Presentation on theme: "Basel II Introduction to the New Regulation for capital adequacy"— Presentation transcript:
1Basel II Introduction to the New Regulation for capital adequacy October 2006
2SummaryWhat is Basel? Basel I vs. Basel IIBasel II in Raiffeisen International and Raiffeisen RomaniaThe costs of Basel II implementationSpecifics for leasing companies
3SummaryWhat is Basel? Basel I vs. Basel IIBasel II in Raiffeisen International and Raiffeisen RomaniaThe costs of Basel II implementationSpecifics for leasing companies
4What is Basel? Basel I vs. Basel II From Basel I to Basel IIIn 1988, the Basel Committee on Banking Supervision (BCBS), under the auspices of the Bank of International Settlements (BIS), in Basel, Switzerland, published a set of minimal capital requirements for banks. This is known as the Basel I or 1988 Basel Accord.Basel I applies to banks with international presence which are required to hold capital equal to 8 % of the risk-weighted assets.The New Capital Accord or Basel II is addressed to:Focus on internationally active banks but principles apply to all banks;Within EU: all credit institutions and securities firms.Basel II introduce a different method of calculating the capital adequacy ratio (solvability ratio) in parallel with new (more strict) requirements regarding supervision and transparency of banks.
5What is Basel? Basel I vs. Basel II Why Basel II ?Rationale for a New AccordMore risk sensitivity. Basel I is credit insensitive with fixed risk percentages applied to certain, pre-defined risk categories: 0%, 20%, 50%, 100%, it does not differentiate creditworthiness of borrowers - “one size fits all!”;More emphasis on internal models and supervisory review. Basel I did not permit internal models.Objectives of the New AccordThe level of capital is directly correlated with the risk profile and the risk appetite of a bankContinue to enhance competitive equalityGreater emphasis on banks’ own assessment of risk and a comprehensive coverage of various risks;The framework of 3 complementary pillars will help making the banking system Safer, Sounder, and More Efficient.
6Committee / regulatory body What is Basel? Basel I vs. Basel IIRomania adopted the EU Directive instead of Basel II AccordThe key differences between Basel Capital Accord and EU Directive are as presented belowCommittee / regulatory bodyBasel Committee for Banking Supervision (Committee of BIS - Bank for International Settlements)Commission of the European UnionG-10-countries*, represented by central banks’ governorsEU countries (EU with observatory status in Basel committee)Scope of influenceInternationally operating banksCredit institutions of the European UnionLegal characterLegally non-binding agreements between national regulatory authoritiesRecommendations on best practicesEU directives, diverse directives for implementation of Basel IImplementation into national law* Representative countries: Belgium, Germany, France, Great Britain, Italy, Japan, Canada, Luxemburg, Netherlands, Spain, Sweden, Switzerland, USA, EU with observatory statusRepresentativesBasel I – Basel Capital Accord from 1988Basel II – International Convergence of Capital Measurements and Capital Standards – A Revised Framework, Comprehensive Version, Updated June 2006Directive 2006/48/EC of the European Parliament and of the Council of 14th June 2006 and Directive 2006/49/EC of the European Parliament and of the Council of 14th June 2006Contents similar to the BIS paper, discrepancies arising from inclusion of local EU specificsDocuments / papersBrusselsBasel
7What is Basel? Basel I vs. Basel II The impact of Basel II is reflected in the following issuesExtensive coverageIn Europe, all banks and investment companies need to comply with the new rulesfor capital and risk management, for all component business areasScope for competitive gainsCompanies with extensive and well diversified risk portfolios have the opportunity to improvemarket positionReporting transparencyThe new disclosure rules on capital and risk management will have a direct impact on creditrating and share priceBusiness mixThe new rules on capital and risk management will have a direct impact on businessinvestment/divestment decisions and market perception of these decisionsSupervisionRegulators are likely to expect the leading and most complex institutions to aspire to the mostadvanced approachesRisk managementThere will be far greater regulatory and market focus on effective risk managementImplementation effortAlthough banks are at varying levels of sophistication regarding risk management, dataarchitecture and system infrastructure, Basel II will involve a major change programme atconsiderable cost
8What is Basel? Basel I vs. Basel II Evolution of Regulatory CapitalCapital Ratio = Total Capital Credit Risk (RWA of Banking Book)1988 Basel Capital Accord„Basel I“Capital Ratio = Total CapitalCredit Risk + Market Risk (MR RWA for trading book)1996 Market Risk AmendmentDefinition unchangedCapital Ratio = Total CapitalCredit Risk + Market Risk Operational Risk„Basel II“2004 New Basel Capital Accord8% minimum unchanedNew capital chargeNo changeRWA calculations revised
9Pillar 1 - Minimum Capital Requirement What is Basel? Basel I vs. Basel IIPillar 1 - Minimum Capital RequirementFor each of the 3 categories of risks - credit risk, market risk and operational risk,there are several measurement options (approaches).Credit RiskStandardised ApproachInternal Rating Based Foundation Approach – available only for non-retail clientsAdvanced Measurement ApproachMarket RiskInternal ApproachOperational RiskBasic Indicator ApproachAdvanced Measurement Approach (AMA)
10What is Basel? Basel I vs. Basel II Pillar 1: Credit Risk
11Pillar 1 - Operational Risk What is Basel? Basel I vs. Basel IIPillar 1 - Operational RiskOperational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external eventsincludes legal riskexcludes strategic and reputation risk
12Market Risk / Trading Book What is Basel? Basel I vs. Basel IIMarket Risk / Trading BookBasel I was concentrated purely on Interest Rate Risk and was based upon either maturity or duration bands.Later on it was amended to include FX and Equity Risks.Value-at-Risk (VaR) is the most popular internal model.
