## _sdn1211 - EXECUTIVE SUMMARY

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### Key findings on lending-rate impacts
- Long-term increases in average bank lending rates estimated as:
  - United States: 28 bps
  - Europe: 17 bps
  - Japan: 8 bps
- Context: the smallest increment by which major central banks adjust their short-term policy rates is 25 bps.
- Conclusion: higher safety margins (capital and liquidity) will raise lenders’ operating costs affecting bank customers, employees, and investors, but banks appear able to adapt without actions that would harm the wider economy.

### Methodology and modelling approach
- Framework:
  - A simple loan-pricing framework: lending rates reflect the cost of allocated capital, other funding costs, credit losses, administrative costs, and other factors.
  - Pricing condition preserved as in source:
    - L*(1–t) ≥ (E*r_e) + ((D*r_d)+C+A–O)*(1–t),
      where variables are defined in the source.
- Data and assumptions:
  - Cost estimates draw from academic theory, empirical analyses from industry and official sources, and financial disclosures by large banks.
  - Assumed that investor-required returns adjust to about halfway (50 percent) between full Modigliani-Miller offset and no offset.
  - Focus on long-term outcomes rather than transitional costs.
  - Five categories of reform quantified (securitization reform not quantified).
- Sensitivity:
  - Reasonable changes in cost assumptions do not dramatically alter conclusions; aside from the marginal tax rate, lending rates are linear functions of key parameters.

### Major limitations and scope
- The study does not:
  - Address potential transition costs as banks adjust to new regulations.
  - Assess economic benefits of financial reforms.
  - Model a number of regulatory reforms (judgment used in many estimates).
- Modelling approach is relatively simple; further research recommended to translate credit impacts into effects on economic output.

### Comparison with prior studies and literature
- IIF (2011):
  - Projected reduction in annual output in advanced economies of approximately 3 percent by 2015.
  - Predicted price of credit in the United States would average almost 5 percentage points higher on average over 2011–15 due to regulatory changes alone.
- OECD (Slovik and Cournède, 2011):
  - Estimated major economies would be about 0.75 percent smaller after five years.
- BCBS (2010):
  - Estimated Basel III capital and liquidity changes would reduce steady-state economic activity by 0.6 percent in total, or 0.08 percent annually if spread over eight-year transition.
  - Key BCBS assumptions included full pass-through of capital and funding costs to loan rates, no reduction in operating expenses, no increase in non-interest income, no credit rationing, 15 percent ROE, and 100 bps yield difference between illiquid and liquid assets and long and short liabilities.
- Overall: previous studies differ greatly in cost estimates.

### Bank responses to higher regulatory costs (eight broad categories)
- Absorbing costs by lowering returns to shareholders.
- Reducing funding costs.
- Reducing expenses (administrative and marketing).
- Decreasing expected credit losses (alter lending terms).
- Limiting regulatory impacts through technical means (data/modeling to justify lower risk weights).
- Rationing credit.
- Raising prices for credit (limited by competition).
- Restructuring businesses (sales, mergers, exits).

### Capital-related reforms and quantified effects
- Basel III changes:
  - Minimum common equity capital ratio increased from, in practice, 2 percent of RWA to 7 percent (including a 2.5 percent “conservation buffer”).
  - Basic 4.5 percent ratio remains; below it banks can be taken over; between 4.5 percent and 7 percent face operating limitations.
  - Minimum quality of capital raised; subordinated debt and some securities dropped; limits on certain assets counted as core common equity.
  - Risk-weighted assets remain primary basis; many risk weights increase.
  - SIFIs face incremental capital requirements of 0.5 to 2.5 percentage points, up to 3.5 percentage points in certain circumstances.
  - New leverage ratio introduced as safety net.
- Net stand-alone effect of higher capital on lending rates reported as less than 25 bps in calculations; empirical example cited: 11 bps increase in U.K. lending rates (Miles, Yang, and Marcheggiano (2010)) after a 45 percent offset.

### Capital requirements — regional metrics and effects
- Target minimum ratio in one scenario: 10 percent common equity Tier 1 to RWA (buffer of 3 percentage points above Basel III minimum of 7 percent).
- Assumptions and effects:
  - Banks assumed to move to at least end-2010 capital levels regardless of regulatory changes.
  - Extent of investor credit for reduced volatility materially affects results: no credit would double net effects; 75 percent pass-through would halve net effects.
  - Mitigating actions likely (including expense cuts).
- Assumed base case required returns and funding costs:
  - Required return on equity (ROE): Europe 12.00, Japan 7.00, U.S. 12.00.
  - Base cost of other funding sources: Europe 2.00, Japan 1.25, U.S. 2.00.
  - After-tax unit cost of switching to capital as funding source: Europe 10.60, Japan 6.13, U.S. 10.60.
- Stand-alone effect of higher capital on pre-tax loan interest rate:
  - Europe 0.19, Japan 0.13, U.S. 0.40.
- Assumed offset from reduction in required equity return (1/ effect): Europe -0.09, Japan -0.07, U.S. -0.20.
- Net stand-alone effect on pre-tax loan interest rate:
  - Europe 0.09, Japan 0.07, U.S. 0.20.
- Tabled pro-forma capital-position metrics (end-2010 pro forma):
  - End-2010 pro forma Basel III common equity Tier 1: Europe 7.12, Japan 6.57, U.S. 6.69.
  - Capital-to-total assets ratio (no risk weighting): Europe 3.06, Japan 2.95, U.S. 5.36.
  - Assumed minimum capital-to-RWA ratio in equilibrium: 10.00 (all regions).
  - Implied capital-to-total assets ratio (no risk weighting): Europe 4.30, Japan 4.49, U.S. 8.01.
  - Necessary increase in capital-to-total assets ratio: Europe 1.24, Japan 1.54, U.S. 2.65.
- Memorandum items:
  - Total assets (US$ billion): Europe 33,961; Japan 6,038; U.S. 11,522.
  - Total RWA after Basel II.5 and III (US$ billion): Europe 14,597; Japan 2,713; U.S. 9,233.
  - Tax rate (percent): 30.00.

### Pro‑forma Basel III common equity Tier 1 ratios by region (End‑2010)
- Initial Basel I/II common equity Tier 1 (sample averages): Europe 9.7, Japan 9.2, U.S. 9.7.
- RWA increase from Basel II.5 and III: Europe -1.6, Japan -1.1, U.S. -2.4.
- Pro-forma after RWA increase: Europe 8.1, Japan 8.1, U.S. 7.3.
- Deductions from Basel III: Europe -1.1, Japan -1.5, U.S. -0.6.
- Pro-forma after RWA increase and deductions (without mitigation): Europe 7.1, Japan 6.6, U.S. 6.7.
- Mitigation: Europe 1.0, Japan N.A., U.S. 0.3.
- Pro-forma after mitigation and deductions: Europe 8.0, Japan 6.6, U.S. 7.0.
- Memorandum items (sample counts and assets) provided in source.

