Professional Documents
Culture Documents
Basel I
Internal
Process
Interest Rate
Credit Risk – in banking
and trading
People books
Foreign
Operational Types of Risks Market
Exchange
Risk Risk
External Equity
Factors
Information Commodity
Risk
* Banana Skins 2003 – The CSFI’s annual survey of the risks facing banks
Regulatory developments – Basel II and IFRS
– Severe limitations
• Insufficiently sensitive to risk (broad categories)
• Very limited account of risk mitigation
Basel II
Three Pillars
Unchanged
Total Capital
≥ 8%
Credit Risk + Market Risk + Operational Risk
Credit risk
(a) Standardised approach – more granular version of Basel I
(b) Foundation IRB – uses banks’ own credit ratings
(c) Advanced IRB – other inputs also determined by bank
Operational risk
(a) Basic indicator approach - % of revenue
(b) Standard indicator approach - % of revenue/assets, by line
of business
(c) Advanced Measurement Approach – internal models etc
The credit portfolio of ABC Bank has undergone
a uniform downgrade as on 31-3- 2008
after an economic downturn. The position prior
to the downgrade is given below:
The minimum capital required after downgrade is …………..
AAA 20 200 20 %
AA 50 200 20 %
A 50 100 20 %
800
540 630
The Capital required will be
A]56.7 crores*
B]58.6 crores
C]60.6 crores
D]62.6 crores
Agenda
Pillar 1 – Minimum capital requirements Pillar 2 – Supervisory Review Pillar 3 – Market Discipline
Market risk Banks should have a process for Market discipline reinforces
Unchanged from existing Basel assessing their overall capital efforts to promote safety and
Accord adequacy and strategy for soundness in banks
maintaining capital levels Core disclosures (basic
Credit risk
Supervisors should review and information) and supplementary
Significant change from existing
evaluate banks’ internal capital disclosures to make market
Basel Accord adequacy assessment and discipline more effective
Three different approaches to the strategies
calculation of minimum capital Supervisors should expect banks
requirements to operate above the minimum
Capital incentives to move to capital ratios and should have the
more sophisticated credit risk ability to require banks to hold
management approaches based capital in excess of the minimum
on internal ratings (cf. trigger / target ratios in UK)
Sophisticated approaches have Supervisors should seek to
systems / controls and data intervene at an early stage to
collection requirements prevent capital falling below
Operational risk minimum levels
Not covered in existing Basel
Accord
Three different approaches to the
calculation of minimum capital
requirements
Adoption of each approach
subject to compliance with
defined ‘qualifying criteria’
Agenda
Risk Weight Calibrated on the basis of Function provided by the Function provided by the Basel
external ratings by the Basel Basel Committee Committee
Committee
Probability of Default (PD) Implicitly provided by the Provided by bank based on Provided by bank based on own
the likelihood that a Basel Committee; tied to risk own estimates estimates
borrower will default over weights based on external
a given time period ratings
Exposure of Default (EAD): Supervisory values set by the Supervisory values set by Provided by bank based on own
for loans, the amount of Basel Committee the Basel Committee estimates
the facility that is likely to
be drawn if a default
occurs
Loss Given Default (LGD); Implicitly provided by the Supervisory values set by Provided by bank based on own
the proportion of the Basel Committee; tied to risk the Basel Committee estimates; extensive process
exposure that will be lost weights based on external and internal control requirement
if a default occurs ratings
Maturity: the remaining Implicitly recognition Supervisory values set by Provided by bank based on own
economic maturity of the the Basel Committee estimates (with an allowance to
exposure Or exclude certain exposures)
At national discretion,
provided by bank based on
own estimates (with an
allowance to exclude certain
exposures
Credit Risk Measurement Approaches under Pillar I
(contd..)
Data Requirements Provision dates Rating data Same as IRB Foundation, plus:
Default events Default events Historical loss data to
Exposure data Historical data to estimate LGD (7 years)
Customer segmentation estimate PDs (5 years) Historical exposure data to
Collateral data estimate EAD (7 years)
Data collateral
segmentation
External ratings
Collateral data
Credit Risk Mitigation Defined by the supervisory All collaterals from All types of collaterals if bank
Techniques (CRMT) regulator; including financial Standardized Approach; can prove a CRMT by internal
collateral, guarantees, credit receivables from goods and estimation
derivatives, “netting” (on and services; other physical
off balance sheet), and real securities if certain criteria
estate are met
Maturity: the remaining Minimum requirements for Same as Standardized, plus Same as IRB Foundation, plus
economic maturity of the collateral management minimum requirements to minimum requirements to
exposure (administration/evaluation) ensure quality of internal ensure quality of estimation of
Provisioning process ratings and PD estimation all parameters
and their use in the risk
management process
Agenda
Calculation of Capital Charge Basic Indicator Approach Standardized Approach Advanced Measurement Approach (AMA)
Calculation of Capital Average of gross income Gross income per Capital charge equals
charge over three years as regulatory business line internally generated measure
indicator as indicator based on:
Capital charge equals 15% Depending on business – Internal loss data
of that indicator line, 12%, 15%, or 18% of – External loss data
that indicator as capital
– Scenario analysis
charge
– Business environment and
Total capital charge
equals sum of charge per internal control factors
business line Recognition of risk mitigation
(up to 20% possible)
Treasury
Advisory Services
Constituent Challenges
Financial Interpret new regulations and understand effects on business and risk
institutions out management
of Basel II’s Demonstrate quality as Basel II emerges as a best practice standard
scope
Agenda
Corporate Governance/
ORGANIZATION Risk Management
Basel II Implementation
PROCESSES
Gap Analysis
Master Plan
Approach Operational Risk
Basel II
METHODS Market and Other Risks
Capital Planning
DATA
Disclosure
(including linkage to IFRS)