U.S. Implementation of Basel II: an Overview
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Basel III: Post-Crisis Reforms
Basel III: Post-Crisis Reforms Implementation Timeline Focus: Capital Definitions, Capital Focus: Capital Requirements Buffers and Liquidity Requirements Basel lll 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 1 January 2022 Full implementation of: 1. Revised standardised approach for credit risk; 2. Revised IRB framework; 1 January 3. Revised CVA framework; 1 January 1 January 1 January 1 January 1 January 2018 4. Revised operational risk framework; 2027 5. Revised market risk framework (Fundamental Review of 2023 2024 2025 2026 Full implementation of Leverage Trading Book); and Output 6. Leverage Ratio (revised exposure definition). Output Output Output Output Ratio (Existing exposure floor: Transitional implementation floor: 55% floor: 60% floor: 65% floor: 70% definition) Output floor: 50% 72.5% Capital Ratios 0% - 2.5% 0% - 2.5% Countercyclical 0% - 2.5% 2.5% Buffer 2.5% Conservation 2.5% Buffer 8% 6% Minimum Capital 4.5% Requirement Core Equity Tier 1 (CET 1) Tier 1 (T1) Total Capital (Tier 1 + Tier 2) Standardised Approach for Credit Risk New Categories of Revisions to the Existing Standardised Approach Exposures • Exposures to Banks • Exposure to Covered Bonds Bank exposures will be risk-weighted based on either the External Credit Risk Assessment Approach (ECRA) or Standardised Credit Risk Rated covered bonds will be risk Assessment Approach (SCRA). Banks are to apply ECRA where regulators do allow the use of external ratings for regulatory purposes and weighted based on issue SCRA for regulators that don’t. specific rating while risk weights for unrated covered bonds will • Exposures to Multilateral Development Banks (MDBs) be inferred from the issuer’s For exposures that do not fulfil the eligibility criteria, risk weights are to be determined by either SCRA or ECRA. -
Impact of Basel I, Basel II, and Basel III on Letters of Credit and Trade Finance
Impact of Basel I, Basel II, and Basel III on Letters of Credit and Trade Finance Requirement Basel I Basel II Basel III 2013 2015 2019 Common Equity 2.0% of 3.5% of RWA 4.5% of RWA 4.5% of RWA RWA Tier 1 Capital 4.0% of 4.0% of 4.5% of RWA 6.0% of RWA 6.0% of RWA RWA RWA Total Capital 8.0% of 8.0% of 8.0% of RWA 8.0% of RWA 8.0% of RWA RWA RWA Capital Conversion -0- -0- +2.5% of RWA Buffer Leverage Ratio Observation Observation (4% of direct assets) (based on Total Capital) 3% of total direct and contingent assets Counter Cyclical Buffer +Up to 2.5% of RWA Liquidity Coverage Observation 30 days 30 days Net Stable Funding Observation Observation 1 year Additional Loss +1% to 2.5% of RWA Absorbency Color Code Key (US Applicability): (Applies only in the US) In the US, applies only to “Large, Internationally-Active Banks” Not yet implemented in the US Depending on the bank and the point in the economic cycle, under Basel III, the total capital requirement for a bank in 2019 may be as much as 15.5% of Risk-Weighted Assets (“RWA”), compared with 8% under Basel I and Basel II. The amount of Risk-Weighted Assets (“RWA”) is computed by multiplying the amount of each asset and contingent asset by a risk weighting and a Credit Conversion Factor (“CCF”) Under Basel I, risk weightings are set: 0% for sovereign obligors, 20% for banks where tenors ≤ one year, 50% for municipalities and residential mortgages, 100% for all corporate obligors Under Basel II, risk weightings are based on internal or external (rating agency) risk ratings with no special distinction for banks; capital requirements for exposures to banks are increased by as much as 650% (from 20% to as much as 150%) The Credit Conversion Factor for Letters of Credit varies under Basel I vs. -
Reducing Procyclicality Arising from the Bank Capital Framework
Joint FSF-BCBS Working Group on Bank Capital Issues Reducing procyclicality arising from the bank capital framework March 2009 Financial Stability Forum Joint FSF-BCBS Working Group on Bank Capital Issues Reducing procyclicality arising from the bank capital framework This note sets out recommendations to address the potential procyclicality of the regulatory capital framework for internationally active banks. Some of these recommendations are focused on mitigating the cyclicality of the minimum capital requirement, while maintaining an appropriate degree of risk sensitivity. Other measures are intended to introduce countercyclical elements into the framework. The recommendations on procyclicality form a critical part of a comprehensive strategy to address the lessons of the crisis as they relate to the regulation, supervision and risk management of internationally active banks. This strategy covers the following four areas: Enhancing the risk coverage of the Basel II framework; Strengthening over time the level, quality, consistency and transparency of the regulatory capital base; Mitigating the procyclicality of regulatory capital requirements and promoting the build up of capital buffers above the minimum in good economic conditions that can be drawn upon in stress; and Supplementing the capital framework with a simple, non-risk based measure to contain the build up of leverage in the banking system. The objective of these measures is to ensure that the Basel II capital framework promotes prudent capital buffers over the credit cycle and to mitigate the risk that the regulatory capital framework amplifies shocks between the financial and real sectors. As regulatory capital requirements are just one driver of bank lending behaviour, the proposals set out should be considered in the wider context of other measures to address procyclicality and reduce systemic risk. -