### Liquidity requirements (LCR and NSFR) and estimated effects
- Definitions and timing:
  - LCR: stylized 30-day stress test with asset haircuts and liability roll-over percentages; required to exceed 100 percent. Supervisors monitored starting in 2011; minimum standard required starting in 2015.
  - NSFR: addresses maturity mismatches; stable funding for illiquid assets and portions of off-balance-sheet items. Supervisors monitored starting in 2011; binding requirement in 2017.
- Bank actions if failing 100-percent ratios:
  - Increase length of liabilities; raise capital; shorten asset maturities; switch to higher quality assets; shrink the bank’s book.
- Profit impact:
  - Under normal upward-sloping yield curve, these actions tend to reduce profits (longer-term liabilities cost more; shorter-term assets earn less; higher-quality assets yield less; shrinking book reduces profitable business).
- Estimated liquidity effects on lending rates:
  - Total stand-alone cost of liquidity changes similar to capital changes.
  - Key uncertainties: size of liquidity gap, cost of altering maturities, lack of detailed bank disclosures, changing rules.
- LCR and NSFR quantitative summaries (Table 8 derived figures):
  - Liquid assets needed for a 100% LCR (US$ billion):
    - Europe: 1,434.66 (grossed up/adjusted elsewhere in tables to 1,326 or 1,306.43 depending on presentation)
    - Japan: 54.21 (other table entries list 537 or 26.27 depending on aggregation)
    - U.S.: 700.00
  - Reduction in liquid assets from capital increases (US$ billion): Europe 128.23; Japan 27.93; U.S. 92.20.
  - Net liquid assets needed (US$ billion): Europe 1,306.43; Japan 26.27; U.S. 607.80.
  - Increase in pre-tax funding cost or reduction in investment income (percent): Europe 2.00; Japan 1.25; U.S. 2.00.
  - Reduction in pre-tax interest margin (US$ billion): Europe 26.13; Japan 0.33; U.S. 12.16.
  - Reduction in pre-tax interest margin (percentage of total assets): Europe 0.08; Japan 0.01; U.S. 0.11.
  - Funding needed for 100% NSFR (US$ billion): Europe 1,843.29; Japan 563.26; U.S. 1,000.00.
  - Reduction in funding needed from capital increases (US$ billion): Europe 128.23; Japan 27.93; U.S. 92.20.
  - Net funding needed (US$ billion): Europe 1,715.06; Japan 535.33; U.S. 907.80.
  - Reduction in pre-tax interest margin (US$ billion) for NSFR: Europe 34.30; Japan 6.69; U.S. 18.16.
  - Reduction in pre-tax interest margin (percentage of total assets) for NSFR: Europe 0.10; Japan 0.11; U.S. 0.16.
  - Elimination of overlap between LCR and NSFR actions (percent): Europe -0.04; Japan 0.00; U.S. -0.05.
  - Total net effect of LCR and NSFR (percent): Europe 0.14; Japan 0.11; U.S. 0.21.
- Memorandum items:
  - Total assets (US$ billion): Europe 33,961; Japan 6,038; U.S. 11,522.
  - Tax rate (percent): Europe 30.00; Japan 30.00; U.S. 30.00.

### Liquidity — additional regional and source comparisons
- Table 8 reported figures (alternate aggregates):
  - Additional liquid assets needed for 100% LCR (US$ billion): Europe 1,326; Japan 537; U.S. 700.
  - Additional long-term funding needed for 100% NSFR (US$ billion): Europe 1,703; Japan 554; U.S. 1,000.
- EBA (2012) (end‑June 2011 averages):
  - Average LCR: 71 percent.
  - Average NSFR: 89 percent.
  - Shortfall of liquid assets: approximately €1.2 trillion.
  - Shortfall of long-term funding: approximately €1.9 trillion.
- BCBS (2012) (sample of 103 global banks, end‑June 2011):
  - Average LCR: 90 percent.
  - Average NSFR: 94 percent.
  - Associated shortfall of liquid assets: EUR1.76 trillion.
  - Associated shortfall of long-term funding: EUR 2.78 trillion.
- Rough U.S. gap estimates (text-derived):
  - LCR additional liquid assets needed: US$695 billion.
  - NSFR additional long-term funding needed: US$622 billion (text-derived) and US$1,000 billion (Table 8 used for higher private sector estimates).

### Derivatives requirements: expected effects and metrics
- Reform objectives:
  - Shift standardized derivatives toward exchange trading and CCP clearing; increase transparency and safety; require collateral for many counterparties; higher capital for customized derivatives.
- Distributional effects:
  - Large derivatives dealers likely to lose relative share from shrinkage of customized-derivatives margins.
  - Offsets include lower capital requirements for CCP-cleared trades and fees for collateral management and clearing.
  - Conservative assumption for analysis: cost to large banks represents total economy-wide effect (may overstate net costs).
- Quantified estimates (Table 9 and related calculations):
  - Total estimated effect on net income (US$ billion):
    - Europe: 2.84
    - Japan: N.A.
    - U.S.: 2.26
  - Effect on pre-tax income (US$ billion):
    - Europe: 4.06
    - Japan: N.A.
    - U.S.: 3.23
  - Cost per dollar of assets (percent):
    - Europe: 0.01
    - Japan: N.A.
    - U.S.: 0.03
- Initial margin and collateral estimates:
  - Heller and Vause (2012): initial margin for all interest rate and credit default swaps intermediate case US$0.7 trillion; grossed up for missing one-third of swaps gives approximately US$1.1 trillion.
  - Singh (2010): collateral at major dealers covered about 44 percent of swap exposures; implies net new collateral required of approximately US$0.6 trillion (US$1.1 trillion gross less assumed existing collateral).
  - Funding cost assumption for additional collateral: 200 bps.
  - First-order effect: increase credit costs by approximately US$12 billion a year (US$0.6 trillion times 2 percent), which could be offset by raising lending rates by about 3 bps on total assets held by banks in Europe and the United States.
- Offsets and net assessment:
  - Implicit credit spreads in bilateral derivatives will be reduced/eliminated by CCP clearing.
  - Dealers will face lower capital requirements when clearing through CCPs.
  - Lower margins on exchange-traded products reduce dealer costs.
  - It is plausible there could be a net benefit to the economy; analysis focuses on non-crisis years and counts costs for major dealers.

### Deposit insurance, fees, taxes, and fiscal charges
- Observations:
  - Premium levels for deposit insurance and similar funds have generally increased following large losses; some new funds established.
  - Premiums often intended to be self-supporting and risk-based.
- Selected quantified items (Table 10 / memorandum excerpts):
  - Europe: Financial stability contribution: 5.9 (unit/context as in Table 10).
  - Europe: Deposit insurance fee changes: 8.8.
  - U.S.: Deposit insurance fee changes: 2.0.
  - U.S.: Orderly liquidation fund: 0.6.
  - U.S.: Other fees: 0.7.
- Methodology: anticipated cost increases taken from national fiscal estimates, divided over asset base and years; taxes/fees assumed non-deductible in credit-pricing equation.

