Implementation of Basel III in Domestic Banks in Taiwan

Financial sector assessment
Box 5
Implementation of Basel III in domestic banks in Taiwan
In order to tackle deficiencies in financial supervision exposed during the global

financial crisis of 2008-09, the Basel Committee on Banking Supervision (BCBS) has
progressively published several documents relating to international capital and liquidity
standards for banks since 2010. These standards, collectively known as Basel III, urged
national authorities to strengthen microprudential supervision, including increases in the
levels and quality of capital, the expansion of the coverage of risk-weighted assets, and
the introduction of a leverage ratio and two liquidity ratios. Furthermore, aiming at
systemic risks that could be caused by procyclicality and interconnectedness of banking
activities, Basel III introduced macroprudential measures, comprising a new capital
conservation buffer, a countercyclical capital buffer and an additional capital surcharge
for systemically important banks. In Taiwan, the standards will be phased in beginning
2013, with full implementation as of 1 January 2019.
With a view to raising the risk-bearing capacity and international competitiveness of

domestic banks, and in compliance with global regulatory reforms, the Financial
Supervisory Commission (FSC), referring to Basel III, revised the Regulations
Governing the Capital Adequacy and Capital Category of Banks in November 2012,
effective from January 2013. Summarized below are the contents of Basel III-related
regulations in Taiwan and the work to be further promoted in the future.
1. Contents of the capital adequacy regulations in Taiwan
The new capital adequacy regulations are Basel III compliant in principle but fine-tuned
according to the operational characteristics of banks in Taiwan. Key points are as
follows:
1.1 Raising capital quality
The FSC, referring to the Basel III capital standards, introduced the definition of
common equity Tier 1 capital, amended the requirements of non-common equity Tier 1
capital and Tier 2 capital (including bail-in provisions),1 and removed the category of
Tier 3 capital from the regulations. Additionally, those capital instruments that were
issued before 12 September 2010 and not qualified as non-common equity Tier 1 capital
and Tier 2 capital will be required to be phased out beginning January 2013 by setting a
cap of 90% of the nominal amount of these instruments in 2013 and reducing the cap by
10 percentage points in each subsequent year.
88 FINANCIAL STABILITY REPORT MAY 2013

1.2 Lifting capital levels
The regulations introduce a capital conservation buffer and incorporate it into minimum
regulatory capital standards. Furthermore, the regulations set out the minimum capital
requirements during the transition period for each year of 2013-2019 and specify that the
common equity, Tier 1 capital and capital adequacy ratios should be no less than 7%,
8.5% and 10.5%, respectively, commencing 2019 (Table B5.1).
1.3 Introducing a leverage ratio

The minimum leverage ratio is set at 3% during the period of parallel run testing between
2013 and 2018. The ratio requirement will be formally implemented on 1 January 2018.
1.4 Introducing a countercyclical capital buffer
In order to avoid the occurrence of systemic risks, the FSC will consult with the CBC
and other relevant agencies, when necessary, to impose on banks an additional provision
of countercyclical capital buffers of up to 2.5%.
Table B5.1 Minimum capital requirements and transition period

2019
Items 2013 2014 2015 2016 2017 2018
onwards
Capital adequacy ratio (%) 8.0 8.0 8.0 8.625 9.25 9.875 10.5
Tier1 capital ratio (%) 4.5 5.5 6.0 6.625 7.25 7.875 8.5
Common equity ratio (%) 3.5 4.0 4.5 5.125 5.75 6.375 7.0
Source: CBC.
2. Future work to be further promoted
Based on the timeline set out by the BCBS, Taiwan will phase in Basel III capital
requirements beginning 2013. Nevertheless, with the major contents of implementation
focused on microprudential dimensions, capital requirements related to macroprudential
dimensions will also need to be strengthened, and liquidity ratio regulations should,
therefore, be deliberated and laid down.
2.1 Considering the operational mechanisms of a countercyclical capital buffer
Article 5 of the Regulations Governing the Capital Adequacy and Capital Category of
Banks provides the legal basis for implementing countercyclical capital buffers.
However, the relevant guidelines and operational mechanisms of a capital buffer have not
FINANCIAL STABILITY REPORT MAY 2013 89

