirementsfor life business
togeneral businessaswell, for liability durationsabove1year.
For liabilitydurationof 1year and less, nodiscountingwouldberequired.
Provision for Adverse Deviation
15.Under the current RBC framework,policy liabilitiesfor both life and
generalinsurancebusinessaretobedeterminedusingbest estimatesand
a provision for adversedeviation (“PAD”) (commonlyknownasa risk
margin).
- For general business, the PAD for both claims liability and unexpired
risk reserves are to be calculated at the 75% level of sufficiency, as set
out in the Insurance(Valuation and Capital) Regulations2004.
- For life business, MAS319 requires thePAD to be determinedusing
more conservativeassumptionssoasto buffer against fluctuationsof
thebest estimateexperience.

73
Thedetermination of the level of PAD is left tothe professional
judgment of the appointedactuaries,whoare bound by theguidance
noteissued by the SingaporeActuarial Society(“SAS”).
Acommon methodadoptedbytheappointedactuariesisfortheloadings
for policy liabilitieswith PAD tobe calculatedashalf of theprescribed
loadingsfor modified policyliabilitiesand modified minimum condition
liabilitiesfor the participatingpolicies.
Put simply, the PAD is roughlyhalf of the C1risk requirements.
16.Internationally, there are a number of methodsbeingused for
derivingPAD or risk margin.
Onemethod whichisgainingprominence(asprescribedin SolvencyII
andtheSwissSolvencyTest) is thecost-of-capitalmethod.
This method reflectsthereturn on the capital a buyer wouldneed to
support the liabilitiesacquired from theholder over thewholerun-off
period.
This method involvesapplying a cost-of-capital rate toprojectedrisk
chargesandthendiscountingthecalculatedcost ofcapitalat therisk-free
rate of interest, to obtain theapplicablerisk margin.
Both SolvencyII and the SwissSolvencyTest adopt a cost-of-capital rate
of 6% per annum.
This rate correspondsto the spread above the risk-freeinterest rate that
an investment gradeinsurer wouldbe charged to raisecapital for the
portfolio, and is alsoconsistent withwhat is assumed in theVaR
assumptionsunder risk calibration.
17.Althoughit ishardertocompute,thecost-of-capitalmethodhasbeen
assessed asthemost market consistent in practiceby some studies.

74
As such, MASwouldlike toseektheindustry’sviewson using the
cost-of-capital method in determiningPAD.
Do you agree that the cost-of-capital approach, for computing the
provision for adverse deviation for both life and general insurance
liabilities,is appropriate?
If so, do you agreethat it is appropriatetoadopt a cost-of-capital rateof
6% per annum?
Asthereisnoevidencetosuggestthat thecost ofprovidingtheamount of
availablecapital to support the policyliabilitieswouldbe substantially
different for life and general insurers,a uniform ratehasbeenproposed
for all types of insurers.
ENTERPRISE RISK MANAGEMENT
1.TheRBC 2 review is not solely limitedto thequantitativeelementsof
theRBC framework;it alsofocusesonMAScontinuingeffortstoimprove
industrystandardson governance, controlsand in particular, risk
management practices.
2.MAS hasalreadyissued a set of comprehensiveguidelineson risk
management practicesthat appliesboth toa financial institution in
general, aswell asto an insurer specifically.
Theguidelinescover board and senior management, internal
control, credit risk, market risk, technology risk, operational risk
(businesscontinuitymanagement and outsourcing), insurancecore
activitiesand insurancefraud.
MAS is lookingat further enhancingtherisk management guidelinesto
adopt a more holisticand enterprise-wide risk management framework,

75
in linewith evolving international standardson EnterpriseRisk
Management (“ERM”) and best practices.
3.The ERM requirements, which we will consult on and expect to issue
by the end of this year, will go beyond addressing risks in each activity or
function.
Thenew requirementswill set out MASexpectationson how insurers
identify and manage the interdependenciesbetweenkeyrisks, and how
thiswill be translatedintostrategic management actionsand capital
planning.
4.Theinternational standardon ERM advocatesERM systemstohave
closelinkagesbetweenongoingoperational management of risk,
longer-term businessgoalsand strategy, and economiccapital
management soastoensure optimal financial efficiency, and sufficient
levelsof solvencyto ensure adequateprotection of policyholders.
An insurer will be expected to carryout itsownrisk and solvency
assessment (“ORSA”).
TheORSAis a self-drivenprocessby the insurer to assessthe adequacy
of itsrisk management practices,and both current and future solvency
positions.
TheBoard and senior management of the insurer are expectedtotake
ownership of theprocess, whichshould be well-documented.
In assessingitsoverall solvencyneeds,all identifiedrelevant andmaterial
risksare to be subjectedto rigorousstressand scenariotesting.
5.We expect insurersto undertake itsORSAregularly and effectively,
givingdue consideration to thedynamic interactionsbetweenrisks, and
thelink betweenrisk management, businessstrategyand capital
management.