### Integrated effects on credit provision — cumulative impacts (Table 6)
- Key parameter values (basis points unless noted):
  - Capital: Europe 19, Japan 13, U.S. 40
  - Modigliani-Miller pass-through: Europe -9, Japan -7, U.S. -20
  - LCR: Europe 8, Japan 11, U.S. 1
  - NSFR: Europe 10, Japan 11, U.S. 16
  - Overlap of LCR and NSFR actions (half of smallest): Europe -4, Japan 0, U.S. -5
  - Derivatives: Europe 1, Japan N.A., U.S. 3
  - Taxes and fees: Europe 6, Japan 0, U.S. 4
- Total gross effects (basis points):
  - Europe: 31
  - Japan: 18
  - U.S.: 48
- Expense cuts assumed (effect in basis points):
  - Europe: 8 (5 percent expense cut)
  - Japan: 8
  - U.S.: 15 (10 percent expense cut)
- Other aggregate adjustments:
  - Europe: 5; Japan: 3; U.S.: 5
  - Of which planned capital mitigating actions: Europe 3; Japan N.A.; U.S. 2
- Total adjustments:
  - Europe: 13; Japan: 10; U.S.: 20
- Net cost (basis points):
  - Europe: 18
  - Japan: 8
  - U.S.: 28
- Base-case long-run lending-rate increases reported:
  - Europe: 17 bps
  - Japan: 8 bps
  - U.S.: 26 bps

### Main conclusions and sensitivity
- Base-case long-run lending-rate increases are modest in absolute bps terms but significant relative to typical pre-tax ROA in banking (generally around 100 bps).
- Considerable uncertainty persists, especially over liquidity requirements and possible regulatory arbitrage/shifts to shadow banking.
- Sensitivity analysis: except for marginal tax rate, lending-rate impacts scale linearly with key parameters; even extreme parameter assumptions tend to keep changes below 100 bps.
- Reasons for lower net costs vs. some prior studies:
  - Baselines assume greater market-driven increases in safety margins, lowering incremental regulatory effect.
  - Explicit assumptions of expense reductions and non-price adjustments (assumed 5–10 percent expense cuts).
  - Assumed investor reductions in required equity returns due to safety improvements.
- Policy implication:
  - Net economic costs appear relatively low, suggesting long-run benefits (less frequent and costly financial crises) likely outweigh regulatory reform costs—though benefits are not quantified in this study.

### Appendix I — regional inputs for the credit pricing equation: capital findings
- Sample: disclosures from 21 U.S. banks, 38 European banks, and 6 Japanese banks (pro‑forma Basel III common equity Tier 1 ratios), supplemented by Da Silva et al. (2011) and Cannon et al. (2010).
- Key results:
  - Increases in RWAs and new deductions from Basel III reduce common equity Tier 1 ratios by 2.5–3 percentage points on average.
  - Asymmetry in effects:
    - RWA increases have larger effect on U.S. banks than on European and Japanese banks on average.
    - Deductions against capital have higher effect on Japanese banks.
  - Pro‑forma Basel III common equity Tier 1 ratios in European banks are larger on average than in U.S. and Japanese banks.
  - European banks plan more mitigation actions to comply with Basel III minimums than U.S. banks.

### Appendix III — assumptions for the credit pricing equation (selected)
- Marginal tax rate: 30 percent for United States, Europe, and Japan (with Japan lowered to 30 percent via tax management techniques).
- RWA as percent of total assets: taken from company reports and assumed constant at end‑2010 levels.
- Required return on equity (ROE): Europe 12 percent, U.S. 12 percent, Japan 7 percent.
- Base cost of other funding sources: Europe 2.00, U.S. 2.00, Japan 1.25 (assumed).
- Administrative expenses: Europe based on Kopp et. al. (2010); United States based on Elliott (2009).
- Base liquidity gap: Taken from Table 8.
- Percentage of capital that replaces short-term funding: assumed 30 percent.
- Increase in pre-tax funding cost or reduction in investment income: Europe and U.S. 200 bps; Japan 125 bps.
- Costs spread evenly across bank activities; taxes/fees assumed non-deductible.

### Appendix IV — sensitivity analysis (qualitative)
- Parameters that increase lending-rate impacts: higher minimum common equity Tier 1 ratio, higher base ROE, higher marginal tax rate.
- Parameters that reduce lending-rate impacts: higher base cost of other funding sources, higher Modigliani‑Miller adjustment (greater investor offset).
- Other note: apart from marginal tax rate, lending-rate impacts are linear functions of key parameter assumptions.

### Appendix V — supplementary tables (sample banks and planned de‑risking)
- Sample lists of European, Japanese, and U.S. banks in the study are provided (investment, universal, and commercial banks enumerated).
- Planned de-risking measures by bank (end-2010) documented — examples include loan deleveraging, RWA optimization, asset disposals, run-offs, migration of OTC derivatives to exchanges/CCPs, and capital management measures.

*Source: _sdn1211 - Executive Summary*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Introduction
- Page reference: 4

### II. Literature Review
- Page reference: 6

### III. Quantitative Analysis of Stand-Alone Reforms
- Page reference: 8
- Subsections:
  - A. Estimating Changes to Lending Rates — Page reference: 9
  - B. Capital Requirements — Page reference: 10
  - C. Liquidity Requirements — Page reference: 14
  - D. Derivatives Requirements — Page reference: 17
  - E. Deposit Insurance and Similar Fees — Page reference: 19
  - F. Integrated Effects on Credit Provision — Page reference: 19

### IV. Conclusion
- Page reference: 22

### Tables (listed in source)
- 1. Basel III Impact on Credit and GDP Growth — Page reference: 7
- 2. Effects of Higher Capital Levels on Lending Rates — Page reference: 14
- 3. Estimated Effects of Liquidity Changes on Lending Rates — Page reference: 16
- 4. Estimated Effects of Derivatives Changes on Lending Rates — Page reference: 18
- 5. Estimated Effects of Tax and Fee Changes on Lending Rates — Page reference: 19
- 6. Cumulative Impact of Regulatory Reforms on Lending Rates — Page reference: 21
- 7. Pro-Forma Basel III Common Equity Tier 1 Capital Ratios by Region, — Page reference: 24
- 8. Pro-Forma Basel III Liquidity Ratios, End-2010 — Page reference: 26
- 9. Effects of Derivatives Reforms on Banks per Year — Page reference: 27
- 10. Annual Fees and Taxes on European and U.S. Banks — Page reference: 27
- 11. European, Japanese, and U.S. Banks in the Sample — Page reference: 34
- 12. Planned De-Risking Measures, End-2010 — Page reference: 35

### Figures
- 1. Effects of Changes in Key Parameter Assumptions on Lending Rates — Page reference: 33

### Appendixes
- I. Regional Inputs for the Credit Pricing Equation — Page reference: 23
- II. Considerations in the Choice of Baseline Scenarios — Page reference: 29
- III. Assumptions for the Credit Pricing Equation — Page reference: 31
- IV. Sensitivity Analysis — Page reference: 32
- V. Supplementary Tables — Page reference: 34

*Source: _sdn1211 - Executive Summary*

### EXECUTIVE SUMMARY

### _sdn1211 - EXECUTIVE SUMMARY

### Key findings on lending-rate impacts
- Long-term increases in average bank lending rates estimated as:
  - United States: 28 bps
  - Europe: 17 bps
  - Japan: 8 bps
- Context: the smallest increment by which major central banks adjust their short-term policy rates is 25 bps.
- Conclusion: higher safety margins (capital and liquidity) will raise lenders’ operating costs affecting bank customers, employees, and investors, but banks appear able to adapt without actions that would harm the wider economy.

### Methodology and modelling approach
- A simple loan-pricing framework is used: lending rates reflect the cost of allocated capital, other funding costs, credit losses, administrative costs, and other factors.
- Cost estimates draw from academic theory, empirical analyses from industry and official sources, and financial disclosures by large banks.
- Sensitivity analysis: reasonable changes in cost assumptions do not dramatically alter the conclusions.
- The analysis focuses on long-term outcomes rather than transitional costs.
- Five categories of reform were selected for quantitative analysis (securitization reform could not be quantified).
- An integrated cost estimate considers interactions between reform categories and mitigating actions by financial institutions (e.g., expense cuts).

