Description
The PPT describes about New Basel Accord and its implications for banks.
The new Basel Accord – Implication for Banks
History
• Basel Committee on Banking Supervision published the Capital Adequacy Accord, also known as the Basel Accord for Financial Service Providers (FSP’s) , in 1988. With growth in the financial sector and newer developments the committee felt the need for a revised accord which was eventually finalised in June 1999, known as BASEL II. (Committee suggested implementation by 2006)
•
,
Difference
Existing Accord 1. Focus on single risk. New Accord 1. More emphasis on banks’ measures – own internal methodology, supervisory review and market discipline.
2. One size fits all.
2. Flexibility, menu of approaches, incentive for better risk management.
3. Broad brush structure.
3. More risk sensitivity.
BASEL II framework
Pillar 1 : Minimum Capital Requirements
• The first pillar is designed to help cover risks within a financial institution. It aims to set minimum capital requirements and defines the current amount of capital. This pillar also stresses on defining the capital amount by quantifying risks such as Credit Risk, Operational Risk and Market Risk.
Measuring Credit Risk
• • Defines minimum capital requirement required to cover exposures to customers and other counterparties. Approaches to calculate credit risk (i) Standardized Approach (ii) Internal Rating Based (IRB) Approach a). Foundation (Finding Probability of default) b). Advanced (Finding Probability of default and also allows bank to provide guarantees and credit derivatives on the risk of exposure.
Measuring operational risk
• Three approaches to calculate operational risk (i) Basic Indicator approach : Single operational parameter is used to calculate the capital for operational risk (eg. Gross annual revenue). The capital charge is a fixed % of this parameter, defined a “Alpha factor. (ii) Standardized approach : Activities of a bank are divided into standard industry business lines (corporate banking, trade finance etc.), Like in the standardized approach, a factor (Beta factor in this case) is applied to each line and the capital charge is calculated for that business line and they are then summed up to get the total charge. (iii) Internal Measurement approach (IM) :Banks internal loss data is used to calculate the risk. Data from various business lines are taken and probability of loss is given along with it.
Measuring Market risk
• Market Risk determines the capital required to cover exposure to changes in market conditions - such as (i) fluctuations in interest rates (ii) foreign exchange rates (iii) equity prices (iv) commodity prices
Pillar 2 : Supervisory and review process
• • Ensure the presence of sound processes at each bank Assess the adequacy of the bank’s capital, based on a thorough evaluation of its risks. Regulatory and supervisory bodies (either the Central Banks or bodies setup by the Central Bank or Government, for regulation and control) will review the internal process So in effect, the bank has the autonomy to frame its control processes while the regulating body will be one to review the processes in place. This increased interaction between banks and regulating bodies thus improving transparency.
•
Pillar 3 : Market Discipline
• The third pillar of the new framework attempts to boost market discipline through enhanced disclosure by banks. Effective disclosures by banks help market participants understand the bank’s risk profile and adequacy of its capital positions, thereby facilitating market discipline. This strategy plays an important role in maintaining the confidence in a financial institution.
Organizations affected by Basel II
Basel II will be applicable to organizations offering the following financial services: Corporate Finance, Retail Banking, Asset Management, Trading and Sales, Payments and Settlements, Commercial Banking, Retail Brokerage, Agency and Custodial Services.
• • • • • • • •
Operational Impact of Basel II
• Rating Agencies All Rating Agencies will incorporate the New Accord in their operational systems to evaluate banks globally. Incorporating this accord will result in establishing a more competitive and safer banking system. Financial Industry - Providers of services such as credit cards and equities will also come under its purview. - Basel II will also have a major impact on the insurance sector, as it will allocate and account for risk capital and enterprise-wide risk management. - It will also affect the securitization of risk. The impact of Basel II will extend to the state owned and managed financial institutions. These institutions will be required to meet market requirements for capital efficiency and optimization. In addition, banks in developing markets will need to invest capital for upgrading their infrastructure. When implemented, Basel II will lead to a restructuring of costs and prices for all financial services.
•
Challenges in implementation
• Operational assessment The Internal Ratings Based approaches (IRB) are significant steps in aligning regulatory capital estimation with evolving best practice in credit risk management. It is unlikely that the calibration of risk factors will be concluded in time for finalization of the New Accord. Most banks have yet to begin to build loss data from which they may determine loss probabilities.
•
Strategic assessment Decisions on the treatment of operational risk could adversely impact the objective of aligning economic and regulatory measures of capital. The quantum of capital proposed for operational risk is substantial. The practice of quantifying operational risk can be considered to be in a very early stage in its life cycle. The adoption of an over simplistic, without due recognition of specific risks and risk management processes could prejudice the integrity of the proposed new regulatory regime.
