TERMS OF REFERENCE Project: Reviewig the Capital Adequacy Regulatio Project Ower: Project Maager: Deputy Project Maagers: Techical Achor (TAN): Mr. Idrit Bak, Bak of Albaia, Supervisio Departmet. Mrs. Mirada Ramaj, Bak of Albaia, Supervisio Departmet. Mrs. Adela Xhemali, Itesa SaPaolo Bak Oe or two peer reviewers from Cetral Baks i the regio. Project Workig Group: BoA Supervisio Departmet, Legal Departmet, Baks, AMF. I - Backgroud - of the problem BoA is seekig to improve ad to expad the coverage of the regulatio o capital adequacy i order to capture a wider rage of risks faced by the baks. The curret regulatio o Capital Adequacy establishes the capital to risk weighted assets ad off-balace sheet items ratio, ad sets the miimum required limit for this ratio. More specifically: the umerator of the adequacy ratio, bak s capital, is composed of core capital ad supplemetary capital ; the deomiator of this ratio cosist of the risk-weighted amouts of the balace sheet assets, off balace sheet items represetig term fiacial istrumets cotracts related to iterest ad exchage rates ad other balace sheet items. More o the defiitio ad calculatio method of the bak capital is provided o the Guidelie o Bak Capital issued by Bak of Albaia. bak capital is composed of core capital ad supplemetary capital. SPI Albaia Secretariat Mrs. Auela Ristai, Director of Operatios, auela.ristai@spi-albaia.eu Ms. Eloa Bollao, Director of Aalytics ad, eloa.bollao@spi-albaia.eu Address: Twi Tower I, Kati 6, Apt. A3. Tiraa, Albaia. Tel. +355 4 80 35; Fax. + 355 4 80 37 www.spi-albaia.eu
The methodology used i the curret framework calculates the (miimum) capital to cover oly for credit risk. Other risk typologies, such as operatioal risk, have ot bee addressed yet. Therefore BoA iteds to improve risk maagemet i lie with Basel II, first pillar of the capital adequacy framework, by ehacig the methodology for calculatig risk weighted assets to credit risk ad by icludig the operatioal risk i calculatig the capital requiremet. Basel Committee defies operatioal risk as the risk of loss resultig from iadequate or failed iteral processes, people ad systems or from exteral evets. This defiitio icludes legal risk, the risk related, but is ot limited to, exposure to fies, pealties, or puitive damages resultig from supervisory s, as well as private settlemets, but excludes strategic ad reputatioal risk. Basel Committee permits baks to choose amog broad methodologies for calculatig their capital requiremets to cover credit ad operatioal risks. For calculatig credit risk charges baks ca choose betwee two broad methodologies. Oe alterative is to measure credit risk i a stadardized maer usig the Stadardized Approach. The other alterative, the Iteral Ratigs-based Approach, allows baks to use their iteral ratig systems for credit risk maagemet. This approach is subject to the explicit approval of the bak s supervisor. For calculatig operatioal risk charges the Committee provides three methods: (i) the Basic Idicator Approach; (ii) the Stadardized Approach; ad (iii) Advaced Measuremet Approaches (AMA). Give the curret status of developmets of the bakig idustry ad the iteral capacities, BoA has cosidered that the Simplified Stadardized Approach or the Stadardized Approach as the most appropriate method for calculatig credit risk charges. I lie with the simplified stadardized approach Basel Committee suggests the Basic Idicator Approach for operatioal risk. I. Legal Framework. The legal framework built up by BoA o capital requiremets for baks cosists of laws, regulatios ad guidelies. I order to implemet the ew methodologies o credit risk ad operatioal risk a thorough ivestigatio of the curret framework is ecessary. The prelimiary legal framework. Existig framework Actios to be followed: Review / Amedmet / Issue Law No. 66 Nr. 66, dated Review: Chapter V Risk Maagemet, art. 58 This approach is ot cosidered as aother approach per se for determiig capital, it rather collects i oe place the simplest optios for calculatig risk-weighted assets.