76
Thesophistication of an insurer’sERM frameworkshould be
commensuratewiththenature, scaleand complexityof the risksthat it
bears.
Proposal 16
MAS proposestointroduceEnterpriseRisk Management
requirements,includingthoserelatingto Own Risk and Solvency
Assessment, to insurers.Wewill consult industryontheERM
requirementsandtarget toissuea final document by end of 2012.
PROPOSED TIMELINE
1.MAS‟ proposedtimelinefor thevariousreviewsoutlined in Sections2
to5 of thispaper are asfollows:
- Finalisethe calibrationfactorsby 1Q 2013. During thecalibration
stage, insurerswouldbe involved in a few roundsof quantitative
impact studies;
- Finalisethe changestothe Insurance(Valuation and Capital)
Regulations2004and Insurance(Accountsand Statements)
Regulations2005by2Q 2013;
- Implement the RBC 2 requirements(with the exceptionof the
insurancecatastropherisk chargeswhichmay need more time) for
accountingyear ending31Dec 2013.
There will be at least 2years of parallel run withthe existingRBC
framework,wherethetotal risk requirementsunderRBC 2framework
wouldbe subject toa floorof a specified percentage of the total risk
requirementsunder the existingRBC framework.
This is toprevent anysudden releasein capital requirements;

77
- Commenceworkon the internal model approachwiththe industry
after the implementationof RBC 2.
Proposal 17
MAS proposestoimplement the RBC 2 requirementsfor theaccounting
year ending 31December 2013.
There will be at least 2years of parallel run withthe existingRBC
frameworkand appropriate floorsimposed to prevent sudden release in
capital requirements.

78
Basel III – CRD 4: Impact and stakes
IntroductoryspeechbyMr ChristianNoyer,
Governorof the Bank of France and
Chairmanof theBoard of Directorsof the
Bank for International Settlements,at the
Autoritéde contrôleprudentiel (ACP)
conference, Paris, 27June 2012.
Ladies and gentlemen,
I am delightedtowelcomeyou todaytothis
new conferenceorganisedby theAutorité de
contrôleprudentiel (ACP).
This morning, the conference will be dedicated to the impact and stakes
of the Basel III reform and, this afternoon, to the supervision of business
practicesin bankingand insurance.
I wouldlike tothank all theparticipantsfor the interesttheyhave shown
in thesecrucial exchangesbetweenregulators,supervisorsand market
participants.
This conferenceisbeingheld against thebackdrop of an economicand
financial environment that remainsvery difficult, characterisedin
particular in Europe by the ongoingsovereigndebt crisis.
Many questionssurround thefuture of the European banking system,
whichhasalreadyundergonemajor transformationsin the recent period
while significant changesin itsprudential frameworkand the
organisationof its supervision are currentlybeingreviewed.
Far from puttingon theback burner questionsconcerningBasel III and
itsapplicationin Europe, that is tosay CRD IV and itsproject to createa
“singlerulebook” for European banks, I believe, on the contrary, these
developmentsunderscore the importanceof better understandingthe

79
current reform and takingtime toreflect, in order toensurethat thenew
frameworkfor banking regulationand thedistributionof supervisory
responsibilitiesin Europe will deliver all their expected benefits.
Beforeleavingyou todiscussingreaterdetail theimpactandstakesofthe
Basel III reform, I wouldlike tomake a few remarkson thistopic in
relationtothecurrent environment.
1. Basel III and CRD IV represent a quantitative and qualitative
leap aimed at addressing the shortcomingshighlighted by the
current financial crisis
First, I believethat it wouldbeuseful torapidlyplacetheBasel III reform
in itscontext, in order tofullyunderstand its scope.
BaselIII isfirstandforemost aresponsetothefinancialcrisisthat started
in 2007.
Thiscrisisandthesubsequent waveofshockstothebankingsystem have
not merely resulted in a temporary lossof output for themajor advanced
economies.
Theyhave alsohad a lastingimpact on employment, industrial
production, the confidenceof investorsand households, and needlessto
sayon public finances,whichmake crisisexit evenmore difficult.
In responsetothesedevelopments, the international communityadopted
in 2009, under the impetusof theG20, an ambitiousreform programme
includingBasel III, whichis a keyelement for the banking sector.
Indeed, a banking system that ismore robust asa wholeand capableof
absorbingmajor shocksis vital to avoid therepetition of such chain
reactionsin the future.