The End
doc_944527846.ppt
The PPT describes about New Basel Accord and its implications for banks.
The new Basel Accord – Implication for Banks
History
• Basel Committee on Banking Supervision published the Capital Adequacy Accord, also known as the Basel Accord for Financial Service Providers (FSP’s) , in 1988. With growth in the financial sector and newer developments the committee felt the need for a revised accord which was eventually finalised in June 1999, known as BASEL II. (Committee suggested implementation by 2006)
•
,
Difference
Existing Accord 1. Focus on single risk. New Accord 1. More emphasis on banks’ measures – own internal methodology, supervisory review and market discipline.
2. One size fits all.
2. Flexibility, menu of approaches, incentive for better risk management.
3. Broad brush structure.
3. More risk sensitivity.
BASEL II framework
Pillar 1 : Minimum Capital Requirements
• The first pillar is designed to help cover risks within a financial institution. It aims to set minimum capital requirements and defines the current amount of capital. This pillar also stresses on defining the capital amount by quantifying risks such as Credit Risk, Operational Risk and Market Risk.
Measuring Credit Risk
• • Defines minimum capital requirement required to cover exposures to customers and other counterparties. Approaches to calculate credit risk (i) Standardized Approach (ii) Internal Rating Based (IRB) Approach a). Foundation (Finding Probability of default) b). Advanced (Finding Probability of default and also allows bank to provide guarantees and credit derivatives on the risk of exposure.
Measuring operational risk
• Three approaches to calculate operational risk (i) Basic Indicator approach : Single operational parameter is used to calculate the capital for operational risk (eg. Gross annual revenue). The capital charge is a fixed % of this parameter, defined a “Alpha factor. (ii) Standardized approach : Activities of a bank are divided into standard industry business lines (corporate banking, trade finance etc.), Like in the standardized approach, a factor (Beta factor in this case) is applied to each line and the capital charge is calculated for that business line and they are then summed up to get the total charge. (iii) Internal Measurement approach (IM) :Banks internal loss data is used to calculate the risk. Data from various business lines are taken and probability of loss is given along with it.
Measuring Market risk
• Market Risk determines the capital required to cover exposure to changes in market conditions - such as (i) fluctuations in interest rates (ii) foreign exchange rates (iii) equity prices (iv) commodity prices
Pillar 2 : Supervisory and review process
• • Ensure the presence of sound processes at each bank Assess the adequacy of the bank’s capital, based on a thorough evaluation of its risks. Regulatory and supervisory bodies (either the Central Banks or bodies setup by the Central Bank or Government, for regulation and control) will review the internal process So in effect, the bank has the autonomy to frame its control processes while the regulating body will be one to review the processes in place. This increased interaction between banks and regulating bodies thus improving transparency.
•
Pillar 3 : Market Discipline
• The third pillar of the new framework attempts to boost market discipline through enhanced disclosure by banks. Effective disclosures by banks help market participants understand the bank’s risk profile and adequacy of its capital positions, thereby facilitating market discipline. This strategy plays an important role in maintaining the confidence in a financial institution.
Organizations affected by Basel II
Basel II will be applicable to organizations offering the following financial services: Corporate Finance, Retail Banking, Asset Management, Trading and Sales, Payments and Settlements, Commercial Banking, Retail Brokerage, Agency and Custodial Services.
• • • • • • • •
Operational Impact of Basel II
• Rating Agencies All Rating Agencies will incorporate the New Accord in their operational systems to evaluate banks globally. Incorporating this accord will result in establishing a more competitive and safer banking system. Financial Industry - Providers of services such as credit cards and equities will also come under its purview. - Basel II will also have a major impact on the insurance sector, as it will allocate and account for risk capital and enterprise-wide risk management. - It will also affect the securitization of risk. The impact of Basel II will extend to the state owned and managed financial institutions. These institutions will be required to meet market requirements for capital efficiency and optimization. In addition, banks in developing markets will need to invest capital for upgrading their infrastructure. When implemented, Basel II will lead to a restructuring of costs and prices for all financial services.
•
Challenges in implementation
• Operational assessment The Internal Ratings Based approaches (IRB) are significant steps in aligning regulatory capital estimation with evolving best practice in credit risk management. It is unlikely that the calibration of risk factors will be concluded in time for finalization of the New Accord. Most banks have yet to begin to build loss data from which they may determine loss probabilities.
•
Strategic assessment Decisions on the treatment of operational risk could adversely impact the objective of aligning economic and regulatory measures of capital. The quantum of capital proposed for operational risk is substantial. The practice of quantifying operational risk can be considered to be in a very early stage in its life cycle. The adoption of an over simplistic, without due recognition of specific risks and risk management processes could prejudice the integrity of the proposed new regulatory regime.
The End
doc_944527846.ppt