Basel II. Stefan Hohl,, BIS Representative Office for Asia and the Pacific Bank for International Settlements

Transcription

1 Basel II Stefan Hohl,, BIS Representative Office for Asia and the Pacific

2 Outline Challenge 2nd consultative document Remarks from the industry Committee s response Implications

3 Challenge Changing financial markets More important role for financial intermediaries Evolving shortcomings of the 88 Accord Capital adequacy in relation to a bank's true risk profile Broad-brushed risk weighting structure Problematic OECD/Non-OECD distinction for sovereigns Created an incentive to take some highest quality assets off the balance sheet Covered only credit and market risks 3

4 The New Accord Three Basic Pillars Minimum Capital Requirements Supervisory Review Process Market Discipline Weighted Risks Definition of Capital Credit Risk Operational Risk Market Risk Standardised Approach (RSA) Internal Ratings Based Approach (IRBA) Foundation Approach Advanced Approaches 4

5 Increasing risk sensitivity Enhanced Risk Sensitivity BCBS major objective: more risk sensitivity ity Implies a judgement on risk Current Accord judgement made by supervisors Standardised Approach judgement by third parties IRB Approach judgement by bank s themselves Evolutionary Approach Current Accord Standardised approach Foundation Internal Ratings-Based Approach Advanced Internal Ratings-Based Approach Better risk management implies lower capital requirements 5

6 Drivers of Credit Risk Probability of default Loss given default Exposure at default Maturity Concentration Borrower risk Facility risk Actual exposures Time dimension risk Diversification of portfolio 6

7 Evolutionary Structure for Credit Risk I Approaches Simple standardised Standardised Foundation IRB Advanced IRB Full credi risk models No external assessments Risk weight based on external assessment Credit Risk Mitigation PD, (M) based on banks' own assessments PD, LDG, EAD, M based on banks' own assessments Recognition of correlations Preferential treatment for domestic business Simple approach Comprehensive approach PD = Probability of default, LDG = Loss given default, EAD = Exposure at default, M = Maturity 7

8 Drivers of Credit Risk - RSA Driver Probability of default Loss given default Exposure at default Maturity Concentration Recognition Credit assessment institutions Credit risk mitigation Credit conversion factors Limited recognition in CRM No specific recognition 8

9 Eligibility Criteria for ECAIs Certain criteria must be fulfilled for recognition of ECAIs Criteria Objectivity Independence Transparency Resources Credibility 9

10 CRM Methodologies RSA/FIRBA Comprehensive approach Focuses on the cash value of the collateral taking into account price volatility Partial collateralization will be recognized Simple approach Developed for banks that only engage to a limited extent in collateralized transactions Maintains the substitution approach in the current accord Will generate higher capital requirements than the comprehensive approach 10

11 Eligible Financial Collateral Standardised approach and Foundation IRB Cash on deposit with the lending bank Government securities rated BB- and above (includes PSEs treated as sovereigns by national supervisor) Bank, securities firm, corporate securities rated BBB- and above Equities included in a main index Certain mutual funds Gold Advanced IRB No limits 11

12 Eligible Physical Collateral Standardised Residential real estate: risk weight 50% Commercial real estate: only when meeting strict conditions (risk weight 50%) Foundation IRB Both residential and commercial real estate LGD could go down to 40% Advanced IRB No limits 12

13 Internal Ratings Based Approach IRBA Wider application than originally anticipated Different approaches for different exposure types Corporate, bank, sovereign, retail Project finance, equities, asset securitisation Based on three main elements Risk components or inputs Risk-weight function Minimum requirements Plus Requirement for Market Discipline Subject to supervisory validation and approval Reflects evolutionary approach 13

14 Parameters Standard Approach Foundation Approach Internal Rating Advanced Approach Credit Risk Models Risk weigths 5 More More More PD Supervisor Bank Bank Bank LGD Supervisor Supervisor Bank Bank EAD Supervisor Supervisor Bank Bank Correlations No No No Yes 14

15 Asset Securitisation - What s new? Compared to Accord 1988 Everything Current proposal seeks to harmonise national treatments Compared to June 1999 Consultative Paper Distinction between investing and originating banks Added clean-break criteria Deduction for credit enhancements Treatment of early amortisation features Added criteria for treatment of unrated securitisations Added treatment and criteria for liquidity facilities Discussion ofo IRB treatment and implicit risk Disclosure requirements 15

16 Other Risk OTHER RISKS Operational risks (including legal risk) Interest Rate risk in the banking book Liquidity risk Strategic, Reputational etc.. Pillar I Pillar II (supervisory review) and/or Pillar III 16

17 Operational Risk 3 approaches outlined Basic Indicator Approach (gross income) Standardised Approach Based on 8 business lines (gross income) Advanced Measurement Approach Issues Data availability Risk Measure Calibration Capital charge = x indicator 17

18 BCBS reactions on key issues raised Incompleteness There are too many green areas. Ready for implementation? Calibration The New Accord would impose too heavy a capital requirement SMEs The New Accord is too onerous on lendings to SMEs Procyclicality Capital requirement will swing up and down over an economic cycle Complexity January 2001 proposal was too complex, with more than 500 pages 18