been stipulated. In view of the fact that a countercyclical capital buffer is within the
scope of macroprudential supervision and highly pertinent to the CBC’s credit policy, the
CBC will promote relevant study and cooperate with the FSC in the stipulation of
provisioning criteria and regulations that are applicable to the domestic banking system.
2.2 Imposing additional supervisory requirements on systemically important

domestic banks to reduce potential risks
In November 2011, the BCBS issued a final version of the document - Global
Systemically Important Banks (G-SIBs): Assessment Methodology and the Additional
Loss Absorbency Requirement. Subsequently, the Financial Stability Board (FSB)
published a list of G-SIBs2 and suggested that national authorities should identify their
domestic systemically important banks (D-SIBs) and adopt appropriate policy measures
to mitigate their negative externalities.3
Domestic banks in Taiwan were not included in the list of G-SIBs. Nevertheless, the
authority will adopt additional supervisory measures for local banks that possibly could
induce systemic risks, so as to improve their loss absorbency ability and reduce potential
impacts.
2.3 Deliberating on the liquidity ratio regulations
The BCBS introduced two liquidity ratios: the liquidity coverage ratio (LCR) and the net
stable funding ratio (NSFR). Both ratios are currently being observed and under
adjustment and expected to be implemented from 2015 and 2018, respectively.4 In line
with the timeline for the implementation of liquidity ratios set out by the BCBS, the FSC
and the CBC, weighing the Basel III standards and the domestic practices of banks’
liquidity management, have actively embarked on deliberations related to the liquidity
regulations applicable to domestic banks.
Notes: 1. The bail-in provision means that the priority order for the distribution of the earnings and assets
of the holder of non-common equity Tier 1 and Tier 2 capital instruments is the same as that of a
common stock holder when the relevant authority assigns officials to take conservatorship over
the issuing bank, orders such a bank to suspend and wind up business, or liquidates the bank.
2. The FSB published an initial list of 29 banking groups identified as G-SIBs in November 2011.
It updated the list in November 2012, indicating the number of G-SIBs was reduced to 28. See
FSB (2012), Update of group of global systemically important banks, November 1.
3. BCBS (2012), A Framework for dealing with domestic systemically important banks, October.
4. The BCBS introduced standards on LCR and NSFR in December 2010. Subsequently, taking
into account their latent impacts on financial markets, credit supply and economic growth, it
revised the calculation of LCR in January 2013. The revised standards will adopt a phase-in
90 FINANCIAL STABILITY REPORT MAY 2013

arrangement that introduces the LCR as planned on 1 January 2015, but with the minimum
requirement set at 60%. This will then rise by 10 percentage points per annum to reach 100% on
1 January 2019.
FINANCIAL STABILITY REPORT MAY 2013 91

Implementation of Basel III in Domestic Banks in Taiwan

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Financial sector assessment

In order to tackle deficiencies in financial supervision exposed during the global

With a view to raising the risk-bearing capacity and international competitiveness of

1. Contents of the capital adequacy regulations in Taiwan

1.1 Raising capital quality

88 FINANCIAL STABILITY REPORT MAY 2013

1.2 Lifting capital levels

1.3 Introducing a leverage ratio

1.4 Introducing a countercyclical capital buffer

Table B5.1 Minimum capital requirements and transition period

2. Future work to be further promoted

2.1 Considering the operational mechanisms of a countercyclical capital buffer

FINANCIAL STABILITY REPORT MAY 2013 89

2.2 Imposing additional supervisory requirements on systemically important

2.3 Deliberating on the liquidity ratio regulations

90 FINANCIAL STABILITY REPORT MAY 2013

FINANCIAL STABILITY REPORT MAY 2013 91

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