1. Basel II as seen by Israel’s Banking System
Rony Hizkiyahu, Supervisor of Banks, Bank of Israel 30 January The Interdisciplinary Center, Herzliya, Caesaria Center

2. Basel II –The Vision
Strengthening the safety and soundness of the international banking system.
Creating standardization and reliability in the banking system at an international level.
Conversion to advanced methods accompanied by incentives.

3. Basel II - Challenges
Improvement of risk management by the banking system (credit and market risks) including risks that were not addressed in the past (operational risk).
Management of organizational culture change with respect to risk (corporate governance).
Creation and maintenance of databases.
Management of credit risk due to small businesses through pools.

4. Basel II - Implications
Upgrading risk management and control systems.
Development of internal and external rating.
Effect on competition.
Effect on credit management of (large) corporations in non-bank financial services industries.
Upgrading small corporations’ management in order to meet the demands of the bank.
Increased efficiency of market activities as a result of increased disclosure.
Increased volatility of the business cycle => change in behavior patterns.
Costs

5. Risk-Based Capital Ratio of the Large Banking Groups in Israel

6. Relative Surplus Capital Adequacy – International Comparison

7. Basel II – The Three Pillars
Minimum Capital Requirements
Pillar 2:
Supervisory Review Process
Pillar 3:
Market Discipline

8. Standardised Approach (SA) Internal Ratings-Based Approach (IRB)
Basel II – Pillar 1 - Main Approaches to the Calculation of Minimum Capital Requirements
Credit Risk
Standardised Approach (SA)
Internal Ratings-Based Approach (IRB)
Foundation Internal Ratings-Based Approach (F IRB)
Advanced Internal Ratings-Based Approach (A IRB)

9. Basic Indicator Approach (BIA) Standardised Approach (SAOR)
Basel II – Pillar 1 – Main Approaches to the Calculation of Minimum Capital Requirements
Operational Risk
Basic Indicator Approach (BIA)
Standardised Approach (SAOR)
Advanced Measurement Approaches (AMA)

10. Basel II – Implementation Prospects in 49 Countries
35 countries in which an implementation date has been set:
Australia
Bahrain
Canada
EU (19 countries)
Hong Kong
India
Latvia
Malaysia
New Zealand Philippines
Singapore
South Africa South Korea
Sri Lanka
Switzerland
Taiwan Thailand US
14 countries in which an implementation date has not been set:
Albania
Argentina
Bermuda Bulgaria
Chile
China
Croatia
Israel
Japan
Mauritius
Panama
Romania Turkey Uruguay
Source:
"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

11. Basel II Implementation Prospects in 35 Countries (according to publicized data)
Source:
"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

12. 35 Countries in which an Implementation Date has been Set1 4 21 5 3
Number of Countries
2009
2008
2010
2007
2006
Year
"מדינות האיחוד האירופי" – אוסטריה, איטליה, אירלנד, אנגליה, בלגיה, גרמניה, דנמרק, הולנד, יוון, לוקסמבורג, נורווגיה, פולין, פורטוגל, פינלנד, ספרד, צ'כיה, צרפת, שבדיה, שווייץ.
Source:
"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.
שנה
2006
2007
2008
2010
2009
מדינות
טאיוואן
סינגפור תאילנד
אוסטרליה,
ד.קוריאה,
הודו,
פיליפינים,
קנדה
מדינות האיחוד האירופי (19) ,
לאטביה,
הונג קונג
דרא"פ,
סרילאנקה,
בחריין
ניו זילנד
מאלזיה
ארה"ב

