Overview of the Overview of the New Basel Capital New Basel Capital
AccordAccordBasel Committee on Banking Basel Committee on Banking
SupervisionSupervision
R94723073 R94723073 陳世樺陳世樺R93723093 R93723093 蘇郁惠蘇郁惠R94723051 R94723051 郭于綺郭于綺
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AgendaAgendaCapital AdequacyCapital Adequacy
Review of Basel IReview of Basel I
Overview of Basel IIOverview of Basel II
Implementation and future prospectImplementation and future prospect
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Capital Protects Capital Protects Against InsolvencyAgainst Insolvency
Importance of Capital AdequacyImportance of Capital Adequacy
Protection from Credit and Interest Rate RisksProtection from Credit and Interest Rate Risks
ASSETSASSETS LIABILITIESLIABILITIES
Long-Term SecuritiesLong-Term Securities
Long-Term LoansLong-Term Loans
$80$80
2020
$100$100
Liabilities (Deposits)Liabilities (Deposits)
Net WorthNet Worth
$90$90
1010
$100$100
ASSETSASSETS LIABILITIESLIABILITIES
Long-Term SecuritiesLong-Term Securities
Long-Term LoansLong-Term Loans
$75$75
1313
$88$88
Liabilities (Deposits)Liabilities (Deposits)
Net WorthNet Worth
$90$90
-2-2
$88$88
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Enforcement of Enforcement of Capital AdequacyCapital Adequacy
Two Capital RequirementsTwo Capital Requirements-Leverage Ratio-Leverage Ratio
-Risk-Based Capital Ratio-Risk-Based Capital Ratio
Leverage Ratio = Core Capital / AssetsLeverage Ratio = Core Capital / Assets
Risk-Based Approach implemented by Risk-Based Approach implemented by Bank of International Settlements (BIS)Bank of International Settlements (BIS)-Basel Agreement-Basel Agreement
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Basel I to Basel IIBasel I to Basel IIBasel I’ s Risk AssessmentBasel I’ s Risk Assessment-Market Risk-Market Risk-Different Credit Risks of Assets-Different Credit Risks of Assets
Basel IIBasel II-3 Pillars-3 Pillars-Unchanged – Market Risk-Unchanged – Market Risk-Reassessed Credit Risk Methods-Reassessed Credit Risk Methods
*Standardised Approach / Internal Ratings *Standardised Approach / Internal Ratings Based / SecuritisationBased / Securitisation
-Added Operational Risk-Added Operational Risk
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3 Pillars3 Pillars
Pillar 1Pillar 1 Pillar 2Pillar 2 Pillar 3Pillar 3Calculation of regulatory Calculation of regulatory minimum capital minimum capital requirementsrequirements
Regulatory supervisory Regulatory supervisory review so as to review so as to complement and enforce complement and enforce minimum capital minimum capital requirements calculated requirements calculated under Pillar 1under Pillar 1
Requirements on rules Requirements on rules for disclosure of capital for disclosure of capital structure, risk exposures structure, risk exposures and capital adequacy so and capital adequacy so as to increase FI as to increase FI transparency and transparency and enhance market/investor enhance market/investor disciplinediscipline
1. Credit Risk1. Credit Risk
2. Market Risk2. Market Risk
3. Operational Risk3. Operational Risk
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Market RiskMarket RiskStandardised MethodStandardised Method-BIS Standards-BIS Standards
Internal ModelsInternal Models-Regulatory Approval-Regulatory Approval
-Risk Metrics / History / Monte Carlo -Risk Metrics / History / Monte Carlo SimulationSimulation
-Subject to Audits and Reviews-Subject to Audits and Reviews
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Core (Tier I) and Supplementary (Tier II) CapitalCore (Tier I) and Supplementary (Tier II) Capital
On Balance Sheet and Off Balance Sheet AssetsOn Balance Sheet and Off Balance Sheet Assets
Assigns risk weighting to different asset classes to Assigns risk weighting to different asset classes to obtain a Credit Risk Adjusted Asset Valueobtain a Credit Risk Adjusted Asset Value
AssetsAdjustedRiskCredit
CapitalTotal
Ratio Capital BasedRisk
Credit Risk - Basel ICredit Risk - Basel I
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Credit Risk – On Credit Risk – On Balance SheetBalance Sheet
i
n
iiaw
1
Credit Risk Adjusted
On Balance Sheet Assets
wwii = Risk Weight of Asset = Risk Weight of Asset
aai i = Book Value of Asset on Balance Sheet = Book Value of Asset on Balance Sheet
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On BS Weightings – On BS Weightings – Basel IIBasel II
