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1 COREP & The New Capital Adequacy Framework Madrid 2005 BASEL II / CAD 3.

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Presentation on theme: "1 COREP & The New Capital Adequacy Framework Madrid 2005 BASEL II / CAD 3."— Presentation transcript:

1 1 COREP & The New Capital Adequacy Framework Madrid 2005 BASEL II / CAD 3

2 2 Outline z Why Basel II & CAD 3 z Basics of the future directive z COREP

3 3 What is it? zBanking Business is a global business zLarge amounts of money are exchanged daily zSystemic importance zNeed for common rules to avoid a global crisis => Basel Committee

4 4 Solvency Ratio z Capital Adequacy Framework yMinimum requirements to run a Bank The most well-known is the: Cooke Ratio Own Funds / Lending > 8%

5 5 From Basel I to Basel II zObjectives of the new Basel capital accord : yEnhance the sensivity of capital requirements to the degree of risk involved in banks positions and activities yEncourage banks to improve their risk measurement and management systems yIncrease the role of banking supervisors and the role of market discipline yConstitute a more comprehensive approach to addressing risks the banks are exposed to yPromote safety and soundness in the financial system as well as competitive equality

6 6 II - Structure of the new accord Three Pillars Minimum capital requirements Risk weighted assets Credit risk Standardised Approach Internal Ratings-based Approach Operational risk Market risks Definition of capital Supervisory review process Market discipline

7 7 A - Pillar 1 Minimum capital requirements

8 8 Credit Risk Market Risk Regulatory Capital Revised Standardized Approach Standardized Approach Internal Models Approach 8 % Foundation IRBA Advanced IRBA Operational risk Basic Indicator Approach Standardized Approach Adavanced Measurement Approach or + +

9 9 Evolutionnary approaches Standardised Approach Foundation IRB Approach Advanced IRB Approach Credit risk modelling ? Capital incentives to move to more advanced approaches Decreasing capital charges

10 10 Operational risk zIn line with the approach to credit risk and market risk, several options are proposed to minimum capital requirements for OpR zEvolutionnary approaches and capital incentives to move to the most advanced approach (AMA) Basic Indicator Approach (BIA) The Standardised Approach (TSA) Advanced Measurement Approach (AMA) Increasing management standard Increasing capital charges

11 Market risk zTreatment remains unchanged, that is 2 options available : yA standardised approach (for specific risk capital requirements, risk weights will be based on the external assessment of the issuer) yAn internal models approach (VaR)

12 12 B - Pillar 2 Supervisory review process

13 13 Supervisory review process zPillar 2 is intended : yto achieve a level of capital commensurate with a banks overall risk profile yto encourage banks to develop and use better risk management techniques in monitoring and managing their risks Only very limited impact on COREP

14 14 C - Pillar 3 Market discipline

15 15 Market discipline zPillar 3 is intended to provide investors with reliable and timely information to understand a banks risk profile zEnhance role of market participants in encouraging banks to hold adequate levels of capital zPre-condition for the use of some methodologies (Internal ratings-based approaches, AMA) zQualitative and quantitative disclosures (information on methodology and key inputs, e.g. explanation of structure of internal rating system and PD, LGD assumptions,…) Will not be covered by COREP

16 16 COREP zA ratio has been defined zNeed to set up a reporting to monitor its application COREP

17 17 What has been done zAn informal initiative, followed by an official working group y9 European Countries, gathered on a voluntary basis to study the feasibility of a common EU reporting. yIts main conclusions were presented to the CEBS on July 1st. The CEBS agreed that a common reporting was feasible and highly desirable and the COREP Group was set up. zA Draft Framework was designed and included yA proposed architecture, with yDraft reporting templates attached, and yPropose an IT Solutions.

18 18 Proposed architecture A: Data deemed necessary by all supervisors B: Country Specific Data (such as Specific Tier 1 instruments) A+B = Common EU Reporting C: Local or Sector-wide taxonomies (Developped under the same standard as the Common Reporting) D: Country specific requirement outside our scope Reporting D4 C1 C2 C3 C4 B 3 B 2 B 1 A D2 D3 D1

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