13. 35 Countries in which an Implementation Date has been Set (Continued)
Approaches adopted to calculate minimal capital requirements 2 3 24 1
Number of Countries
No Specified Approach
Only Standard
Standard with Parallel Calculation
Standard 2007
Advanced 2008
All the Approaches
Advanced Only (US)
Approach
Source:
"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.
גישה
מתקדמת
בלבד
כל השיטות
סטנדרטית 2007
מתקדמת 2008
סטנדרטית עם חישוב מקביל
רק סטנדרטית
לא מצוינת הגישה
מדינות
ארה"ב
אוסטרליה,
סינגפור,
דרום קוריאה,
מדינות האיחוד האירופי (19) ,
הונג קונג, לאטביה,
ניו זילנד,
קנדה,
מאלזיה
דרא"פ,
סרילאנקה
הודו, פיליפינים
תאילנד
טאיוואן, בחריין
"מדינות האיחוד האירופי" – אוסטריה, איטליה, אירלנד, אנגליה, בלגיה, גרמניה, דנמרק, הולנד, יוון, לוקסמבורג, נורווגיה, פולין, פורטוגל, פינלנד, ספרד, צ'כיה, צרפת, שבדיה, שווייץ.

14. Basel II – Implementation Prospects in 14 Countries (according to published data)
Source:
"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

15. Basel II – 14 Countries in which no Implementation Date has been Set
Albania, Argentina, Bermuda, Bulgaria,
Chile, China, Croatia
Israel
Japan
Mauritius, Panama
Romania, Turkey, Uruguay
Source:
"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.
Note: Countries in red will implement the standard approach and the advanced approach

16. The Principles for Implementing Basel II in Israel

17. The Principles for Implementing Basel II in Israel
The Supervisor of the Banks will adopt Basel II in its latest version (June 2006), as a proper conduct of banking business directive.

18. The Principles for Implementing Basel II in Israel (Continued)
2. The Supervisor’s directive for the implementation of Basel II will be based on a full and exact translation of the original in English.
The directive will include as additional paragraphs in order to clarify those areas which require specific instructions and/or transitional instructions for implementation in Israel.

19. The Principles for Implementing Basel II in Israel (Continued)
3. The Supervisor will set 2009 as the implementation date. From that year on, every banking corporation will implement all three pillars of Basel II, in all their aspects.
In 2008, the banks will provide the data they received during the implementation of Basel II to the Supervisor.

20. The Principles for Implementing Basel II in Israel (Continued)
4. A banking corporation that will be able to implement an advanced approach on the implementation date will receive all the necessary assistance from the Supervisor in order to fulfill the instructions of Basel II regarding this approach.
5. A banking corporation which will not be able to implement an advanced approach according to Basel II on the implementation date will have to implement an alternative approach.

21. The Principles for Implementing Basel II in Israel (Continued)
6. The Supervisor will hold discussions and consultations with “Basel”, regulatory authorities and other entities abroad and in Israel concerning main issues in the adoption of Basel II in Israel.
7. The Supervisor will hold discussions and consultations with the banking corporations on all aspects of the implementation of Basel II, including those which according to Basel II require a specific directive of the Supervisor.

22. The Principles for Implementing Basel II in Israel (Continued)
8. Up until the implementation date, the Supervisor will monitor and support each banking corporation’s preparations to implement Basel II.
9. The Supervisor will appoint a supreme steering committee for Basel II and will serve as its Chairman.
10. The Supervisor will initiate seminars and training activities on main issues related to the implementation of Basel II.

23. The Principles for Implementing Basel II in Israel (Continued)
11. The Supervisor will publish, in stages, the directives for the implementation of Basel II.
At the end of the first quarter of 2007 (approximately), the Supervisor will publish an ANPR:
A discussion draft regarding Pillar 3 of Basel II which addresses disclosure.
A draft of a directive for the implementation of Basel II according to the standardised approach (credit risk, market risk and operational risk).
A preliminary draft of a directive for the implementation of the complete Basel II directive, according to both the standardised approach and the advanced approaches.
A Quantitative Impact Study (QIS) in order to organize the information on the plans and estimates of each banking corporation regarding the implementation of Basel II and its effects.
ANPR-Advanced Notice of Proposed Rulemaking

24. The Principles for Implementing Basel II in Israel (Continued)
At the end of the third quarter of 2007 (approximately), the Supervisor will publish a full draft of the directive for the implementation of Basel II in all its aspects.

25. Thank you