Basel I categories too broadBasel I categories too broad
Standardised ApproachStandardised Approach
Better differentiation of assetsBetter differentiation of assets
Introduces external credit rating (S&P)Introduces external credit rating (S&P)
Improves Risk SensitivityImproves Risk Sensitivity
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Credit Risk – Off Credit Risk – Off Balance SheetBalance Sheet
Contingent, not actual claimsContingent, not actual claims
Not Face Value, but an amount equivalent to Not Face Value, but an amount equivalent to an eventual on-balance-sheet credit riskan eventual on-balance-sheet credit risk-Convert to Credit Equivalent Amount (CEA)-Convert to Credit Equivalent Amount (CEA)
-Conversion Factors-Conversion Factors
Guaranty ContractsGuaranty Contracts
Basel II introduces Derivative ContractsBasel II introduces Derivative Contracts
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Off BS – Guaranty Off BS – Guaranty ContractsContracts
Face Value * Conversion Factor = CEAFace Value * Conversion Factor = CEA
CEA * Risk Weight = Risk Adjusted ValueCEA * Risk Weight = Risk Adjusted Value
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Guaranty Contracts - Guaranty Contracts - Basel IIBasel II
Unused portion of loan commitments Unused portion of loan commitments with original maturity of one year or with original maturity of one year or less will be 20%. (Previously 0%)less will be 20%. (Previously 0%)
Uses the Basel II assigned credit risk Uses the Basel II assigned credit risk weightsweights
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Derivative Contracts - Derivative Contracts - Basel IIBasel II
FI is exposed to “Counterparty Credit FI is exposed to “Counterparty Credit Risk”Risk”
Distinction between Exchange Traded Distinction between Exchange Traded and Over-the-Counter contractsand Over-the-Counter contracts
Credit Risk of Exchange-Traded Credit Risk of Exchange-Traded Derivatives is ~zeroDerivatives is ~zero
OTC Contract Credit Risk in two elementOTC Contract Credit Risk in two element
Potential Exposure / Current ExposurePotential Exposure / Current Exposure
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CEA for Derivative CEA for Derivative ContractContract
Potential ($) + Current ($) = CEAPotential ($) + Current ($) = CEA
CEA * Risk Weight = Risk Adjusted ValueCEA * Risk Weight = Risk Adjusted Value
Current Exposure, if Replacement Value is –ve, Current Exposure, if Replacement Value is –ve, then zero. If +ve, then use that valuethen zero. If +ve, then use that value
Conversion for Potential ExposureConversion for Potential ExposureRemaining MaturityRemaining Maturity Interest Rate ContractsInterest Rate Contracts Exchange Rate ContractsExchange Rate Contracts
Less than one yearLess than one year 00 1.0%1.0%
One to five yearsOne to five years 0.5%0.5% 5.0%5.0%
Over five yearsOver five years 1.5%1.5% 7.5%7.5%
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AssetsAdjustedRiskCredit
CapitalTotal
Ratio Capital BasedRisk
Credit Risk – Risk Credit Risk – Risk Based RatioBased Ratio
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IRB ApproachIRB Approach
Banks’ internal assessmentBanks’ internal assessment
Some risk weights and formulas still Some risk weights and formulas still givengiven
Covers a range of portfolios with different Covers a range of portfolios with different exposures.exposures.-Corporate, Bank and Sovereign Exposures-Corporate, Bank and Sovereign Exposures
-Retail Exposure-Retail Exposure
-Specialized Lending-Specialized Lending
-Equity Exposures-Equity Exposures
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IRB – Data InputsIRB – Data InputsProbability of Default (PD)Probability of Default (PD)
Loss Given DefaultLoss Given Default
Exposure at DefaultExposure at Default
MaturityMaturity
Provided by bank based on own estimatesProvided by bank based on own estimates
Supervisory values set by the CommitteeSupervisory values set by the Committee
Foundation IRB – Use BIS values (except PD)Foundation IRB – Use BIS values (except PD)
Advanced IRB – Use own estimatesAdvanced IRB – Use own estimates
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IRB – ImplementationIRB – Implementation
Relies on internally generated inputsRelies on internally generated inputs
Still a minimum standard to ensure Still a minimum standard to ensure comparability across bankscomparability across banks
