Charles Freeland Basel
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Transcript of Charles Freeland Basel
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Basel II Update
Dubrovnik, 27-28 May 2004
Charles FreelandDeputy Secretary General
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Future schedule
Mid-year 2004 Finalisation of new framework
2004-2005 National processes• Further testing/impact studies, to guide
national discretion choices• Legislation and national rule-making• Banks plan for implementation
End-2006 G10 implementation of simpler methodologies
End 2007 G10 implemention of advanced methods
2007-? Extended transition period for non-G10
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Parallel running and floors
2006 2007 2008 2009
Foundation IRB Parallel calculation
95% 90% 80%
Advanced approaches for credit and/or operational risk
Parallel calculation/ impact studies
Parallel calculation/ impact studies
90% 80%
The floor is expressed as a percentage of the bank's capital requirement under Basel I
There is a possibility that further testing (QIS) will result in the need for recalibration or a scaling factor
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IRB issues resolved this month
1. Securitisation simplified
– Same treatment for originating and investing banks– Internal Assessment Approaches permitted
2. Credit cards resolved
– One single default correlation factor– Treatment of securitised credit card receivables
3. Stress LGDs to be consulted on further
– One single calculation required
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The Madrid "breakthrough"
The BCBS had previously decided to calibrate IRB against expected plus unexpected losses (EL + UL)
The reason was essentially a lack of uniformity in national provisioning rules and accounting rules
In Madrid, the BCBS decided to respond to industry requests to calibrate IRB to UL only In addition, a calculation of EL will be made by each IRB bank and the numerator of the
ratio will be adjusted accordingly
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Adjustment to the numerator
General provisions will be removed from the numerator for IRB banks
EL will be compared with the sum of general plus specific provisions for the portfolios in question
If provisions < EL, the deficiency will be deducted 50% from Tier 1 and 50% from Tier 2
If provisions > EL, the excess will be added to Tier 2 (to a limit of 0-6% of risk-weighted assets at national discretion)
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Why did we correct EL/UL?
It is how the banks calibrate their IRB The new proposal:
– Is conceptually purer– Simplifies the framework– Recognises different provisioning practices in
different jurisdictions Accountants continue to insist on "incurred losses“
but they acknowledge "experienced credit judgement"
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Position of non-BCBS/EU member countries
Australia, Hong Kong, Singapore and South Africa will be ready by 2006
Brazil, Chile, Malaysia, Mexico may be a bit slower China and India have NOT rejected Basel II (their
opinions are public) China have already introduced Pillars 2 and 3 but
will wait for an appropriate time to adopt Pillar 1 India is now introducing market risk and intends to
adopt Basel II subject to some local adjustments
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Simple standardised approach (Annex 9)
Establish sovereign risk weights - assuming no external ratings, export credit agency scores established by the OECD are a sound alternative
Banks and regulated securities firms get one risk weight worse than the sovereign (i.e. 50% if sovereign is 20%)
New risk buckets for mortgages (35%) and retail (75%) 150% weighting band for past due loans Conversion factor for undrawn commitments up to one
year raised to 20% of principal (from zero) Operational risk charge (15% of gross income)
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OECD Export Credit classifications (April 2004)
0% (grade 1) "old" OECD members, Singapore, Taiwan
20% (grade 2) Chile, China, Czech Republic, Hong Kong SAR, Hungary, Malaysia, Poland, Slovenia
50% (grade 3) India, Israel, Mexico, Saudi Arabia, Slovakia, South Africa, Thailand
100% (grade 4) Bulgaria, Croatia, Romania, Russia,
100% (grade 5) Turkey
100% (grade 6) Brazil, Ukraine
150% (grade 7) Argentina, Bosnia, Macedonia, Nigeria, Pakistan, Venezuela, Serbia/Montenegro, Surinam
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Assistance for countries proposing to implement Basel II
BCBS has established an Accord Implementation Group
AIG has already conducted extensive fact-finding/ information-sharing
FSI is planning intensive training programmes (e-learning project)
IMF/WB technical assistance programmes Private sector consultants
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"Practical considerations" circulated to supervisors (August 2003) Basel II should not take precedence over other
supervisory priorities such as the implementation of the Basel Core Principles
Countries need to decide soon what banks or set of banks should move to Basel II and when
Commence national legislative/regulatory processes Strengthen supervisory resources and training
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High-level Principles for crossborder implementation (August 2003)1. Legal responsibilities of supervisors will not change2. The home supervisor of a banking group is responsible for
oversight of implementation on a consolidated basis3. Host supervisors, particularly of subsidiaries, have requirements
that need to be understood and recognised4. There will need to be enhanced cooperation between
supervisors, led by the home supervisor5. Where possible, supervisors should avoid performing
uncoordinated approval and validation work6. Supervisors should communicate the rules of home and host
supervisors to banking groups operating in multiple jurisdictions
About 20 case studies now in train - if you have questions, contact the home supervisor not the bank
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The level playing field!