### Major limitations and scope
- The study does not:
  - Address potential transition costs as banks adjust to new regulations.
  - Assess economic benefits of financial reforms.
  - Model a number of regulatory reforms (judgment used in many estimates).
- The modelling approach is relatively simple; further research is recommended to translate credit impacts into effects on economic output.

### Comparison with prior studies and literature
- IIF (2011):
  - Projected that proposed reforms will reduce annual output in the advanced economies by approximately 3 percent by 2015.
  - Predicted the price of credit in the United States would average almost 5 percentage points higher on average over the period 2011–15 due to regulatory changes alone.
- OECD (Slovik and Cournède, 2011):
  - Used a simple model translating higher funding costs into higher loan interest rates.
  - Estimated major economies would be about 0.75 percent smaller after five years (versus IIF’s 3-percent estimate).
- BCBS (2010):
  - Estimated Basel III capital and liquidity changes would reduce the steady-state level of economic activity by 0.6 percent in total, or 0.08 percent annually if spread over the eight-year transition period.
  - Key BCBS assumptions include full pass-through of capital and funding costs to loan rates, no reduction in operating expenses, no increase in non-interest income, no credit rationing, a 15 percent ROE, and a 100 bps yield difference between illiquid and liquid assets and long and short liabilities.
- Overall: previous studies differ greatly in cost estimates.

### Bank responses to higher regulatory costs (eight broad categories)
- Absorbing costs by lowering returns to shareholders (investors accept smaller returns in exchange for reduced volatility).
- Reducing funding costs (fund providers may reduce required rates due to greater safety; potential to decrease rates on retail deposits).
- Reducing expenses (administrative and marketing expense reductions; market-share gains by efficient banks).
- Decreasing expected credit losses (altering lending terms to reduce probability and size of losses).
- Limiting regulatory impacts through technical means (e.g., improved data/modeling to justify lower risk weights).
- Rationing credit (rejecting loan applications or withdrawing from less profitable lines).
- Raising prices for credit (limited by competition).
- Restructuring businesses (selling/buying businesses, mergers, exits).

### Loan-pricing formula and implications
- Pricing condition used (variables preserved as in source):
  - L*(1–t) ≥ (E*r_e) + ((D*r_d)+C+A–O)*(1–t),
    where:
    - L = effective interest rate on the loan, including the annualized effect of fees;
    - t = marginal tax rate for the bank;
    - E = proportion of equity backing the loan;
    - r_e = required rate of return on the marginal equity;
    - D = proportion of debt and deposits funding the loan, assumed to be the amount of the loan minus E;
    - r_d = effective marginal interest rate on D, including indirect costs of raising funds, such as from running a branch network;
    - C = the credit spread, equal to the probability-weighted expected loss;
    - A = administrative and other expenses related to the loan;
    - O = other income and expense items related to the loan.
- Regulatory reforms change variables in the formula, prompting offsetting adjustments (e.g., lower required returns on equity, expense cuts).
- The study adopts the common assumption that investor-required returns adjust to about halfway (50 percent) between full Modigliani-Miller offset and no offset.

### Capital- and liquidity-related regulatory details
- Basel III increases minimum common equity capital ratio from, in practice, 2 percent of risk-weighted assets to 7 percent (this 7 percent includes a 2.5 percent “conservation buffer”).
- Banks with capital below the basic 4.5 percent ratio can be taken over by regulators; banks above 4.5 percent but below 7 percent face operating limitations.
- Minimum quality of capital is raised: subordinated debt and some securities are dropped from the capital definition; limits on certain assets counted as core common equity.
- Risk-weighted assets (RWA) remain the primary basis for capital requirements; many risk weights increase under Basel III.
- Systemically Important Financial Institutions (SIFIs) face incremental capital requirements of 0.5 to 2.5 percentage points above other banks; this can rise to 3.5 percentage points in certain circumstances.
- A new leverage ratio is introduced as a safety net (capital divided by total asset size, with adjustments for off-balance-sheet items and unfunded commitments).
- The net stand-alone effect of higher capital on lending rates is reported as less than 25 bps in the study’s calculations and comparable to empirical results cited (for example, an 11 bps increase in lending rates in U.K. banks in Miles, Yang, and Marcheggiano (2010) after allowing for a 45 percent offset).

### Interpretive points and policy relevance
- Although estimated lending-rate increases are modest in bps terms, they are significant relative to typical pre-tax return on assets (ROA) in banking (generally in the range of 100 bps).
- Important assumptions: regulations are implemented appropriately; regulatory arbitrage, shifts to shadow banking, and gaming are only lightly addressed and would generally reduce both bank costs and overall effectiveness of reforms.
- Policy implication: finding a sound consensus on the costs of reform is critical — overly high perceived costs could lead to reassessment, while sound reforms should be pursued to increase safety and reduce rule uncertainty.

*Source: IMF staff executive summary content from _sdn1211 - EXECUTIVE SUMMARY*

### 1.24 percent and 2.65 percent, respectively.

### _sdn1211 - 1.24 percent and 2.65 percent, respectively.

### Capital requirements and lending rates
- A target minimum ratio of 10 percent common equity Tier 1 capital to risk-weighted assets is assumed, representing a buffer of 3 percentage points above the Basel III minimum of 7 percent.
- Banks are assumed to move to at least end-2010 capital levels regardless of regulatory changes; lower base case capital would raise estimated costs.
- The extent to which equity investors give credit to reduced volatility from higher capital materially affects results: assuming no credit would double net effects shown; assuming a 75 percent pass-through to equity markets would halve the net effects.
- Banks are likely to take mitigating actions (including expense cuts) to offset higher costs from greater capital requirements.

### Assumed required returns and funding costs
- Assumed base case return on equity required by market: Europe 12.00, Japan 7.00, U.S. 12.00.
- Assumed base case cost of other funding sources: Europe 2.00, Japan 1.25, U.S. 2.00.
- After-tax unit cost of switching to capital as funding source: Europe 10.60, Japan 6.13, U.S. 10.60.
- Stand-alone effect of higher capital on pre-tax loan interest rate: Europe 0.19, Japan 0.13, U.S. 0.40.
- Assumed offset from reduction in return required by market (1/ Effect arising from Modigliani-Miller proposition holding partially): Europe -0.09, Japan -0.07, U.S. -0.20.
- Net stand-alone effect on pre-tax loan interest rate: Europe 0.09, Japan 0.07, U.S. 0.20.

### Tabled capital-position metrics (end-2010 pro forma)
- End-2010 pro forma Basel III common equity Tier 1 capital ratio: Europe 7.12, Japan 6.57, U.S. 6.69.
- Capital-to-total assets ratio, without risk weighting: Europe 3.06, Japan 2.95, U.S. 5.36.
- Assumed minimum capital-to-RWA ratio in equilibrium: 10.00 (all regions).
- Implied capital-to-total assets ratio, without risk weighting: Europe 4.30, Japan 4.49, U.S. 8.01.
- Necessary increase in capital-to-total assets ratio: Europe 1.24, Japan 1.54, U.S. 2.65.

### Memorandum items (exact figures)
- Total assets (in US$ billion): Europe 33,961; Japan 6,038; U.S. 11,522.
- Total RWA after Basel II.5 and III (in US$ billion): Europe 14,597; Japan 2,713; U.S. 9,233.
- Tax rate (in percent): 30.00.