Requires bank have strong control Requires bank have strong control environment and process to collect dataenvironment and process to collect data
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Treatment of the Treatment of the securitisation exposures : securitisation exposures : recognition of risk recognition of risk transfertransfer
KIRB: capital required on underlying pool had it not securitised
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Rating based Rating based approachapproach
External Rating Base risk weight
AAA 12%
AA 15%
A 20%
BBB+ 50%
BBB 75%
BBB- 100%
BB+ 250%
BB 425%
BB- 650%
< BB- & unrated Deduction
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Inputs for the Inputs for the Supervisory formulaSupervisory formula
Credit enhancement level (L)Credit enhancement level (L)
Degree of the exposure (T)Degree of the exposure (T)
Capital requirement for the underlying Capital requirement for the underlying assets (assets (KKIRBIRB))
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Operational RiskOperational Risk((Def) risk of Def) risk of loss from inadequate or failed loss from inadequate or failed
‧‧ internal processesinternal processes
‧‧ peoplepeople
‧ ‧ systemssystems
‧ ‧ external eventsexternal events
Basic Indicator Approach
Standardised Approach
Advanced Measurement Approach (AMA)(more risk sensitive FI’s)
Internal Measurement Approach (IMA)
Loss Distribution Approach (LDA)
Scorecard Approach (SA)
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Basic Indicator Basic Indicator ApproachApproach
Operational capital = Operational capital = * I * I
=0.15=0.15
I = Gross income (Avg. over the previous 3 years)I = Gross income (Avg. over the previous 3 years)
Standardized Standardized ApproachApproach
Proxy for risk exposure (scale of business operation)
Operational capital = Operational capital = ii * I * Iii
i=1,2,…,8 (business lines) i=1,2,…,8 (business lines)
i i = supervisory factor, ranging from 12~18%= supervisory factor, ranging from 12~18%
IIii = exposure indicator = exposure indicator
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Business lines Business lines (Standardised Approach)(Standardised Approach)Business Business
unitsunitsBusiness linesBusiness lines FactorsFactors
Investment Investment BankingBanking
Corporate FinanceCorporate Finance ββ11
Trading and SalesTrading and Sales ββ22
BankingBanking Retail BankingRetail Banking ββ33
Commercial Commercial BankingBanking
ββ44
Payment and Payment and SettlementSettlement
ββ55
Agency Services Agency Services and Custodyand Custody
ββ66
OthersOthers Retail BrokerageRetail Brokerage ββ77
Asset ManagementAsset Management ββ88
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Recent modification Recent modification after QIS3after QIS3
QIS3 (Quantitative Impact Study 3)QIS3 (Quantitative Impact Study 3) :: – – the most recent quantitative exercisethe most recent quantitative exercise
– – conducted in 2002conducted in 2002
– – gather information from banks of varying sizegather information from banks of varying size from more than 40 countriesfrom more than 40 countries
on the impact of Basel proposals on the impact of Basel proposals
on their existing portfolioson their existing portfolios
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Modification to the Modification to the Pillar OnePillar One
1.1. Recognition of provisions (for IRB)Recognition of provisions (for IRB) ‧ ‧provision(P)= general provision + specific provisionprovision(P)= general provision + specific provision
‧ ‧expected loss(EL)= 12.5*PD*LGD(%)*EADexpected loss(EL)= 12.5*PD*LGD(%)*EAD
(1) (1) general provisions will be removed from the numeratorgeneral provisions will be removed from the numerator
(2) Let k = EL – P(2) Let k = EL – P If k<0 (provision shortfall)If k<0 (provision shortfall) 0.0.5*|k| deducted from Tier 1 capital, 5*|k| deducted from Tier 1 capital, 0.0.5*|k| deducted from 5*|k| deducted from
Tier 2Tier 2 capitalcapital
If k>0 (provision excess)If k>0 (provision excess) amount of k added to Tier 2 capitalamount of k added to Tier 2 capital (up to a limit of 0-6% of the risk-weighted assets at (up to a limit of 0-6% of the risk-weighted assets at
national discretion)national discretion)
Each year, recognize Loan Loss Provision Each year, recognize Loan Loss Provision ((提列壞帳損失提列壞帳損失 ) ) and Allowances for Loan and Allowances for Loan Loss (Loss (備抵壞帳備抵壞帳 , , same as Loan Loss same as Loan Loss Reserve Reserve 壞帳準備壞帳準備 ) ) on a accrual basis.on a accrual basis.