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Eligible capitalON-BALANCE-SHEET
CREDIT RISK+
Off-balance-sheet credit risk+
Market risk+
OPERATIONAL RISK
Four out of six parameters basically unchanged
= 8%
Pillar 1
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Pillar 1
Key changes: Wider spectrum of credit risk weights Greater recognition of collateral More refined treatment of securitisation Charge for operational risk introduced Undrawn commitments weighted at 20% of principal
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1 Risk weighting based on risk weights of sovereign in which the bank is incorporated, but one category less favourable.
2 Risk weighting based on the assessment of the individual bank.3 Claims on banks of an original maturity of less than three months generally receive a weighting that is
one category more favourable than the usual risk weight on the bank’s claim.
Standardised Approach – Risk Weights
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Standardised ApproachRisk weights for individuals and corporates
Basel II
Risk Weight
Basel I
Risk Weight
Exposures (other than residential mortgages)
AAA, AA 20% 100%
A 50%
BBB, BB, unrated 100%
B, CCC and below, 90 days past due 150%
Non-mortgage performing retail:
Exposure below 1 million euros and (at discretion) less than 0.2% of total non-mortgage retail portfolio of the bank
75%
Residential mortgages
Performing 35% 50%
90 days past due 100%
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0
10
20
30
40
50
AAA AA A+ A- BBB BB+ BB- B CCC
Default
Historical Default Rates
Main reason for using ECAIs: increases the risk sensitivity
High correlation between ratings and default rates
S&Ps PD over 5-year horizon
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Capital charge for corporates under SA and IRB
048
1216202428
Probability of default
Capitalcharge
%
IRB (C&I)SA
8% (current Accord)
Capital Charge under SA versus other measures
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Operational risk
Basic indicator (15% of average gross income over 3 years)
Standardised approach (based on separate scaling factors for gross income from defined business lines) between 12% and 18% of gross income
A range of advanced methods based on loss experience, subject to addition risk control criteria
Op risk is growing, both from unexpected external events and internal problems (ie “friendly fire”)
Choice of three approaches proposed:
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Pillars 2 and 3
Critical to the “balance” of the proposal Pillar 2 (Supervisory review) includes attention to risk management generally,
including:
– Concentration risk– Interest rate risk– Collateral management risk
Pillar 3 (disclosure) is designed to enforce market discipline
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The challenge for banks and supervisors
Initial phase– Determine approach to be used– Revise legislation/administrative guidance (e.g. EU
Directives)– Draw up reporting forms/guidance notes– Train staff for implementation
Ongoing– Activate Pillar 2– Review standards for IRB banks
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What are the basic aims of Basel II?
To deliver a prudent amount of capital in relation to the risk that is run
To provide the right incentives for sound risk management
Basel II is not intended to be neutral between different banks/different exposures
However, there is a desire not to change the overall amount of capital in the system
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Keep an eye on BCBS website
www.bis.org/BCBS