Development and Implementation of Basel II

Transcription

1 Development and Implementation of Basel II Bank Analysts and Investors Event Richard Gresser. Gilbert Menard January

2 AGENDA Framework goals & development process Implementation scope and timing Advanced Approach review process Related policy development

3 Framework goals Strengths of Basel I Relatively simple structure Initially strengthened soundness and stability of financial system Adopted globally Enhanced competitive equality between internationally active banks Page 3

4 Framework goals Weaknesses identified with Basel I Capital required does not mirror increasingly complex risk profiles Can be easily arbitraged OECD/Non-OECD distinction Incentive to take high quality assets off the balance sheet Not much recognition of credit risk mitigants Page 4

5 Framework goals Basel Committee Goals Enhance risk sensitivity of capital requirements Greater emphasis on banks own assessment of risk Improve transparency for market discipline Page 5

6 Development Process 1999 Consultative Paper #1 issued on Basel II by BCBS Orientation of Basel II policy development 2001 Consultative Paper #2 issued on Basel II by BCBS Two Quantitative Impact Studies OSFI established core Basel II (IRB) experts to promote domestic implementation 2002 Quantitative Impact Study Consultative Paper #3 issued on Basel II by BCBS Initial draft domestic guidance on supervisory expectations related to Basel II implementation in Canada (Pillar 1 expectations defined) First review of Basel II implementation bank gap analysis submissions

7 Development Process 2004 OSFI releases comprehensive consultative paper on Basel II implementation Quantitative Impact Study # 4 Submissions of Banks Basel II rollout plans 2005 Finalisation of the Basel framework Quantitative Impact Study #5 Development of formal draft guidance ( CAR ) Expansion of supervisory reviews related to Pillar 1 Development of data reporting requirements ( BCAR ) 2006 AIRB applications and on-site reviews of IRB systems Finalisation of supervisory guidance The start of parallel reporting Parallel Run start date: October 31, Rollout of Basel II implementation & approval reviews Basel II start date: November 1, 2007

8 Implementation Scope and Timing Bank Size International ly Active Domestic Banks Smaller Banks Availability of Approaches AIRB for material portfolios & credit businesses in Canada and U.S. Other credit portfolios based on banks roll-out plans Operational risk all approaches are available except Alternative Standardized All credit and operational approaches [except Alternative Standardized] are available Page 8

9 Implementation Scope and Timing Implementation Dates November 1, 2007 (for fiscal year ends October 31) and January 1, 2008 (for fiscal year ends December 31) Flexible Approach to Implementation Flexible approach is because: AIRB is expected of internationally active banks FIRB and standardized approaches for credit risk will be available if banks fail to achieve the advanced approach Waiver mechanisms provide for orderly roll-out AMA is not mandatory Page 9

10 Implementation Scope and Timing Canada compared to US and UK Timing of Implementation Canada U.S. U.K. All approaches (Nov 1, 2007 or Jan 1, 2008) Requiring Advanced approaches for Core Instittuions (2009?) Opt-in and Other banks may have Basel II Standarized NPR TBD SA, FIRB (Jan 1, 2007) AIRB, AMA (Jan 1, 2008) Parallel Reporting IRB institutions 5 quarters (Q to Q4 2007) IRB institutions 4 quarters (2008?) NA Capital Floors IRB or AMA institutions 90% in % in 2009 Core institutions 95% First floor 90%Second floor 80% Third floor IRB or AMA institutions 95% in % in % in 2009

11 Implementation Scope and Timing Timing of banks targeting Advanced Approaches November 1, AIRB 1 FIRB January 1, AIRB January 1, AIRB November 1, AIRB January 1, AIRB

12 IRB Approval Process: Five Phases Phase 1 Monitoring Implementation Efforts Phase 2 Formal Application and preparation for parallel reporting Phase 3 Meaningful Parallel Reporting Phase 4 Approval for Pillar 1 Credit Risk Capital Purposes Phase 5 Ongoing Compliance Monitoring Page 12

13 IRB Approval Process: Five Phases Phase Description Timing for Institutions with Oct. 31 YE Timing for Institutions with Dec. 31 YE Phase 1: Monitoring Institutions Implementation Efforts Part A: Preliminary self-assessment against IRB minimum requirements and associated project planning Part B: Rollout plan for IRB implementation November 1, 2004 to January 31, 2006 N/A Phase 2: Formal Application and Preparation for Meaningful Parallel Reporting Year 1 of parallel reporting period Submission of approval package to OSFI Review of institution s application packages February 1, 2006 to July 31, 2006 April 1, 2006 to September 30, 2006 Phase 3: Meaningful Parallel Reporting and Completion of OSFI Review for Approval Year 2 of parallel reporting period Completion of monitoring of capital reporting and any outstanding approval work August 1, 2006 to July 31, 2007 October 1, 2006 to September 30, 2007 Phase 4: Approval for Pillar 1 Credit Risk Capital Purposes Two-step approval decision 1.Conditional approval decision 2.Reconfirmed and final approval August 1, 2007 to December 31, 2007 October 1, 2007 to February 29, 2008 Phase 5: Monitoring of Ongoing Compliance Post approval and ongoing compliance From November 1, 2007 From January 1, 2008 Page 13

14 Pillar 1 Work Model: Key Supervisory Activities Supervisory Framework: Reliance-Based and Risk-Based Supervision Basel II Implementation Process (Banks: Gap Analysis - Rollout Plan Implementation - Use Test/Validation) Requirements (CAR; Implementation Notes; Self-Assessment Instructions; Data Requirements) Key Supervisory Activities Review of self-assessment/ application packages Work stream reviews (e.g. Validation) Data submission quality assessment Status update/ gap analysis meetings BRR assessment Approval Decision (by Year-End 2007) Page 14

15 Advanced Approach review process Pillar 1 Work Model: Risk Based FI Class Approach Approval Home/ Host Host/ Home Materiality** (Total) Conglomerates IRB IRB Required Required N/A Material Intensity of Work Effort High Large Foreign Subsidiaries IRB IRB Required N/A Required Material Medium Other Foreign Subsidiaries IRB IRB Required N/A Required Less Material Standardized Institutions All Domestic Banks Other Foreign Subsidiaries SA Not Required (Readiness Assessment only) N/A N/A N/A* Medium / Low Low Page 15

16 IRB Approval Timelines Dates for DTIs with Oct 31st year-end Dates for DTIs with Dec 31st year-end Feb 1, 2006 Apr 1, 2006 Starts Oct 31, 2006 to Oct 31, 2007 Starts Dec 31, 2006 to Dec 31, 2007 Milestone IRB application package, including selfassessment against minimum IRB requirements Parallel reporting under Basel I and Basel II for five quarters starts Q4 2006, Q1-Q Aug 1, 2007 Oct 1, 2007 Conditional Approval Oct 31, 2007 Dec 31, 2007 Updated application package (as at July 31, 2007) Nov 1, 2007 Jan 1, 2008 Implementation date Dec 31, 2007 Feb 29, 2008 Final Approval

17 Related Policy Development Milestone ICAAP Advisory Incremental Default Risk Description Parallels advisories issued buy the US and CEBS Sets expectations for internal capital management and dialogue with supervisory review process Basel Consultative paper on details of principles for sound quantification for default risk in trading books Mid-2008 potential guidance on how these concepts apply in Canada Page 17

18 Questions?