Basel II, Sovereign Ratings and Transfer Risk External Versus Internal Ratings
Basel II, Sovereign Ratings and Transfer Risk External versus Internal Ratings by Stijn Claessens and Geert Embrechts* 07 May 2002 Abstract Basel II puts great emphasis on external ratings, including from rating agencies, to quantify credit risks, but it also allows financial institutions to use their internal risk ratings. This is also the case for international lending, but following recent emerging markets’ crises, the quality of sovereign ratings has received much criticism. At the same time, little is known about the quality of internal ratings of country risk. Using data from a major international bank, we assess the relative performance of internal and external country ratings. We find that internal and external ratings are driven by similar factors and both underestimate “event risks”, but that external ratings are somewhat slower in adjusting to a financial crisis. ------------------------------------------------------------------------------------------------------------ University of Amsterdam and Rabobank International, the Netherlands respectively. For presentation at the conference Basel II: An Economic Assessment, Bank for International Settlements, Basel, 17-18 May 2002, organized by the Centre for Economic Policy Research, Journal of Financial Intermediation, and the Basel Committee on Banking Supervision. The opinions do not necessarily express those of the Rabobank. The authors would like to thank Peter Boswijk and Martijn Krijger for help with the statistical analysis and Michiel van Voorst, Leendert Colijn, Adriaan Kukler, Frank Ligtenberg and Leonhardt van Efferink for comments on an earlier version. 1 Introduction In January 2001 the Basel Committee on Banking Supervision issued a consultative document on a new Basel Capital Accord (the ‘Basel II’ proposal). Under the standardized approach, Basel II puts greater emphasis on the role of external ratings, including from rating agencies, to assess credit risks. -
Revised Standards for Minimum Capital Requirements for Market Risk by the Basel Committee on Banking Supervision (“The Committee”)
A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf Basel Committee on Banking Supervision STANDARDS Minimum capital requirements for market risk January 2016 A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2015. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9197-399-6 (print) ISBN 978-92-9197-416-0 (online) A revised version of this standard was published in January 2019. https://www.bis.org/bcbs/publ/d457.pdf Minimum capital requirements for Market Risk Contents Preamble ............................................................................................................................................................................................... 5 Minimum capital requirements for market risk ..................................................................................................................... 5 A. The boundary between the trading book and banking book and the scope of application of the minimum capital requirements for market risk ........................................................................................................... 5 1. Scope of application and methods of measuring market risk ...................................................................... 5 2. Definition of the trading book .................................................................................................................................. -
US Implementation of Basel II
U.S. Implementation of Basel II: An Overview May 2003 Objectives of the Revisions to the Basel Accord • Advance a “three-pillar” approach – Pillar 1 -- minimum capital requirement – Pillar 2 -- supervisory oversight – Pillar 3 -- heightened market discipline • Develop a measure of capital that is: – more risk sensitive than the current approach – better suited to the complex activities of internationally- active banks – capable of adapting to market and product evolution 2 Objectives of the Revisions to the Basel Accord (cont’d) • Encourage improvements in risk management and enhance internal assessments of capital adequacy • Incorporate an operational risk component into the capital charge (to correspond with the unbundling of credit risk) • Heighten market discipline through enhanced disclosure 3 Revised Basel Accord • Two approaches developed for calculating capital minimums for credit risk: – Standardized Approach (essentially a slightly modified version of the current Accord) – Internal Ratings-Based Approach (IRB) • foundation IRB - supervisors provide some inputs • advanced IRB (A-IRB) - institution provides inputs • underlying assumption is a broadly diversified portfolio -- by both product and geography • qualifying standards will be rigorous 4 Revised Basel Accord (cont’d) • Three methodologies for calculating capital minimums for operational risk – Basic Indicator Approach – Standardized Approach – Advanced Measurement Approach (AMA) • use of AMA subject to supervisory approval – rigorous quantitative and qualitative standards -
Defaulted Exposures