19 2001 January July - August September - October (2002) CP2 Working Papers CP3 The First Pillar (Minimum capital requirement) Credit Risk Standardised Approach (Use of external credit ratings) IRB Approach (Use of banks internal rating system Operational Risk Corporate exposures Sovereign exposures Bank exposures Retail exposures Specialised lending Equity Exposures Expected Losses and FMI Asset Securitisations Market Risk(maintain current Accord framework) The Third Pillar The Second Pillar Equity Exposures Expected Losses and Margin Income Specialised lending Asset Securitisation Operational Risk Streamlined proposal : shows only frameworks in CP2 Getting the full picture 19

20 Calibration of New Accord The calibration intended in the Second Consultative Package (CP2, January 2001) The results of the Second Quantitative Impact Study (QIS2): G10 average, after incorporating some of the working paper proposals Review of the Standardised Approach calibration The calibration aimed at for the Third Consultative Package (CP3) Current Accord Standardised Approach Foundation IRB Operatio nal risk Credit risk Current Accord Standardised Approach Foundation IRB Operatio nal risk Credit risk QIS2.5(Nov.2001) QIS3(2002) Further review of the IRB calibration Current Accord Standardised Approach Foundation IRB Operatio nal risk Credit risk Proposals made in Working Papers -Reduction in the target of operational risk capital as a percent of current minimum capital requirements from 20% to 12% (September 2001) -Modifications related to the coverage of expected losses, including the use of excess general provisions, specific provisions, and future margin income (July 2001) 40 Required Capital (% of exposure) Potential Modification as a basis for the QIS Probability of Default (PD)(%) Corporate (CP2) Corporate( QIS2.5) Retail (nonmortgage CP2) Retail (nonmortgage QIS2.5) 20

21 Calibration additional changes Modified risk weight function is now (OIS 2.5) a decreasing function of asset correlation C&I: asset correlationc decreases from 20% to 10% Residential mortgage: asset correlationc equals 15% Other retail: asset correlationc decreases from 15% to 4% EL charges in CPII Expected losses, including the use of excess general provisions, specific provisions, and margin income (in( certain circumstances) can be used to offset IRB capital requirements w and probably "granularity-index" index" factor will be strenghtened in Pillar II 21

22 Probability of Default (PD) 3 bp IRB Capital Requirement 1/2001 (C&I) 1.1% IRB Capital Requirement QIS 2.5 (C&I) 1.4% 10 bp 2.3% 2.7% 25 bp 4.2% 4.3% 50 bp 6.4% 5.9% 75 bp 8.3% 7.1% 100 bp (1%) 10.0% 8.0% 1.25% 11.5% 8.7% 2.00% 15.4% 10.3% 4.00% 5.00% 10.00% 20.00% 23.3% 26.5% 38.6% 50.0% 13.4% 14.8% 21.0% 30.0% 22

23 Probability of Default (PD) 3 bp IRB Capital Requirement 1/2001 (Retail) 0.5% IRB Capital Requirement QIS 2.5 (res. mortgage) 0.4% IRB Capital Requirement QIS 2.5 (other retail) 0.4% 10 bp 1.1% 1.0% 0.9% 25 bp 2.0% 2.0% 1.8% 50 bp 3.2% 3.4% 2.8% 75 bp 4.2% 4.5% 3.6% 100 bp (1%) 5.1% 5.5% 4.2% 1.25% 6.0% 6.4% 4.7% 2.00% 8.3% 8.8% 5.7% 4.00% 5.00% 10.00% 20.00% 13.4% 15.6% 24.8% 38.3% 13.7% 15.7% 23.2% 32.5% 7.1% 7.4% 8.5% 10.6% 23

24 Graphical representation C&I Corporates under CP2 Modified Asset correlation 0.25 Corporates under CP2 Modified Capital charge 60% % 40% % % % Prob. of Prob. of 0 default default 0% 5% 10% 15% 20% 0% 5% 10% 15% 20% 0% 24

25 Graphical representation Retail M o rtgages under CP 2 Modified Capital charge 25% All retail under CP2 Modified other retail Modified mortgage Prob. of default 0% 5% 10% 15% 20% Asset correlation Prob. of default 0% 5% 10% 15% 20% N on -m ortgage retail un der CP 2 Modified Prob. of default 0% 5% 10% 15% 20% 20% 15% 10% 5% 0% Capital charge 70% 60% 50% 40% 30% 20% 10% 0% 25

26 SME issue likely lower capital charge Greater recognition of physical collateral and receivables in foundation IRBA; ; QIS 2.5 treats already fully secured loans via Other physicalp collateral: 45% LGD Receivables: 40% LGD Possible inclusion of size of company into the risk weight function in addition to decreasing asset correlation Smoothes out cliff effect between retail and C&I What else? 26

27 Procyclicality Flattening risk weight curve Flattening risk weight curve CP2(Jan 2001) Actual capital to be held QIS2.5(Nov 2001) Stress testing Standardized Approach Current Accord Operational risk charge may work countercyclically to offset procyclicality of the credit risk charge to some extent. Recession Recovery Boom Slow-down Recession Time 27

28 Reduced Complexity Simplification Reduced Prescriptiveness Flexibility No One size fits all Risk sensitivity Level playing field Streamlining Pillar III: items reduced to 10% of CP2 Minimum Requirement for IRBA reedited Specialised Lending will be part of C&I Rethinking of concentration measure within Pillar I w factor now in Pillar II 28

29 Implications Fully fleshed risk-sensitive sensitive proposals for QIS 3 Should provide incentive compatible approach Should lead towards more stability Challenge for banks and supervisors Need for expertise Need for comparability of practices around the globe Need for consistent implementation Need for establishing IT infrastructure International Cooperation BIS, FSI, Wider scope for regional cooperation 29