13Pillar 2 – Supervisory Review What is Basel? Basel I vs. Basel IIPillar 2 – Supervisory ReviewThe key principle of the supervisory review“Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels“The key premise: Supervisors are empowered to require and penalize banks to hold capital above the minimum. Supervisors will conduct regular review to ensure adequate capital; if review fails, supervisor should increase capital charge.Responsibility for adequate capital rests with the bank’s management
14Pillar 3 – Market Discipline What is Basel? Basel I vs. Basel IIPillar 3 – Market DisciplineExtensive disclosure requirements: By disclosing detailed information about all risk types, a bank enables other participants in the market to assess its risk position and the adequacy of its capital.Mandatory disclosuresWay in which the accord is applied within the group;Amount and quality of the group’s capital;Qualitative and quantitative information on the methods used and measurement of all three forms of risk in the banking book, including strategies for managing future risk;An analysis of the capital adequacy of the group, including contingency plans for times of stress.Supplementary disclosures, at request of regulator
15SummaryWhat is Basel? Basel I vs. Basel IIBasel II in Raiffeisen International and Raiffeisen RomaniaThe costs of Basel II implementationSpecifics for leasing companies
16RZB Group approaches for Pillar 1 Basel II in Raiffeisen International and Raiffeisen RomaniaRZB Group approaches for Pillar 1RZB Group aims to implement starting :Internal Rating Based Foundation Approach for Credit Risk andStandardized Approach for Market and Operational RisksRaiffeisen Bank Romania and Raiffeisen Leasing Romania willimplement starting :Standardised Approach for Credit, Market and Operational Risks
17SummaryWhat is Basel? Basel I vs. Basel IIBasel II in Raiffeisen International and Raiffeisen RomaniaThe costs of Basel II implementationSpecifics for leasing companies
18The costs of Basel II implementation Basel II is a business issue and an IT issue and is a major change programme at considerable costBasel II implementation doesn’t mean only implementation of IT system and software programs but also implementation of best practices in risk managementBasel II requires substantial work and effort as well as significant investments, as major changes can occur at the level of the organizationBasel II is an opportunity to reduce costs and improve efficiency to gain competitive advantage. Reducing risks means it is reduced the amount of money to be put aside for covering the risks.The cost and availability of capital for all banks in future are closely related to the efficient and effective implementation of IFRS and Basel II. This is the most important issue for any bank for the next three to five years, with massive impacts on margins, business strategy, and internal project execution.
19The costs of Basel II implementation In July 2006 NBR requested a quantitative impact study (QIS), based on 31 December 2005 figures, in order to evaluate the impact of new capital accord - Basel II implementation; the study was focused on for credit & operational risk only;28 banks, representing 90% of the entire banking system, participated to this study;For credit risk all the 28 banks used the standardized approach and the result on the capital adequacy ratio (CAD) is a 1.5 percentage points reduction, from 20.99% based on current regulations to19.47%;For operational risk different approaches were used: 18 banks used base approach and 10 banks, including Raiffeisen bank, used standardized approach; operational risk will put a supplementary pressure on CAD ratio, reducing it with another 1.6 percentage points;In conclusion, for both credit and operational risks, the reduction in CAD ratio for the 28 banks, will be 3.1 percentage pointsEven with this negative impact, the CAD ratio at Romanian banking system is still well above the new minimum level of 8% proposed by NBR, following the implementation of Basel II requirement starting 1st of January 2007.