80
In thisrespect,despitethedelayinthereform agendaintheUnitedStates,
Europe must clearlypressforward: the credibilityof our banksand our
economiesis at stake.
Basel III is naturallybased on BaselII which establishesthecurrent
capital adequacyrules.
However,Basel III goesfurther than merelychangingand updatingthe
existingrules.
–Basel III indeed considerablystrengthensthe capital requirementsthat
banksmust meet, but this reform ismore extensivein that it significantly
enhancestheprudential framework:in additiontocapital requirements,it
establishesliquidityrequirements, and a leverageratiois set tobe
introduced in the medium term.
From this point of view, Basel III is a far-reachingreform of banking
regulation.
–Furthermore, and most importantly, I believethat Basel III is a major
stepforwardinthat it leadstoamuchcloserinteractionthanhasbeenthe
casetodatebetweenthe individual supervisionof banks, known as
microprudential supervision, and the overall supervision of thebanking
and financial system, or macroprudential supervision.
Thisbroader view of banking supervision, takingaccount of all its facets,
translatesintoa number of provisionsand notablyintroducesadditional
capital buffers(a capital conservation buffer, a countercyclical buffer and
a buffer for systemically important financial institutions) in excessof the
regulatoryminimum.
Basel III thereforerepresentsa quantitativeand alsoa qualitativeleap.
Given the magnitudeof the changestobe made, Basel III hasmajor
repercussionson market participants,whomust adapt to thisnew
environment.

81
Theserepercussionsareboth anticipatedand desirable, but the
potentiallynegativeconsequencesof thisreform must be kept toa
minimum.
In thisrespect, manyassociatedriskswerehighlightedduringitsdrafting
and even more sorecently, due to the current economicand financial
difficulties.
Theseincludedtherisk of arise in thecost of credit or of a credit crunch.
Hence, the impact and stakesof Basel III must be carefullyanalysed and
addressed.
2. The difficult economic environment stressesthe importance
of implementing Basel III in an appropriate manner but does
not call into question the rationale of the reform
Without playing down thepotential risksassociatedwith the
implementationof BaselIII, to whichtheACP pays close attention, I
believethat this reform can be successfullyimplemented.
Allow me to mention some reasonsfor this conviction and offer some
avenuesfor actions:
– First, French banks, whichhave complied withBasel 2.5 rulessince
December 2011, are in a strongpositiontomeet thenewcapital adequacy
requirementswhen theycome intoforce.
Moreover,French banksare ahead of the Basel III schedule.
CurrentlywithCore Tier 1capital ratiosof over 9%, the main French
groupsdemonstratetheir abilitytomeet theEuropeanBankingAuthority
deadlineof 30 June 2012.

82
Theyshould alsofullycomplywith thenew Basel III requirementsby
2013.
–TheACP iscloselymonitoringcredit institutions‟preparationsforBasel
III. By doingso, anyproblemscan be identified at anearlystage and
issuesrelatingto itsimplementation can be addressed, whichI believe is
essential for a smooth transition.
Moregenerally, in addition to theindividual monitoring of banks‟
preparation, coordinationbetweensupervisorsand theplayersconcerned
is alsoimportant toensure a clearunderstandingof the rulesand identify
anyquestionsrelatingto the reform and their potential consequences.
TheACP liaiseson a regular basiswiththeprofession on all prudential
matters.
Indeed, today‟sconferenceis a prime illustrationof this.
–It isalsoessentialtocloselymonitorandtakeintoaccount theimpact of
thenew regulationson the financial system and theeconomy and to
assessthe different interactionsin order, if necessary, to deal with the
unforeseen consequencesof Basel III.
In this respect, theACP, whichmaintainsclose linksto theBanque de
France and operatesunder itsaegis, is naturallyparticularlyattentiveto
and involved in all these matters.
This is whyweare accompanying the prudential reform withmore
general and macroeconomic reflectionson thefinancingof the
economy, and in particular on credit developmentsand the relationship
betweenbankingregulation and monetary policy.
Thenew liquidityratiosthereforecannot be applied astheystand asthey
donot takeintoaccount all their consequencesand interactionsbeyond
theprudential objectivesthemselves,whichincludein particular the

83
functioningof theinterbank market, thelevel of intermediationor the
conditionsof monetary policy implementation.
I therefore believe that the work underway on the calibration of these
ratios isof the utmost importance in order to properly manage all the
consequencesof thesenew rules.
Before handing the floortoDanièle Nouy, SecretaryGeneral of the
Autoritédecontrôleprudentiel, I wouldlike toconcludewithafew words
on recent developmentsin Europe.
You are awareof mycommitment to full harmonisation in Europe: this
“singlerulebook” is theonlywaytoachievea truly efficient single
market.
You are alsoawarethat thenegotiationsbetweentheEuropean Council
and Parliament might reintroducethenational optionsthat the
Commissionhad removed.
Theymay also, under a compromisetext, render partly redundant and
ineffectivetheresponsibilitiesof supervisorsof home and host
countries,aswell asthoseof micro-prudential and macro-prudential
supervisors.
In this context, I believethat the creation of a bankingunion is tobe
supported.
It wouldbe a major development for bankingsupervision in
Europe, whichwouldbring numerousbenefitsand wouldenableusto
efficientlyaddressthe current difficulties.
Suchadevelopment wouldmost likelyhaveverypositiveconsequencesin
that it wouldbe a step towardsgreater European harmonisation.
Naturally, thebenefitsof such a reform wouldbemore far-reachingbut
such questionsgobeyond the scope of today‟s conference.

84
Questionsregardingthe impact and stakesof Basel III will alreadygive
amplefood for thought in the rich debatesand discussionsthis morning.
I wishyou all a fruitful conference.

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