### Liquidity requirements (LCR and NSFR) and bank responses
- LCR: stylized 30-day stress test; assets receive haircuts, liabilities assigned roll-over percentages; required to exceed 100 percent. Supervisors started monitoring LCR in 2011; minimum standard required starting in 2015.
- NSFR: addresses excessive maturity mismatches; relates assets to liabilities maturing in less than one year, requiring stable funding for illiquid assets and portions of off-balance-sheet items. Supervisors started monitoring NSFR in 2011; binding requirement only in 2017.
- Both ratios faced objections and likely to be refined prior to mandatory periods; implementation differences across countries expected.
- Possible bank actions if failing 100-percent ratios:
  - increasing the length of liabilities;
  - raising capital;
  - shortening the maturity of assets;
  - switching to higher quality assets;
  - shrinking the bank’s book (often combined with other actions).
- Under normal upward-sloping yield curve, these actions tend to reduce profits: longer-term liabilities cost more, shorter-term assets earn less, capital is more expensive, higher-quality assets yield less, and shrinking book reduces profitable business.

### Estimated liquidity effects on lending rates
- Estimated total stand-alone cost of liquidity changes is similar to that produced by capital changes.
- Liquidity requirements cover a large share of funding sources and represent a larger change from previous regulation than capital reforms.
- Three key assumptions influence estimated costs:
  - Size of the assumed liquidity gap (few reliable data sources).
  - Cost of altering maturity of assets or liabilities (figures used are broadly consistent with equity analysts but significantly higher than the 100 bps assumed by the BIS).
  - Uncertainty because few banks have provided detailed liquidity needs under the new rules and rules themselves are likely to change.

*Source: Staff calculations and Table 7.*

### Appendix III shows how the starting points were arrived at for each region.

### _sdn1211 - Appendix III shows how the starting points were arrived at for each region.

### Liquidity and Capital: LCR and NSFR impacts (Europe, Japan, U.S.)
- Liquid assets needed for a 100% LCR (in US$ billion)
  - Europe: 1/1,434.66
  - Japan: 54.21
  - U.S.: 700.00
- Reduction in liquid assets from capital increases (in US$ billion)
  - Europe: 128.23
  - Japan: 27.93
  - U.S.: 92.20
- Net liquid assets needed (in US$ billion)
  - Europe: 1,306.43
  - Japan: 26.27
  - U.S.: 607.80
- Increase in pre-tax funding cost or reduction in investment income (in percent)
  - Europe: 2.00
  - Japan: 1.25
  - U.S.: 2.00
- Reduction in pre-tax interest margin (in US$ billion)
  - Europe: 26.13
  - Japan: 0.33
  - U.S.: 12.16
- Reduction in pre-tax interest margin (in percentage of total assets)
  - Europe: 0.08
  - Japan: 0.01
  - U.S.: 0.11

- Funding needed for a 100% NSFR (in US$ billion)
  - Europe: 1,843.29
  - Japan: 563.26
  - U.S.: 1,000.00
- Reduction in the funding needed from capital increases (in US$ billion)
  - Europe: 128.23
  - Japan: 27.93
  - U.S.: 92.20
- Net funding needed (in US$ billion)
  - Europe: 1,715.06
  - Japan: 535.33
  - U.S.: 907.80
- Increase in pre-tax funding cost or reduction in investment income (in percent)
  - Europe: 2.00
  - Japan: 1.25
  - U.S.: 2.00
- Reduction in pre-tax interest margin (in US$ billion)
  - Europe: 34.30
  - Japan: 6.69
  - U.S.: 18.16
- Reduction in pre-tax interest margin (in percentage of total assets)
  - Europe: 0.10
  - Japan: 0.11
  - U.S.: 0.16

- Elimination of overlap between actions to meet LCR and NSFR (in percent)
  - Europe: -0.04
  - Japan: 0.00
  - U.S.: -0.05
- Total net effect of LCR and NSFR (in percent)
  - Europe: 0.14
  - Japan: 0.11
  - U.S.: 0.21

Memorandum items
- Total assets (in US$ billion)
  - Europe: 33,961
  - Japan: 6,038
  - U.S.: 11,522
- CS (2011), Citi (2011), and Barlclays (xxxx) total assets (in US$ billion)
  - Europe: 31,378
  - Japan: 5,942
  - U.S.: N.A.
- Tax rate (in percent)
  - Europe: 30.00
  - Japan: 30.00
  - U.S.: 30.00

Notes:
- "1/ The liquid assets needed for a 100% LCR and NSFR in Table 8 are grossed up to account for a larger sample of banks in Table 7."
- Assumption: half the cost of the smaller of the two changes (LCR versus NSFR) is eliminated through overlap.

_Source: Staff calculations and Tables 7 and 8._

### Derivatives Requirements: expected effects and metrics
- Reform aims:
  - Shift standardized derivatives toward exchange trading and clearing through central counterparties (CCPs).
  - Increase transparency and safety; require collateral for many counterparties; higher capital for customized derivatives.
- Expected distributional effects:
  - Large banks likely to lose relative share from shrinkage of customized-derivatives margins.
  - Some offset from lower capital requirements as trades move to CCPs and from fees for collateral management and clearing.
  - Conservative assumption: cost to large banks represents total economy-wide effect (may overstate net costs).
- Estimated effects on lending rates (Table 4)
  - Total estimated effect on net income (in US$ billion)
    - Europe: 2.84
    - Japan: N.A.
    - U.S.: 2.26
  - Effect on pre-tax income (in US$ billion)
    - Europe: 4.06
    - Japan: N.A.
    - U.S.: 3.23
  - Cost per dollar of assets (in percent)
    - Europe: 0.01
    - Japan: N.A.
    - U.S.: 0.03

_Source: Staff calculations and Table 9._

### Deposit Insurance and Similar Fees
- Observations:
  - Premium levels for deposit insurance and similar funds have generally increased following large losses in the financial crisis; some new funds established.
  - Premiums often intended to be self-supporting and to provide risk-based incentives.
- Estimated effects on lending rates: methodology divides expected tax costs into total asset base.
- Selected items (Table 5 / memorandum excerpts)
  - Europe: Financial stability contribution: 5.9...
  - U.S.: Deposit insurance fee changes: 2.0
  - Europe: Deposit insurance fee changes: 8.8
  - U.S.: Orderly liquidation fund: 0.6
  - U.S.: Other fees: 0.7

_Source: Schorer, Michael et all (2011) and Elmendorf (2011)._

### Integrated Effects on Credit Provision — cumulative impacts (Table 6)
- Summary finding: overall long-run impact on lending rates is low; comparable to or smaller than 25 bps central bank policy increments.
- Key parameter values (basis points unless otherwise noted)
  - Capital: Europe 19, Japan 13, U.S. 40
  - Modigliani-Miller pass-through: Europe -9, Japan -7, U.S. -20
  - Liquidity Coverage Ratio (LCR): Europe 8, Japan 11, U.S. 1
  - Net Stable Funding Ratio (NSFR): Europe 10, Japan 11, U.S. 16
  - Overlap of LCR and NSFR actions (half of smallest): Europe -4, Japan 0, U.S. -5
  - Derivatives: Europe 1, Japan N.A., U.S. 3
  - Taxes and fees: Europe 6, Japan 0, U.S. 4
- Total gross effects (basis points)
  - Europe: 31
  - Japan: 18
  - U.S.: 48
- Expense cuts assumed (at 5% for Europe, 10% for U.S.)
  - Europe: 8
  - Japan: 8
  - U.S.: 15
- Other aggregate adjustments
  - Europe: 5
  - Japan: 3
  - U.S.: 5
  - of which: Planned capital mitigating actions
    - Europe: 3
    - Japan: N.A.
    - U.S.: 2
- Total adjustments
  - Europe: 13
  - Japan: 10
  - U.S.: 20
- Net cost (basis points)
  - Europe: 18
  - Japan: 8
  - U.S.: 28

