address some of the major supervisory weaknesses. these included the lack of a common definition of quality of capital, no limits on leveraging, no common standards for liquidity and a failure to recognize the excessive market risks embedded in trading and derivative transactions that had risen very sharply among the major banks. therefore, basel ii would have not done the job it was required to do. this brings me to the basel iii which not only addresses the shortcomings of basel ii but goes far beyond by introducing a variety of new concepts which have raised the bar in terms of global supervisory standards. some of these concepts emerged from the various lessons learned exercises that were carried out following 2007, while others are a product of serious research and reflection by the global banking supervisors. basel iii has introduced some fundamental reforms such as elevating the status of common equity capital as the key component of core capital. it also has introduced the concept of a conservation capital buffer and even more importantly an additional countercyclical buffer on top of the minimum capital bis central bankers ’ speeches requirements. also basel iii has recognized that liquidity is as important if not even more important than capital for safety and viability of banking institutions. it has recognized that there must be limits on leveraging by financial institutions so that bankers are restrained from excessive risk taking. basel iii also has taken a serious and perhaps a much needed closer look at risks in trading and investment activities and particularly for derivatives and off balance sheet transactions. in july 2009, as an interim measure, basel committee had issued a document addressing the market and trading book weaknesses in basel ii for immediate implementation. this document is known as basel ii. 5. basel iii goes much further with refinements in areas such as counterparty credit risk, credit value adjustments, etc. these measures should enhance the risk management, governance and supervision of such activities as securitizations, resecuritizations and credit derivatives. also at the conceptual level there is far greater emphasis on stress testing by banking institutions for various risks. banks are required to develop stress scenarios and demonstrate their ability to cope and survive under stressful situations. basel iii also requires supervisors to use stress testing at the systemic level. one related area of major concern that has kept basel committee very busy is the enhanced supervisory regime for global systemically important financial institutions ( g - sifis ). these institutions will be subject to a more stringent, sensitive and effective supervisory regime and will also face a higher capital charge in form of

abdulrahman a al - hamidy : risk strategies for basel iii compliance and beyond – extracting business value from regulatory change speech by his excellency dr abdulrahman a al - hamidy, vice governor of the saudi arabian monetary agency ( sama ), at the institute of banking / moody ’ s analytics symposium, riyadh, 30 november 2011. * * * distinguished participants, i am pleased to be here today to share my thoughts on “ risk strategies for basel iii compliance and beyond ”. given the lingering global financial crisis with ongoing impact on a number of economies and financial markets, this is a relevant and timely subject to deliberate upon. i appreciate the efforts of the institute of banking and the moody ’ s analytics to organize this symposium for the benefit of the bankers and supervisors in the kingdom. i have seen the list of topics to be covered today and the impressive list of speakers and i am confident that all of you would greatly benefit from the discussions. the world today has not yet recovered from the global financial crisis that started in 2007. while the governments, central banks, supervisory authorities and international organizations have been working hard to revive and revitalize financial markets and financial institutions in many advanced markets, the recovery has been slow. following the financial crisis the lessons learned exercise had attributed the main causes to include a long period of easy monetary policy that fueled accelerated economic growth accompanied by lax and light supervision in a number of advanced markets. consequently, one of the key response from the authorities was to develop the basel iii reforms package that aims to strengthen global supervision of international banks and banking systems. while the global banking supervisors have been working hard to improve banking supervision, the financial crisis has mutated into a fiscal crisis in some markets in europe, once again threatening the viability of some global banks and causing the risk of contagion to other financial institutions and markets. consequently this drives home the lessons that strengthening banking supervision alone is not sufficient and that prudent fiscal and monetary policies are essential for a sound and resilient banking system. before i talk about basel iii, i would like to revisit the evolution of the basel ii framework which was published by the basel committee in june 2004 with a tentative full implementation date of 1st january 2007. consequently in 2007 a pertinent question was that why did basel ii fail to prevent the financial crisis. the response was that apart from its slow and uneven implementation in the advanced markets, basel ii was a flawed standard that had failed to