Professional Documents
Culture Documents
Pre-1988
1988: BIS Accord (Basel I)
1996: Amendment to BIS Accord
1999: Basel II first proposed
2010: Basel III first proposed
Pre-1988
Main Provisions:
Capital must be 8% (9% in India) of risk
weighted amount.
Framework was to be implemented by end 1992
At least 50% of capital must be Tier 1
Tier 1 Capital: common equity, non-cumulative
perpetual preferred shares
Tier 2 Capital: cumulative preferred stock,
certain
types
of
99-year
debentures,
subordinated debt with an original life of more
than 5 years
The Math
RWA
i 1
On-balance sheet
assets: principal
times risk weight
wi Li
j 1
w C
*
j
10
50
Residential mortgages
20
100
Interest
rate
Exch Rate
and Gold
Equity
<1
0.0
1.0
6.0
7.5
10.0
1 to 5
>5
0.5
1.5
5.0
8.0
Precious
Metals
except gold
Other
Commodities
7.0
10.0
6.0
15.0
7.0
12.0
Example: A $100 million interest rate swap with 3 years to maturity and with
market value of $5 million would have a credit equivalent amount of $5.5
million
Implementation of Basel I
Criticism of Basel I
Liberalization and Transformation of the
financial sector
Various amendments to Basel I: the market
risk amendment 1996
The revised capital accord or Basel II
PILLAR I
Minimum capital
requirements
Credit risk
Market
Market risk
Operational risk
PILLAR II
Supervisory
Review
Review of the
institutions
capital adequacy
Review of the
internal
assessment
process
PILLAR III
Market
Discipline
Enhancing
transparency
through
rigorous
disclosure
norms.
Revised
Unchanged
New
The new Accord focuses on revising only the denominator (riskweighted assets), the definition and requirements for capital are
unchanged from the original Accord.
Credit Risk
Standardized approach
Internal Rating Based (IRB) approach
Foundation vs. Advanced
Operational Risk
AAA to A+ to
AAA-
Risk
0
weights (%)
20
BBB+ to
BBB-
BB+ to B- Below
B-
Unrated
50
100
100
150
50
BBB+
to
BB-
100
Below Unrated
BB150
100
Foundation approach
Advanced approach
Operational Risk
Operational Risk
KBIA = EI*
Where
KBIA = the capital charge under the Basic Indicator
Approach
EI = the level of an exposure indicator for the whole
institution, provisionally gross income
= a fixed percentage, set by the Committee, relating
the industry-wide level of required capital to the
industry-wide level of the indicator
Operational Risk
Standardized approach
Operational Risk
Standardized approach
KTSA = (EI*)
Where:
KTSA
= the capital charge under the Standardized
Approach
EI
= the level of an exposure indicator for each of
the 8 business lines
= a fixed percentage, set by the Committee, relating
the level of required capital to the level of the gross
income for each of the 8 business lines
Operational Risk
Business Lines
Corporate finance
Trading and sales
Retail banking
Commercial banking
Payment and settlement
Agency services
Asset management
Retail brokerage
Beta Factor
18%
18%
12%
15%
18%
15%
12%
12%
Operational Risk
Operational Risk
Market Risk
Principal risk
Standardized Approach
Market Discipline
Basel II Limitations
Basel III
Objectives
Basel III
Basel III
Basel III
Capital
requirements
must
consider
macroeconomic environment and credit
growth in the economy