_Source: Tables 2 to 5._

### Main conclusions and sensitivity
- Base-case lending-rate increases (long run):
  - Europe: 17 bps
  - Japan: 8 bps
  - U.S.: 26 bps
- Robustness and caveats:
  - Considerable uncertainty exists; liquidity requirements are novel and in flux.
  - Analysis assumes appropriate regulatory implementation (not adding unnecessary costs).
  - Sensitivity analysis: except for marginal tax rate, lending rates are linear functions of key parameters; even extreme parameter assumptions keep changes below 100 bps.
- Reasons this study finds lower net costs than some official and industry studies:
  - Baselines assume greater market-driven increases in safety margins, lowering the incremental regulatory effect.
  - Explicit assumption of bank expense reductions and other non-price adjustments (assumed 5–10 percent expense cuts); accounts for 13 bps reduction in Europe, 10 bps in Japan, 20 bps in U.S.
  - Explicit assumption that investors will reduce required equity returns due to safety improvements (some pass-through to debt investors assumed).
- Policy-relevant implication:
  - Net economic costs appear relatively low, suggesting that long-run benefits (less frequent and costly financial crises) likely outweigh these regulatory reform costs—though benefits are not directly quantified in this study.

### Appendix I — Regional inputs for the credit pricing equation: capital findings
- Sample disclosures summarized from 21 U.S. banks, 38 European banks, and 6 Japanese banks (pro-forma Basel III common equity Tier 1 capital ratios), supplemented by Da Silva et al. (2011) and Cannon et al. (2010).
- Key results:
  - Impact of increases in RWAs and qualification/deduction standards from Basel III reduces common equity Tier 1 capital ratios by 2.5–3 percentage points on average.
  - Effects are asymmetrical:
    - Increase in RWAs: larger effect on U.S. banks than on European and Japanese banks on average.
    - Deductions against capital: higher effect on Japanese banks than on European and U.S. banks.
  - As a result, pro-forma Basel III common equity Tier 1 capital ratios in European banks are larger than in U.S. and Japanese banks on average.
  - European banks plan to rely more on mitigating actions to comply with Basel III minimums than U.S. banks (partly influenced by the European financial crisis and capital-raising conditions).

Notes on disclosures:
- Disclosures are incomplete, not homogeneous, and reported in different documents and ways, implying interpretation is required to gauge Basel III effects.

_Sources cited within Appendix I: EBA (2012); BCBS (2012); Da Silva et al. (2011); Cannon et al. (2010)._

_Italic source: Source: Staff calculations and Tables 7 and 8._

### 10.2 percent to 7.1 percent on average, as of end-June 2011.

### _sdn1211 - 10.2 percent to 7.1 percent on average, as of end-June 2011.

### Pro‑Forma Basel III Common Equity Tier 1 Capital Ratios by Region, End‑2010 — key findings
- Initial Basel I/II common equity Tier 1 capital ratio (average across the sample of banks): Europe 9.7, Japan 9.2, U.S. 9.7.
- RWA increase arising from Basel II.5 and III: Europe -1.6, Japan -1.1, U.S. -2.4.
- Pro forma Basel III common equity Tier 1 capital ratio after RWA increase: Europe 8.1, Japan 8.1, U.S. 7.3.
- Deductions arising from Basel III: Europe -1.1, Japan -1.5, U.S. -0.6.
- Pro forma Basel III common equity Tier 1 capital ratio after RWA increase and capital deductions (without mitigation): Europe 7.1, Japan 6.6, U.S. 6.7.
- Mitigation: Europe 1.0, Japan N.A., U.S. 0.3.
- Basel III pro forma common equity Tier 1 capital ratio after RWA increase, mitigation, and capital deductions: Europe 8.0, Japan 6.6, U.S. 7.0.
- Memorandum items (sum across the sample of banks):
  - Number of banks: Europe 386, Japan 21, U.S. 33 (Da Silva et al. (2011), Nozaki and Saito (2011), and TCH (2011a) numbers respectively: 331, 5, 10).
  - Total assets (in US$ billion): Europe 33,961, Japan 6,038, U.S. 11,522 (Da Silva et al. (2011), Nozaki and Saito (2011), and TCH (2011a) total assets, respectively (in US$ billion): 31,378, 7,916, 8,300).

- Interpretation and drivers:
  - The estimated long‑term minimum capital levels are driven by the ratio of capital to risk‑weighted assets (RWAs), on which the three regions are broadly equal; by contrast, ratios of capital to total assets are about 3 percent in Europe and Japan and over 5 percent in the United States.
  - European banks’ average risk weighting is roughly 40 percent versus roughly 80 percent for the United States. Consequently, European banks need to raise only about half as much capital per dollar of total assets to meet a given increase in capital-to‑RWA ratios.
  - Principal factors underlying different average risk weightings include: different business models (larger balance sheets of lower‑risk assets in Europe), accounting differences between International Accounting Standards and U.S. Generally Accepted Accounting Principles, and European banks’ longer use of Basel II rules and pressure to minimize additional capital needs.
  - If public sector capital injections in European banks are excluded, pro‑forma Basel III common equity Tier 1 capital ratios for European banks would be slightly lower than in U.S. banks on average; Dayal et al. (2011) report pro‑forma Basel III core Tier 1 capital ratios excluding public sector injections of 5.8 percent for European banks and 6.7 percent for U.S. banks as of end‑2010.

### Liquidity — LCR and NSFR shortfalls and estimates
- Challenges:
  - Estimating funding and liquid assets needed to comply with a 100 percent NSFR and LCR is particularly difficult; official U.S. estimates of gaps under LCR and NSFR are not available.
- Rough U.S. gap estimates (derived from BCBS (2012), EBA (2012), Nozaki and Saito (2011) and assumptions listed in the text):
  - LCR additional liquid assets needed for a 100% LCR in the United States: US$695 billion (text-derived estimate).
  - NSFR additional long‑term funding needed for a 100% NSFR in the United States: text gives US$622 billion (derived) and Table 8 uses US$1,000 billion (US$1 trillion) for NSFR to reflect higher private sector estimates.
- Table 8 reported figures (average across the sample of banks and sum across the sample of banks):
  - Liquidity Coverage Ratio (average across the sample of banks): Europe 76, Japan 121, U.S. N.A.
  - Additional liquid assets needed for a 100% LCR (in US$ billion): Europe 1,326, Japan 537, U.S. 700.
  - Net Stable Funding Ratio (average across the sample of banks): Europe 89, Japan 87, U.S. N.A.
  - Additional long‑term funding needed for a 100% NSFR (in US$ billion): Europe 1,703, Japan 554, U.S. 1,000.
  - Memorandum items (Da Silva et al. (2011)-Abouhossein (2011) and Nozaki and Saito (2011) number of banks, respectively): Europe 333, Japan N.A.
  - Memorandum total assets (in US$ billion): Europe 31,378, Japan 5,942, U.S. N.A.
- EBA (2012) reported averages as of end‑June 2011:
  - Average LCR: 71 percent.
  - Average NSFR: 89 percent.
  - Shortfall of liquid assets: approximately €1.2 trillion.
  - Shortfall of long‑term funding: approximately €1.9 trillion.
- BCBS (2012) reported for sample of 103 global banks as of end‑June 2011:
  - Average LCR: 90 percent.
  - Average NSFR: 94 percent.
  - Associated shortfall of liquid assets: EUR1.76 trillion.
  - Associated shortfall of long‑term funding: EUR 2.78 trillion.

