Professional Documents
Culture Documents
Agenda
z Risks in Banking
z Basic Concepts of Capital Adequacy
z Capital Adequacy Regulation: Some Background
z Key elements of Basel II
Risks in Banking
z A bank that does not take risks is not a bank
z Risk taking is the crucial economic role of banks and the
Risks in Banking
Credit risk
Market risk
Liquidity risk
Operational risk
Interest Rate risk
Reputational risk
5%
30%
60%
5%
Credit Risk
Market Risk
Operational Risk
Other Risks
instruments)
z Latin American debt crisis
Equity
Disclosed reserves
Undisclosed reserves
Revaluation reserves
Hybrid instruments
active banks
Relatively simple structure
Worldwide adoption
Increased competitive equality among international banks
Greater discipline in managing capital
A benchmark for assessment by market participants
management systems
z Focus on internationally active banks but should be
suitable for banks of varying levels of complexity and
sophistication
more options
Banks in different jurisdictions
Banks of all sizes and levels of sophistication
z It is much more comprehensive: two new pillars plus
operational risk
Supervisory
Review
Process
Market
Discipline
Supervisory review
process
Risk weighted
assets
Credit risk
Standardised
Approach
Internal
Ratings-based
Approach
Definition of
capital
Operational
risk
Basic
Indicator
Approach
Standardised
Approach
Market
discipline
Market
risks
Advanced
Measurement
Approaches
Standardised
Approach
Core
Capital
Models
Approach
Supplementary
Capital
Risk Sensitivity
z What factors are driving credit risk?
Risk Sensitivity
Risk Sensitivity
Basel Capital Ratio (1988 ) =
$ 40 billion
= 12 . 5 %
$ 320 billion
$ 40 billion
Capital Ratio =
= 13 .3 %
$ 300 billion
z and rise for those with more risk
$ 40 billion
Capital Ratio =
= 11 .4 %
$ 350 billion
Risk Components
Key components
z Borrower risk
z Transaction risk
z Exposure
Risk Components
Accord?
z There are several approaches for calculating capital
requirements
z New Accord should be applicable to
Menu of Options
Standardised Approach
z Objective is to align regulatory capital with economic
sovereign
bank
corporate
z Risk weights dependent upon external credit assessments
Claims on Sovereigns
Credit
Rating
AAA to
AA-
Risk
Weights
0%
A+ to BBB+ to BB+ to
ABBBB-
Below Unrated
B-
20%
150%
50%
100%
100%
Claims on Sovereigns
z At national discretion, supervisors may allow the use of
ECA Risk
Score
Risk
Weight
4 to 6
Claims on Banks
z Two options:
BBB+ to
BBB-
BB+
to B-
Below Unrated
B-
Sovereign Risk
Weight
0%
20%
50%
100%
150%
100%
20%
50%
100%
100%
150%
100%
BBB+ to
BBB-
BB+
to B-
Below Unrated
B-
Risk Weight
20%
50%
50%
100%
150%
50%
20%
20%
20%
50%
150%
20%
Claims on Corporates
z Based upon comments received from the industry, a 50%
sovereign RW
Credit Assessment AAA to A+ to
of Corporates
AAARisk Weight
20%
50%
BBB+ to
BB100%
Below Unrated
BB150%
100%
Claims on Corporates
in order that the bank can have a 100% capital charge will
affect the quality of the unrated borrower pool; thus a
higher RW (higher than 100%) may ultimately be
necessary
Claims on Retail
z New lower risk weight for retail portfolio, e.g.
Assessment
AAA AA-
Sovereigns
(Export credit agenci es)
Option 1
Option 2
Banks
Corporat es
Ret ai l
A+ - A-
BBB+ BBB-
BB+ - B-
Bel ow B-
Unrated
100%
( 4- 6)
150%
(7)
100%
150%
100%
0%
(1)
20%
(2)
50%
( 3)
20%
50%
100%
100%
20%
3
(20%)
50%
3
(20%)
50%
3
( 20%)
100%
3
( 50%)
20%
50%
100%
BB+ - BB100%
150%
3
( 150%)
50%
3
( 20%)
Bel ow BB150%
100%
Mortgages
35%
Other retail
75%
Risk weighting based on risk weights of sovereign in which the bank is incorporated, but one category less
favourable.
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 banks claim.
20
10
0
AAA
AA
A+
A-
BBB BB+
BB-
CCC
claim or jurisdiction)
z Process for recognizing ECAIs must be disclosed
z Eligibility critieria
- objectivity
- international access
(transparency)
- resources
- independence
- disclosures
- credibility
Recognition
Bank
Foundation
Advanced
Loss-given-default (LGD)
45%
Bank
Exposure-at-default (EAD)
100%
Bank
Maturity
2 years
Bank
Correlations
Loss-given-default (LGD)
25%
C&I
Charge
20%
)
(SMEs
s
e
is
r
terp
ized en
s
m
iu
ed
and m
Small
15%
10%
5%
Charge
Charge
8% (= current Accord
0%
0%
2%
4%
6%
8%
10%
PD
20%
Charge
15%
Mortgages (LGD 25%)
10%
8% (= current Accord
5%
0%
0%
2%
4%
6%
8%
10%
PD
Expected
loss
0
Economic capital
Unexpected loss
Capital, Reserves
Chosen
confidence
level
Frequency of loss
Provisions
Stress
loss
Amount of loss
credit risk
z The Committee is moving away from a one-size-fits-all
Three
Three
Basic Pillars
Basic Pillars
Minimum capital
Minimum capital
requirements
requirements
Supervisory review
Supervisory review
process
process
Market
Market
discipline
discipline
Risk weighted
Risk weighted
assets
assets
Operational
Operational
risk
risk
Credit risk
Credit risk
Standardised
Standardised
Approach
Approach
Internal
Internal
Ratings-based
Ratings-based
Approach
Approach
Definition of
capital
Basic
Basic
Indicator
Indicator
Approach
Approach
Standardised
Standardised
Approach
Approach
Market
risks
Advanced
Advanced
Measurement
Measurement
Approaches
Approaches
Standardised
Approach
Core
Capital
Models
Approach
Supplementary
Capital
internal processes
people
systems
or from external events
Interest rate
risk in the banking book
Liquidity
risk
Strategic,
Reputational
etc..
Continuum of approaches
lower
sophistication
Standardised Approach
risk-sensitivity
higher
Continuum of approaches
Basic Indicator Approach (BIA)
percentage ()
z Proposed indicator: gross income
Practices
z Generally not for internationally active banks
Continuum of approaches
Basic Indicator Approach (BIA)
Standardised Approach
z Activities divided into 8 business lines
z Indicator: gross income
z Capital charge for each business line calculated by