The Role of Bank Supervisory Authorities under the New Basel Accord Challenges for Asia Hua Hin, 9 July 2003 Stefan Hohl, BIS Representative Office for Asia and the Pacific, Hongkong
Goals of Revision of Capital Accord - 1 Enhance the risk sensitivity of capital requirements Accord 1988: Four broad risk weighting categories Comprehensive coverage of risks Accord 1988: Credit risk plus market risks in 1996 Present a menu of options to choose from Accord 1988: One-size-fits-all approach Greater focus on banks world-wide Accord 1988: Intended to apply to internationally active banks in G10 2
Goals of Revision of Capital Accord - 2 More power to supervisors and the market Accord 1988: Focused on minimum capital requirements Maintain overall level of capital in the banking system Implications Complexity? Cyclicality? 3
The New Capital Accord in a Nutshell Three Basic Pillars Mutually reinforcing pillars Minimum Capital Requirements Supervisory Review Process Market Discipline Weighted Risks Definition of Capital Credit Risk Operational Risk Market Risk Standardised Approach (SA) Internal Ratings Based Approach (IRBA) Asset Securitisation Basic Indicator Approach (BIA) Standardised Approach (SA) Advanced Measurement Approaches (AMA) Foundation Approach Advanced Approaches SA IRBA 4
Capital charges for corporate and SME exposures Charge 25% 20% 15% 10% 5% C & I (LGD 45%) SME (max.adjustment) 0% 0% 2% 4% 6% 8% 10% PD IRB certainly does not always mean lower capital requirements 5
Capital charges for retail exposures 20% Other retail (LGD 85%) Charge 15% 10% 5% Mortgages (LGD 25%) Revolving (LGD 85%) 0% 0% 2% 4% 6% 8% 10% PD IRB certainly does not always mean lower capital requirements 6
Future time table May 2003: Consultative Document III Fall 2003: Final Accord End-2004: IRBA banks start data warehousing of PD observations to benefit from transitional arrangements Without exception, banks adopting the advanced IRBA are required to have at least five years of data for PDs, and seven years for LGDs and EADs End-2005: parallel calculation (old and new) for IRB banks End-2006: Accord comes into force From 2007 through 2008: declining floor (90%, 80%) 7
Implementation - Challenges for Asia Assessing national priorities important first step Effective implementation does not necessarily require application of the New Accord to all banks in a jurisdiction However, implementing key elements Pillar 2 and Pillar 3 even if Pillar 1 is not fully implemented after year-end 2006 seems reasonable 8
Implementation - What needs to be done? Overarching policy considerations Assessing national priorities versus benefits of implementation in end 2006 Core Principles implemented? Legal and regulatory infrastructure? Role of market discipline? Accounting standards? Human resources? Soundness of corporate governance structure? 9
Implementation considerations Phase 1 Determining the Scope of Application Assess current status/needs of banking system Determine range of approaches which banks could reasonably be expected to implement Identify significant banks (size, complexity, international presence, systemic importance) Implementation/Timing National considerations Phased approach (different approaches, different dates) 10
Implementation considerations - Phase 2 Assessment of Banks Capabilities Assess risk management capabilities of significant banks Early communication with banks Determine current status Determine quantitative impact Discuss national discretion Supervisory efforts to assist banks in their process Guidance of what models will be acceptable Data collection specifications Discuss validation of internal assessments 11
Implementation considerations - Phase 3 Assessing Supervisory Preparedness Translate findings of phase 2 into legislation and supervisory framework Give national guidance including timeframe Assess supervisory resource and training requirements Internal resources and/or new staff Consultants Infrastructure requirements (IT, reporting, ) Dialogue between supervisors crucial 12
Implementation considerations - Phase 4 Implementation Pass legislation Perhaps adjust to national conditions of Accord Run of old and new system in parallel Continue dialogue with other supervisors 13
What has been done? All BCBS member countries, plus EU and some countries (Australia, Singapore,?) have indicated to implement by end 2006 Largest banks on IRB (US only on Advanced IRB) Most will have many banks on the Standardised Approach (probably US is exemption) With explicit Pillar 1 charge for Operational Risk But, implementation of pillars 2 & 3 will vary Impact analysis Quantitative Impact Study 3 Strong participation in Asia 14
Quantitative Impact Study - QIS 3 Launched on 1 st October 2002 with participating banks BCBS * - 188 banks Other countries - 177 banks 18 EME countries including Australia, China, Hongkong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Thailand Coordinated by APRA and BIS Asian Office 5 EU accession countries and 7 non-g10 EU Group 1 banks are large, diversified, internationally active with Tier 1 capital > 3bn Group 2 banks are smaller, sometimes specialized institutions * BCBS Basel Committee for Banking Supervision (13 countries) 15
QIS 3 overall results QIS 3 results - overall percentage change in capital requirements 15% 10% 5% 0% -5% -10% Standar di sed IRB Foundati on IRB Advanced BCBS Gr oup 1 BCBS Gr oup 2 Other Gr oups 1 & 2-15% -20% -25% Other represents 17 EME countries 16
QIS 3 SA contributions Contributions to Change in Capital Standardised Approach Overall change Operational risk Overall credit risk Other portfolios Securitised assets SME Retail Other Groups 1 & 2 BCBS Group 2 BCBS Group 1 Bank Sovereign Corporate -15% -10% -5% 0% 5% 10% 15% 20% 17
QIS 3 Foundation IRB contributions Overall change Operational risk Overall credit risk Other portfolios General provisions Securitised assets SME Other Groups 1 & 2 BCBS Group 2 BCBS Group 1 Retail Bank Sovereign Corporate -30% -20% -10% 0% 10% 20% 18
QIS 3 Advanced IRB contributions Contributions to Change in Capital IRB Advanced approach Overall change Operational risk Overall credit risk Other portfolios General provisions Securitised assets SME Retail Bank Sovereign Corporate BCBS Group 1-15% -10% -5% 0% 5% 10% 15% 19
SA variation for BCBS banks 110% 90% 70% 50% 30% 10% % change in minimum capital requirements versus current Accord -10% -30% -50% -70% 0-10 10-15 15-20 >20 Tier 1 plus Tier 2 capital less deductions bn 20
SA variation for other banks 110% 90% 70% 50% 30% 10% % change in minimum capital requirements versus current Accord -10% -30% -50% -70% 0-5 >5 Tier 1 plus Tier 2 capital less deductions bn 21
QIS 3 BCBS major impacts (Group 1) Standardised 1 Sovereign + 19 Bank + 43 Retail mortgages - 20 FIRB 1 + 47 + 45-56 1 % change in risk-weighted assets to current approach, in contrast to contributions 22
Concluding Thoughts IRBA is most risk sensitive, but SA equally important New Accord encourages banks to refine their risk measurement and risk management over time Implementation challenges for all countries Appropriate capital adequacy framework should be implemented to ensure safety and soundness of the banking system and encourage improvements in risk management. Effective implementation requires a framework suited national circumstances Supervisors should ensure that, over time, they can permit their significant banks the possibility to move to more advanced methodologies 23