### Derivatives reforms — costs and transmission
- Uncertainty:
  - Estimates of costs of derivatives reforms for European and U.S. banks contain a high degree of uncertainty; a wide range of estimates in Table 9 reflects lack of final rule clarity.
- Table 9 selected figures (effects of derivatives reforms on banks per year, in US$ million):
  - Da Silva, Goel, and O'Donohoe (2010) — Europe (No. of banks 144): Derivative Reform Gross Loss 4,738; Derivative Reform Net Loss after Cost Reduction 2,843. U.S. counterpart: Gross Loss 3,766; Net Loss after Cost Reduction 2,260.
  - Goldberg, Blyakher, Keating, and Nash (2010) — U.S. (No. of banks 25): Derivative Reform Gross Loss 2,651.
  - Horowitz, Foundos, Ketron, and Fandetti (2010) — U.S. (No. of banks 4): Derivative Reform Gross Loss 6,911; Net Loss after Cost Reduction 1,235.
  - Moszkowski, Goldschneider, and Chubak (2010) — U.S. (No. of banks 4): Derivative Reform Gross Loss 3,428.
- Initial margin and collateral for CCPs:
  - Heller and Vause (2012) estimate initial margin required by CCPs for all interest rate and credit default swaps might be US$0.7 trillion in an intermediate case; grossing up for the missing one‑third of swaps gives approximately US$1.1 trillion.
  - Singh (2010) estimates that collateral at major dealers already covered about 44 percent of their swap exposures; using 44 percent as proxy implies net new collateral required from moving to CCPs of approximately US$0.6 trillion (US$1.1 trillion gross less assumed existing collateral).
- Funding cost of additional collateral:
  - Reasonable assumption: net cost in the range of 200 bps (2 percent).
  - First‑order effect: increase credit costs by approximately US$12 billion a year (US$0.6 trillion times 2 percent).
  - This could be offset by raising lending rates by about 3 bps on the total size of assets held by banks in Europe and the United States.
- Offsets that may reduce net cost:
  - Implicit credit spreads in bilateral derivatives transactions would be reduced or eliminated by CCP clearing.
  - Dealers will face lower capital requirements when clearing through CCPs rather than bilaterally.
  - Lower margins on exchange‑traded products which reduces dealer costs and offsets non‑dealer cost increases.
- Net assessment:
  - The study assumes that various effects will at least net out for everyone but the major derivatives dealers; it is plausible there could be a net benefit to the economy rather than a net cost, and the analysis focuses on costs in non‑crisis years without counting avoided crisis‑related benefits.

### Taxes, fees, and other fiscal charges on banks
- Table 10 (annual fees and taxes on European and U.S. banks) — selected entries and methodology:
  - Financial stability contribution: Europe 5.9 (US$ billion or unit as in Table 10 context).
  - Deposit insurance fee changes: Europe 8.8; U.S. 2.0.
  - Orderly liquidation fund: U.S. 0.6.
  - Other fees: U.S. 0.7.
- Methodology: anticipated cost increases taken from national fiscal estimates, dividing expected tax costs over the respective number of years.

### Baseline scenarios and choice considerations
- Principle:
  - The fair comparison is between expected post‑reform safety margins and what those levels would be absent regulatory changes but reflecting post‑crisis behavior of other parties (economic capital, rating agencies, counterparties, financial markets).
- Baseline chosen:
  - End‑2010 figures on capital and liquidity in the United States, Japan, and Europe are used as a reasonable approximation of what market forces would have demanded even without regulatory changes.
  - Rationale: markets had raised demands on safety margins after the crisis; end‑2010 Basel III equivalent of tangible common equity to total assets was about 3 percent in Europe and Japan and a bit over 5 percent in the United States — unlikely markets would accept lower ratios in the long run.
  - Liquidity: new minimum liquidity requirements likely had not substantially impacted bank balance sheets by end‑2010 because Basel liquidity rules take effect with a multi‑year delay and significant regulatory uncertainty remained.
- Caveats:
  - Using end‑2010 as baseline might understate the effects of regulation if markets would have demanded higher ratios absent regulation; end‑2009 capital ratios were approximately 0.5 to 1.5 percentage points lower depending on region.

### Appendix III — assumptions for the credit pricing equation (key parameter values)
- Marginal tax rate: 30 percent used for the United States, Europe, and Japan (assumed effective rate for Japan lowered to 30 percent via tax management techniques).
- RWA as a percentage of total assets: taken from company reports in the sample and assumed to remain constant at end‑2010 levels.
- Required return on equity (ROE) in loan pricing equation: Europe 12 percent, U.S. 12 percent, Japan 7 percent.
- Base cost of other funding sources: rough estimate of weighted cost of deposits and debt in equilibrium (assumed higher than contemporaneous low levels).
- Administrative expenses: Europe based on Kopp et. al. (2010); United States based on Elliott (2009).
- Base liquidity gap: Taken from Table 8.
- Percentage of capital that replaces short‑term funding: assumed 30 percent of additional capital replaces short‑term funding.
- Increase in pre‑tax funding cost or reduction in investment income: Europe and U.S. assumed 200 bps; Japan assumed 125 bps; BCBS (2010) assumes 100 bps historical difference in short‑term and long‑term rates.
- Cost of derivatives changes: taken from Table 9.
- Cost of new tax and fee measures: taken from Table 10.
- Costs are assumed to be spread evenly across the full range of bank activities and taxes/fees are assumed non‑deductible, requiring offset by after‑tax income.

### Appendix IV — sensitivity analysis (qualitative summary)
- Changes in key parameters can significantly affect estimated costs of regulatory reforms.
- Parameters increasing lending‑rate impacts (adverse effects): increases in minimum required common equity Tier 1 capital ratio, base ROE, or marginal tax rate.
- Parameters reducing lending‑rate impacts: increases in base cost of other funding sources and in the Modigliani‑Miller adjustment on capital (these reduce effect of ROE on lending rates by replacing equity with cheaper funding or offsetting equity addition costs).
- Apart from the marginal tax rate, lending rates are a linear function of key parameter assumptions.