8..006 O Baks of the Republic of Albaia. Regulatio o Capital Adequacy approved ad ameded by BoA s Supervisory Coucil. Guidelie o Bak Capital approved ad ameded by BoA s Supervisory Coucil. Other Regulatios for risk maagemet. a) Amed: The methodology for Credit risk charges calculatio. methodology: Simplified Stadardized Approach. b) Issue: The methodology for Operatioal risk calculatio. methodology: Basic Idicator Approach. Amed: Chapter I Geeral, art. 3, Purpose Issue a guidelie o Credit Risk Maagemet Issue a guidelie o Operatioal Risk Maagemet Comply with Basel Committee guidace o Soud Practices for the Maagemet ad Supervisio of Operatioal Risk II - Project Objective Defiitio of policy goals Withi the policy goal of improvig the capital adequacy to the credit risk ad to the operatioal risk accordig to Basel II, First pillar, the project objective is to prepare the ecessary amedmets ad to defie a implemetatio timeframe. III Iteded Strategy Descriptio of the BR steps =========Scopig of ======== ======Aalysis ==== = = =Coclusio= Of Impact Cosultatio * PWG * See attachmet The project maagemet group (Project Ower, Project Maager, Deputy Project Maager, supported by the SPI Secretariat) will act based o the madate received from the SPI Committee to review the Capital Adequacy regulatio, to modify the methodology o credit risk ad to itroduce operatioal risk i calculatig capital requiremets. 3
The project workig group (PWG), with the support of SPI Albaia Secretariat, will work to revise the existig Capital Adequacy ad brig it i lie with the developmets i bakig system ad with Basel II requiremet o capital adequacy. Plaed steps to achieve project s objective:. To idetify the legal framework that regulates the capital requiremets for baks. To acquire a clear uderstadig o the provisios of Basel II ad EU respective directives ad iteratioal experiece o capital adequacy framework, focused o credit ad operatioal risk; 3. Based o the gaied expertise, to formulate the proposal for amedmets i the existig legal framework ad/or for issuig ew regulatios ad guidelies i order to have a comprehesive framework; 4. To assess the possible impact of the ew methodologies o credit ad operatioal risk ad ru o the desig ad impact; 5. To propose a implemetatio pla. IV- Methodology: from kick off to the accomplishmet of the project A. First PWG Meetig Preparatio of PWG st meetig (PM/DPM ad SPI Secretariat) PWG The Project Ower will appoit PM ad AAB will appoit the DPM. SPI Secretariat will draft the ivitatio letter. PMG ad SPI Secretariat to prepare: a. a backgroud ote o curret situatio, icludig ; b. a ote o iteratioal experiece (Basel II provisios ad experiece i Europea coutries). Output: First Draft of Scopig of for PWG discussio After PMG clearace ad before the st meetig, SPI Secretariat will sed to PWG members the followig documets:. Draft preset TORs.. Draft of Scopig of documet. PWG st meetig PWG 4
Objectives: a. To uderstad the curret ad the policy goals; b. To formulate s o policy implemetatio; c. To aalyze the impact for users, regulated firms ad regulators of chagig the capital requiremets. Output: Iformatio to complete a documet comprisig the Scopig of the ad the Impact Assessmet (Impact Assessmet Aalysis Documet - IAAD) to be edorsed i PWG d meetig. The IAAD covers steps -8 of the Better Regulatio Template. PM/DPM establishes homework: SPI Secretariat will prepare the miutes of the meetig B. Secod PWG Meetig Preparatio of PWG d meetig (PM/DPM ad SPI Secretariat) PMG ad SPI Secretariat to draft the for data collectio. PWG d meetig Objective: To discuss ad agree o the cost ad beefit ; Output: (a) Edorsemet of IAAD (-8) ad (b) Fial. PWG PM/DPM establishes homework: SPI Secretariat: will prepare the miutes of the meetig will itegrate the idividual cotributios o the cost ad beefit. C. Third PWG Meetig Preparatio of PWG 3 rd meetig (PM/DPM ad SPI Secretariat) SPI Secretariat to: collect data from PWG participatig baks; ad summarize results ad prepare draft summary impact assessmet for PWG discussio ad edorsemet. PMG ad SPI Secretariat: to draft policy optio cosultatio paper, icludig amedmet proposals. PWG 3rd meetig PWG 5
Objectives: (a) To edorse Impact Assessmet Aalysis Documet icludig Summary Impact Assessmet ; b) To fialize policy optio cosultatio paper. Output: a) IAAD; b) fial policy optio cosultatio paper. D. Forth PWG Meetig Preparatio of PWG 4 th meetig (PM/DPM ad SPI Secretariat : PM/DPM ad SPI Secretariat to: a. Ru with stakeholders based o the policy optio cosultatio paper; b. Draft feedback documet. PWG 4th meetig PWG Objective: a) To discuss the cosultatio feedback documet ad the policy documet; ad b) To agree o the policy s. Output: s. Followig PWG 4 th meetig: Preparatio of the SPI Committee paper. VI - Project Team The team is composed of: Bak of Albaia Baks VII Tetative PWG meetig schedule First meetig October 008 Secod meetig November 008 Third meetig November 008 Fourth meetig December 008 6
VIII Cosulted documets - Basel Committee o Bakig Supervisio, 006, Iteratioal Covergece of Capital Measuremet ad Capital Stadards, A Revised Framework, Jue 006. - Basel Committee, 003, Guidace o Soud Practices for the Maagemet ad Supervisio of Operatioal Risk, February 003. - Law N0. 66, dated 8..006 O Baks o the Republic of Albaia. - Regulatio o Capital Adequacy. - Guidelie o Bak Capital. Attachmet 7
The EU Better Regulatio Approach Steps Purpose Scopig of problem. idetificatio To uderstad if a market/ failure creates the case for itervetio.. Defiitio of policy To idetify the effects of the market / failure to the. 3. Developmet of do othig To idetify ad state the status quo. optio 4. Alterative policy optios To idetify ad state alterative policies (amog them the market solutio ). Aalysis of impact 5. Costs to users To idetify ad state the costs bore by cosumers 6. s to users To idetify ad state the beefits yielded by cosumers 7. Costs to regulated firms ad To idetify ad state the costs bore by regulator ad regulator regulated firms 8. s to regulated firms ad To idetify ad state the beefits yielded by regulator ad regulator regulated firms. Data Questioaire To collect market structure data to perform a quatitative cost ad beefit Cosultatios. Documet To lear market participat opiios o various policy optios Coclusio. Fial Recommedatios Fial report to decisio-makers, based o Cost Aalysis ad market feedback Source: CESR-CEBS-CEIOPS 3L3 Guidelies, adjusted by the Covergece Program based o experiece. 8