Course 14. Capital Adequacy

Transcription

1 Course 14. Capital Adequacy

2 Outline (1) About BIS (establishment) (2) Mission (3) Basel Committees (4) Basel Capital Accord (Basel I, II, III) (5) Recent regulatory incentives Micro vs Macro prudentiality Liquidity risk Systemic risk

3 (1) About BIS (establishment) One Bank to Rule Them All

4 (2) Mission The mission of the BIS is to serve central banks in their pursuit of monetary and financial stability & foster international cooperation by: fostering discussion and facilitating collaboration among central banks; supporting dialogue with other authorities that are responsible for promoting financial stability; carrying out research and policy analysis on issues of relevance for monetary and financial stability; acting as a prime counterparty for central banks in their financial transactions.

5 (3) Basel Committees The Basel Committee on Banking Supervision (BCBS); The Committee on the Global Financial System (CGFS); The Committee on Payments and Market Infrastructures (CPMI); The Markets Committee; The Central Bank Governance Forum; The Irving Fisher Committee on Central Bank Statistics (IFC).

6 (3) Basel Committees BIS hosts three groups that have their own legal personality: the Financial Stability Board (FSB); the International Association of Deposit Insurers (IADI); and the International Association of Insurance Supervisors (IAIS).

7 (3) Basel Committee on Banking Supervision (BCBS)

8 (3) BCBS regulations

9 (4)Basel Capital Accord What is Basel Accord? Basel Accord I: In 1988 BCBS published a set of minimal capital requirements for internationally active banks based on credit risk; updated in 1996 to cover market risk. Basel Accord II was issued by BCBS in 2004 to address shortcomings in the treatment of credit risk and incorporated operational risk. It is based on three pillars. minimum capital requirements; supervisory review practices; market discipline.

10 (4) Basel Capital Accord Basel II Accord

11 (4) Basel Capital Accord Basel II Accord

12 Capital Adequacy Ratio Cooke Ratio=Capital / Risk Weighted Assets 8% => Capital = min 8% * Risk Weighted Assets Definition of Capital Capital= Core Capital + Supplementary Capital

13 CORE & SUPPLEMENTARY CAPITAL 1) Core Capital (Tier I Capital) i) Paid Up Capital ii) Disclosed Reserves (General and Legal Reserves) 2) Supplementary Capital (Tier II Capital) i) General Loan-loss Provisions ii) Undisclosed Reserves (other provisions against probable losses) iii) Asset Revaluation Reserves iv) Subordinated Term Debt (5+ years maturity) v) Hybrid (debt/equity) instruments

14 RISK WEIGHT CATEGORIES IN BASEL-I (1) 0% Risk Weight: Cash, Claims on central governments and central banks denominated in national currency and funded in that currency 20% Risk Weight: Claims on multilateral development banks and claims guaranteed or collateralized by securities issued by such banks 50% Risk Weight: Loans fully securitized by mortgage on residential property that is or will be occupied by the borrower or that is rented. 100% Risk Weight: Claims on the private sector

15 (4) Basel Capital Accord Deficiencies of Basel II Accord Market risk not robust to extreme and unforeseen market variations Liquidity risk do not addressed Isolated risk (micro) no consideration of the probability and cost of bank failures and their impact on the system as a whole

16 (5) Recent regulatory incentives Entire system risk vs Isolated risk Macroprudential vs Microprudential regulation

17 (5) Recent regulatory incentives Basel III bank-level, or microprudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress Liquidity risk (new!) macroprudential, system wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time. Systemic risk (new!)

18 (4) Recent regulatory incentives Identifying SIFIs: how? TBTF: Too Big To Fail TITF: Too Interconnected To Fail => TITBAF: Too Important To Be Allowed To Fail

19 (4) Recent regulatory incentives Identifying SIFIs: methodology The Basel method The market method Static risk indicators => balance-sheet & off-balance-sheet items international activity (20%); size (20%); interconnections (20%); substitutability (20%); complexity (20%). Dynamic risk indicators => market variables contagion effects Bank i System macroeconomic shocks System Bank i!!! Negative externalities: fire sales, liquidity spirals, haircuts (margins), losses (trading portfolio), undercapitalization

20 (4) Recent regulatory incentives Global Systemically Important Banks (29 GSIB-s) Source: BIS, 2015

21 (4) Recent regulatory incentives Domestic SIFIs (Romania) Source: NBR (2015)

22 Conclusions The importance of BIS: major improvement in capital regulation ; enhance safety and soundness of the banking system, but a lot of challenges in the implementation ; less incentives for regulatory arbitrage ; better risk management by institutions.

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24 Thank you!