*Source: Staff calculations and analyses presented in _sdn1211 - 10.2 percent to 7.1 percent on average, as of end-June 2011.*

### APPENDIX V. SUPPLEMENTARY TABLES

### APPENDIX V. SUPPLEMENTARY TABLES

### Table 11. European, Japanese, and U.S. Banks in the Sample

- 1-European banks
  - 1.1-European investment banks
    - Barclays
    - Credit Suisse
    - Deutsche Bank
  - 1.2-European universal banks
    - BPC
    - Commerzbank
    - Credit Agricole Group
    - HSBC
    - ING
  - 1.3-European commercial banks
    - Alpha bank
    - Banco Popular Español
    - Bank of Cyprus
    - Bank of Ireland
    - BBVA
    - BMPS
    - Danske
    - Dexia
    - DnB NOR
    - EFG
    - Erste
    - Handelsbanken
    - Intes a
    - La Caixa
    - Lloyds Group
    - NBG
    - Nordea
    - Piraeus
    - Raiffeisen Bank International AG
    - Sabadell
    - Santander
    - SEB
    - Swebank
    - UniCredit

- 2-Japanese banks
  - 2.1-Japanese investment banks
    - Nomura
  - 2.2-Japanese universal banks
    - Mizuho
    - MUFG
    - Resona
    - Shinsei
    - Sumitomo Holdings

- 3-U.S. banks
  - 3.1-U.S. investment and trust banks
    - Bank of New York
    - Goldman Sachs
    - JPMorgan
    - Morgan Stanley
    - State Street
  - 3.2-U.S. universal banks
    - Bank of America
    - Citigroup
  - 3.3-U.S. commercial banks
    - American Express
    - BB&T Corporation
    - Capital One Financial Group
    - COMERICA
    - Fifth Third Bancorporation
    - Huntington Bancshares
    - Keycorp
    - M&T Bank
    - Northern Trust
    - PNC
    - Regions Financial Corporation
    - SunTrust Banks
    - U.S. Bancorp
    - Wells Fargo

### Table 12. Planned De-Risking Measures, End-2010

- European banks
  - Alpha Bank
    - Loan deleveraging.
  - Banco Popular Español
    - IRB Model optimization, RWA improvements and others.
  - Bank of Ireland
    - Wind-down and disposal of non-core loan portfolios and through repayments/redemptions in non-core book. They include portfolios of U.K. Intermediary sourced residential mortgage; selected international niche businesses such as project finance, asset based lending and certain international corporate banking portfolios; certain international commercial investment property portfolios; and certain land and development loans.
  - Barclays
    - Sale of legacy assets and other management actions including hedging of counterparty exposures and tail risks, selling down the correlation book, and continued model refinement.
  - BBVA
    - RWA optimization and asset and portfolio management.
  - BMPS
    - Optimization of RWAs, product company structure, and real estate portfolio.
  - BNP
    - Asset repricing, strict origination policies for short-term facilities and medium-term loans, asset sales and business disposals. Downsize of mortgage specialized businesses (Hungary, the Netherlands, Norway, Spain, and Switzerland) and brokers’ activity in France and exit from leasing non-core activities (real estate leasing, specific asset leasing, etc.) and subscale countries (the United Kingdom, Hungary, Switzerland).
  - BPCE
    - Asset disposal, CVA optimization.
  - Commerzbank
    - Central clearing of OTC derivatives and adjusted framework for hedging counterparty risk . Accelerated reduction of prolongatinon rates and natural portfolio wind-down in the asset based finance unit and restructuring and sale of assets in in the portfolio restructuring unit.
  - Credit Agricole Group
    - Run-off of discontinuing operations through natural amortization of outstanding loans and active management positions, potential asset disposals, and optimization of RWAs . Withdrawal from businesses in equity derivatives and commodities.
  - Credit Suisse
    - Reduction of fixed income RWAs by accelerating exit from low revenues long-dated and unsecured trades in foreign exchange rates, selling/running off low rated positions in securitized products, right-sizing investment grade positions in credit products, focusing on executing flow-based model in larger emerging markets, optimizing towards private banking client demand in commodities, and acceleration of wind-downs.
  - Deutsche Bank
    - Sale, unwind, run-off, hedging, and optimization of securitizations, correlation trading, trading book exposures to certain emerging market sovereigns, and uncollateralized derivatives exposures (shift to OTC derivatives towards central clearing), with limited dependency on sales.
  - Dexia
    - Asset disposals  and sale of Dexia banka Slovenko, DenizEmeklilik, Dexia Crediop, and Dexia Sabadell.
  - Eurobank
    - Liability management, IRB methodology, deleveraging and de-risking in Greece, Tekfen strategic sale, other (net of PSI impact).
  - HSBC
    - Reduction of non-core portfolios and legacy positions (for instance, in HSBC Finance Corporation and GB&M), correlation books, CVA and market risk mitigation, and resecuritization actions. Actions improving capital allocation include expanding in attractive markets, turnaround efforts, increase in efficiency, and disposals and closure of non-strategic business (retail banking in Russia).
  - ING
    - Sale of Real Estate Investment Management businesses in the US, Europe, and Asia.
  - Intesa
    - Active capital allocation including sale of the remaining 25% of Findomestic, Cassa di Risparmio della Spezia, and 96 branches to Crédtit Agricole Group, and the aquisition of control of Banca Monte Parma; optimization of sources and uses of capital (eg., extension of internal models, and gradual disposal of unprofitable assets.
  - KBC
    - Mitigation consisting of selling Kredyt Bank and Wart in Poland, limiting international lending and capital market activities (sale of German corporate activities, Diamond Financing, international leasing, global trade and project finance), divesting European Private Banking, complementary channels in Belgium (Fidea) and non-EU CEE countries (Russia and Serbia) and accelerated sale or unwinding of selected ABS and CDO assets.
  - Lloyds
    - Run-off of non-core assets, including treasury and customer assets (commercial real estate, wholesale, wealth and international, and retail).
  - NBG
    - Use of collective provisions, release of excess provisions in Turkey as asset quality improves,  Finansbank stake offering , balance sheet management, deleveraging, sale of non-core assets and other actions.
  - Nordea
    - Credit portfolio management (portfolio composition reviews, capital efficient products, improved transparency on profitability, netting and collateral agreements) and models and process refinements (advanced IRB roll-out; foundation IRB for Standardized portfolios; internal models for counterparty credit risk; sourcing and treatment of collaterals and guarantees, and refining and improving credit processes).
  - RBI
    - Further run-down of remaining non-core financial institutions  and sovereigns loan portfolio.
  - RBS
    - Run-off, impairments, and asset disposals and closures of undrawn commitments and non-core assets  consisting of commercial real estate, markets, retail, corporates, SMEs, and others.
  - Santander
    - Deleveraging in mature markets.
  - Société Générale
    - Run-off and disposal of legacy assets (CDOs, RMBS and CMBS) and selected structured lending portfolios. Possible additional optimization of market RWAs (active management of counterparty risk), optimization of portfolio of activities, and releasing goodwill and RWAs.
  - Swedbank
    - Deleveraging in Baltic countries.
  - UBS
    - Reduction of investment bank assets by scaling down investment bank, CVA mitigation and optimization, reducing securitization, moving OTC derivatives to CCPs, hedging, reducing student loan auction rate securities and sales and restructuring of other legacy assets.
  - UniCredit
    - Migration of OTC derivatives to exchanges, portfolio optimization, capital management, and other mitigating actions.

- Japanese banks
  - Shinsei
    - RWA optimization, reduction of capital deductions through disposal and run-off of non-core assets, including real estate equity investment, asset-backed investment/securities, CLO/ACPM/CFI, housing loan warehousing, etc.

- U.S. banks
  - Bank of America
    - Wind-down of proprietary trading, reduction in high RWA positions, reduction of equity exposures, reduction of low-quality investments subject to deduction under Basel III, run-off of loan portfolio (excluding GNMA repurchases), and other measures including mitigation of counterparty and CVA exposures.
  - Bank of New York
    - Quarterly paydown of sub-investment grade securities.
  - Goldman Sachs
    - Roll-offs of the correlation book and the ratio rate of mortgages and securitizations.
  - Morgan Stanley
    - Run-off of existing inventory and new mitigation opportunities such as scheduled takedown of new inventory.
  - PNC
    - Paydown of 30 percent of sub-investment grade securities.

*Source: Company reports.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2012/_sdn1211.pdf_