Loan loss expenseLoan loss expense XXXXXX
Allowances for Loan Loss Allowances for Loan Loss XXXXXX
When actual loan loss occursWhen actual loan loss occurs
Allowances for Loan Loss XXXAllowances for Loan Loss XXX
LoanLoan XXXXXX
Expense
Reduction of net loan asset
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Recent modification Recent modification after QIS3after QIS32. 2. Recognition of provisions (for standardized)Recognition of provisions (for standardized)
-different risk weights for past due loans with -different risk weights for past due loans with
specific provisionspecific provision
(Ex)(Ex)
Specific provision level of Specific provision level of the past due loanthe past due loan
Risk weightRisk weight
≧≧ 20%20% 100%100%
nonenone 150%150%
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Recent modification Recent modification after QIS3after QIS33. 3. Operational risk: partial adoption of AMAOperational risk: partial adoption of AMA
- - Advanced Measurement Approach is required Advanced Measurement Approach is required for large international banks and banks with for large international banks and banks with significant risk exposuressignificant risk exposures
- allowed partial adoption: partially AMA, partially - allowed partial adoption: partially AMA, partially basic indicator approach or standardized basic indicator approach or standardized approachapproach
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Recent modification Recent modification after QIS3after QIS3
4. 4. Operational risk: risk reduced by Operational risk: risk reduced by insurance (for AMA)insurance (for AMA)
- recognition of insurance as risk mitigant- recognition of insurance as risk mitigant :: insurance amount deducted from capital insurance amount deducted from capital
requirement (up to 20% of total operational requirement (up to 20% of total operational risk capital requirement risk capital requirement ))
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Pillar 2Pillar 2 :: Supervisory Supervisory reviewreviewGuiding PrincipalsGuiding Principals
--For BanksFor Banks :: assess their capital adequacy positions assess their capital adequacy positions relative to their overall risks.relative to their overall risks.
-For Supervisors-For Supervisors :: review and take appropriate actions review and take appropriate actions in response to those assessments.in response to those assessments.
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Principle 1: Banks should have a process for Principle 1: Banks should have a process for assessing their overall capital adequacy in assessing their overall capital adequacy in relation to their risk profile and a strategy for relation to their risk profile and a strategy for maintaining their capital levels.maintaining their capital levels.
Principle 2: Supervisors should review and Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy evaluate banks’ internal capital adequacy assessments and strategies, as well as their assessments and strategies, as well as their ability to monitor and ensure their compliance ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors with regulatory capital ratios. Supervisors should take appropriate supervisory action if should take appropriate supervisory action if they are not satisfied with the result of this they are not satisfied with the result of this process.process.
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Principle 3: Supervisors should expect banks to Principle 3: Supervisors should expect banks to operate above the minimum regulatory capital ratios operate above the minimum regulatory capital ratios and should have the ability to require banks to hold and should have the ability to require banks to hold capital in excess of the minimum.capital in excess of the minimum.
Principle 4: Supervisors should seek to intervene at Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from falling below an early stage to prevent capital from falling below the minimum levels required to support the risk the minimum levels required to support the risk characteristics of a particular bank and should characteristics of a particular bank and should require rapid remedial action if capital is not require rapid remedial action if capital is not maintained or restored.maintained or restored.
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Update of Pillar 2Update of Pillar 2
-stress testing-stress testing Estimate the extent to which the IRB capital requirements Estimate the extent to which the IRB capital requirements could increase during a stress scenario.could increase during a stress scenario.
-banks’ review of concentration risks and the treatment -banks’ review of concentration risks and the treatment of residual risks that arise from the use of collateral, of residual risks that arise from the use of collateral, guarantees and credit derivatives.guarantees and credit derivatives.
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Pillar 3Pillar 3 :: Market Market disciplinediscipline
PurposePurpose--Complement the minimum capital requirements of Pillar 1 Complement the minimum capital requirements of Pillar 1 and the supervisory review process addressed in Pillar 2.and the supervisory review process addressed in Pillar 2.
Disclosures requirementsDisclosures requirements -allow market participants to assess key information about a -allow market participants to assess key information about a
bank’s risk profile and level of capitalizationbank’s risk profile and level of capitalization..
