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29management report Regulatory Conditions Basel III We made further progress implementing the Internal Ratings Based Approach (IRBA). At the beginning of 2014 the Use-Test was started, in which according to the latest implementation plan is the last rating system to be reviewed (retail business Swit- zerland). This step marks the completion of the prerequisites needed for the authorisation audit which is scheduled to begin in the second quarter of 2015. We have been participating in the Basel Committee on Banking Supervision (BCBS) monitoring of Basel III for a number of years. In doing so key figures like the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are calculated several times a year. The insights gained have made it possible for us to assess the effects of future binding minimum standards before they are introduced and make adjustments as needed. Our voluntarily participation has enabled us to continually monitor all impor- tant key figures for a long time and use them to manage the Bank. Calculations made to date reveal that the LCR, which is steadily rising and which must be observed as of 2015, has al- ready been well fulfilled. We have also met the NSFR figure, which becomes valid in 2018 and thus far has been foreseen to serve as only an observation ratio, without having to take any specific measures. A Leverage Ratio will be introduced within the framework of Basel III as of 2018. Up until now the European Parliament has rejected the Leverage Ratio for European regulatory purposes. The European Banking Authority was tasked with presenting a study concerning the Leverage ratio in 2015. According to the requirements of Basel III, the maximum leverage ratio is set at 3 percent for the entire volume of loans made by a bank in re- lation to its equity capital. Currently it cannot be ruled out that the Leverage Ratio will be applied differently for different busi- ness models at the European level and that the low-risk match- ingly refinanced mortgage business will be treated differently than high-risk investments. Low-risk areas of business can only generate appropriate yields if the required level of underlying equity capital is kept at a correspondingly low level that reflects the risks involved. In contrast, inappropriately high levels of re- quired equity capital lead to the acceptance of higher risks in order to generate sufficient yields for the equity capital providers. For this reason we believe that our conservative business model will be disproportionately penalised by a non-risk weighted lever- age ratio. In view of the Leverage Ratio discussions at the inter- national level favouring its introduction, it appears necessary to make preparations to begin observing the Leverage Ratio in 2018. Furthermore, we are also attentively following the current discus- sions and publications of various authorities regarding Basel III. It is difficult to comprehensively prepare to meet future require- ments at this time as widely varying positions are still held by the different institutions involved in the current discussions at national, European and international levels. For this reason we will continue to prepare to the greatest extent possible, although in general we will wait until the final version of the respective rules have been approved before we begin to implement them. As the example of LCR shows, significant changes can still occur at the last minute. We believe it is necessary for the regulators to provide an appropriate amount of time for implementation purposes. New subject areas related to the introduction of Basel III were, and are being, monitored centrally and implemented by the af- fected divisions in various projects. Up until today all of the known aspects have been implemented on time. The enormous variety of requirements mandated by the supervisory authority does, however, pose a major challenge to a bank of our size and leads to significant costs. Single Supervisory System for EU Banks At the beginning of November 2014 the ECB took over the direct supervision of more than 120 credit institutions it deemed to be significant in the eurozone, including MünchenerHyp. Prior to assuming its supervisory tasks the ECB conducted intensive au- dits of all the affected banks’ balance sheets, as well as a stress test, within the framework of a comprehensive assessment. The ECB defined December 31, 2013 as the date of reference for these reviews. The Comprehensive Assessment was conducted in the first half of the year 2014. The ECB announced the results at the end of October 2014.