Enhancements to Basel II

Hassan NasserCompliance & Inspection DirectorDubai Multi Commodities Centre

Enhancements To Basel II

• Basel Committee is responding to the financial crisis by strengthening the Basel II framework

Enhancements to Pillar 1

• Strengthening the risk capture of Basel II framework

• CDOs of ABS – Re-securitization are highly correlated with systematic risk

• It warrants higher capital charge

Enhancements to Pillar 1

• Increasing the capital requirement for Liquidity lines extended to support ABCP by eliminating the distinction between short-term and long-term facilities

Enhancements to Pillar 1

• Banks must obtain comprehensive information about the underlying exposure characteristics of their externally-rated securitization positions

• Failure of which would result in higher capital requirements

Enhancements to Pillar 2

• Firm-wide governance and risk management

– Understanding the firm-wide risk profile

– Aggregate firm-wide exposure information in a timely manner using easy to understand and multiple metrics

– Considering long term performance over the cycle

Enhancements to Pillar 2

• Firm-wide governance and risk management (contd.)

– Set clear incentives in accordance with the stated risk appetite

Enhancements to Pillar 2

• Capturing the risk of off-balance exposures and securitization activities including:

– Contractual risk

– Non-contractual commitments

– Implicit support

– Reputational risk

Enhancements to Pillar 3

• Disclosures will include:

– Securitization exposures in the trading book

– Sponsorship of off-balance sheet vehicles

– IAA for securitization and other ABCP liquidity facilities

– Re-securitization exposures

Enhancements to Pillar 3

• Valuation with regards to securitization exposures

• Pipeline and warehousing risk with regard to securitization exposures

Thank You