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TableTable :: Disclosures in the New AccordDisclosures in the New Accord
Subject Type Location in Supporting Document
Scope of Application Strong recommendations Pillar 3
Capital Strong recommendations Pillar 3
Credit Risk-general Strong recommendations Pillar 3
Credit Risk-Standardised Approach
Requirements and strongrecommendations
Pillar 3
Credit Risk MitigationTechniques
Requirements and strongrecommendations
Pillar 3
Credit Risk-IRB Approaches Requirements Pillar 3
Market Risk Strong recommendations Pillar 3
Operational Risk Strong recommendations and, in future, requirements
Pillar 3
Interest Rate Risk in theBanking Book
Strong recommendations Pillar 3
Capital Adequacy Strong recommendations Pillar 3
Asset Securitization Requirements Asset Securitization
ECAI Recognition Requirements Standardized Approach
Supervisory Transparency Strong recommendations Standardized Approach and Pillar 2
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Dialogue with market participants and Dialogue with market participants and supervisorssupervisors --avoid potentially flooding the market with information that would be hard to use avoid potentially flooding the market with information that would be hard to use
in understanding a bank’s actual risk profilein understanding a bank’s actual risk profile..
Align with national accounting standardsAlign with national accounting standards
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Implementation of Implementation of New AccordNew Accord
Transition to New AccordTransition to New Accord -Committee members within the G10-Committee members within the G10 Implementation date for New Accord of year-end 2006.Implementation date for New Accord of year-end 2006.
-outside the G10-outside the G10 *The minimum capital requirements will be implemented after year-end 2006.*The minimum capital requirements will be implemented after year-end 2006. *The first priority is implementing key elements of the supervisory review and market discipline *The first priority is implementing key elements of the supervisory review and market discipline
components of the New Accord.components of the New Accord.
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Forward looking aspectsForward looking aspects
-AIG (the Accord Implementation Group)-AIG (the Accord Implementation Group) for national supervisors to exchange information on for national supervisors to exchange information on the practical implementation challenges of Basel 2 and the practical implementation challenges of Basel 2 and on the strategies they are using to address these issues.on the strategies they are using to address these issues.
-CTF (Committee’s Capital Force)-CTF (Committee’s Capital Force) responsible for considering substantive modifications responsible for considering substantive modifications to and interpretations of the New Accord. to and interpretations of the New Accord.
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-reconciling any major unintended inconsistencies in the-reconciling any major unintended inconsistencies in the treatment of similar exposures.treatment of similar exposures.
-close any loopholes and unintended effects of the new-close any loopholes and unintended effects of the new framework.framework.
-banks adopting the more advanced approaches to risk-banks adopting the more advanced approaches to risk assessment will be required to run them in parallel with theassessment will be required to run them in parallel with the existing Accord for 1 year prior to the implementation of existing Accord for 1 year prior to the implementation of
Basel Basel IIII..
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Cross-border implementationsCross-border implementations -enhance cooperation between supervisors on a practical-enhance cooperation between supervisors on a practical basis.basis.
-supervisors should avoid performing uncoordinated approval-supervisors should avoid performing uncoordinated approval and validation work in order to reduce the implementationand validation work in order to reduce the implementation burden for banks.burden for banks.
-the legal responsibilities of supervisors for the regulation of-the legal responsibilities of supervisors for the regulation of their domestic banking organizations and the arrangementstheir domestic banking organizations and the arrangements of consolidated supervision will not change.of consolidated supervision will not change.
-mutual recognition-mutual recognition
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ConclusionConclusionCapital adequacyCapital adequacy
-capital requirement-capital requirement
Basel I to Basel IIBasel I to Basel II
Pillar1Pillar1 :: minimum capital requirementsminimum capital requirements - Credit Risk- Credit Risk
*On BS *On BS & & Off BS Off BS
*IRB APPROACH*IRB APPROACH
*Securitization*Securitization
**Rating based approachRating based approach
*Supervisory Formula Approach*Supervisory Formula Approach
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-Market Risk-Market Risk
*Standardised Method*Standardised Method
*Internal Models*Internal Models
-Operational Risk-Operational Risk
**Basic Indicator ApproachBasic Indicator Approach
*Standardized Approach*Standardized Approach
-Recent modification after QIS3-Recent modification after QIS3
Pillar2Pillar2 :: Supervisory review Supervisory review
Pillar3Pillar3 :: Market disciplineMarket discipline
Implementation of New AccordImplementation of New Accord