Defaulted Exposures Summary 1. The Standardised Approach definition of past-due loans is broadened to match the IRB definition of default. 2. The new definition now includes: a) Exposures, rather than just loans, that are past due for more than 90 days. b) Exposures to a “defaulted borrower” who is, in the opinion of the bank, “unlikely to pay” its credit obligation in full. 3. By mistake or by design the Standardised Approach floor of 72.25% adds a significant capital charge to the losses already covered by the Expected Losses calculated in the IRB Approaches. Review A. Current treatment- a refresher The Standardised Approach does not actually deal with the concepts of defaulted exposures or default as such. There are therefore no definitions beyond the fact that this asset class consists of loans that are more than 90 days past due. These loans are risk-weighted as follows: • 150% risk weight when specific provisions are less than 20% of the outstanding amount of the loan. • 100% risk weight when specific provisions are no less than 20% of the outstanding amount of the loan. Note that: 1. The risk weight is applied to the loan after deducting specific provisions or write-offs, if any. ©2020 BankT&D Consulting Limited www.banktandd.com 2. If a portion is covered by a guarantee or collateral, the risk weight only applies to the unsecured portion. B. Basel IV revisions 1. Scope and concepts The major change is the broadening of the definition. Basel IV introduces the concept of “defaulted exposure”, which is: 1. -
Basel Ii/Iii Implementation Roadmap for the Eastern Caribbean Currency Union
BASEL II/III IMPLEMENTATION ROADMAP FOR THE EASTERN CARIBBEAN CURRENCY UNION Bank Supervision Department EASTERN CARIBBEAN CENTRAL BANK ST KITTS BASEL II/III IMPLEMENTATION ROADMAP FOR THE EASTERN CARIBBEAN CURRENCY UNION 1.0 PURPOSE This Roadmap provides an overview of the Eastern Caribbean Central Bank’s (ECCB/the Central Bank) Basel II/III implementation programme for the Eastern Caribbean Currency Union (ECCU). The document outlines the Central Bank’s approach towards implementation, the implementation options selected and key deliverables/activities. The Roadmap is intended to guide the expectations and actions of all stakeholders associated with the Basel II/III implementation process. 2.0 INTRODUCTION The ECCB is committed to implementing certain aspects of Basel II/III in the ECCU for computing the capital adequacy of institutions licenced under the Banking Act 2015 (the Act), in accordance with Sections 46 and 47 of the Act1. Towards this end, the ECCB established a dedicated team (Basel Implementation Group) for spearheading the implementation effort and a Basel II/III Working Committee comprising of representatives from the ECCB, ECCU Bankers Association and commercial banks, for collaborating with the banking industry on an ongoing basis. The Central Bank sought comments on some draft standards2 in 2018 and plans to continue to deepen its interaction with licensees via a number of consultations and training sessions. Basel II/III constitutes a more comprehensive measure of capital adequacy than the existing Basel I. Basel II/III seeks to align regulatory capital requirements more closely with the underlying risks that banks face. The framework requires banks to assess the riskiness of their assets with respect to credit, market and operational risks and seeks to ensure that banks’ minimum capital requirements better reflect inherent risks in their portfolios, risk management practices and accompanying disclosures to the public. -
(RCAP) Assessment of Basel III Regulations –
Basel Committee on Banking Supervision Regulatory Consistency Assessment Programme (RCAP) Assessment of Basel III regulations – United States of America December 2014 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2014. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9197-012-4 (print) ISBN 978-92-9197-011-7 (online) Contents Glossary ................................................................................................................................................................................................ 1 Preface ................................................................................................................................................................................................ 3 Executive summary ........................................................................................................................................................................... 5 Response from United States ....................................................................................................................................................... 7 1 Context, scope and main assessment findings ................................................................................................... 8 1.1 Context ............................................................................................................................................................................... -
POLICY BRIEF No. 34
DEVELOPMENT CENTRE POLICY BRIEFS OECD DEVELOPMENT CENTRE POLICY BRIEF No. 34 In its research activities, the Development Centre aims to identify and analyse problems the implications of which will be of concern in the near future to both member and non-member countries of BANKING ON DEVELOPMENT the OECD. The conclusions represent a contribution to the search for policies to deal with the issues involved. PRIVATE FINANCIAL ACTORS AND DONORS IN DEVELOPING COUNTRIES The Policy Briefs deliver the research findings in a concise and accessible way. This series, with its wide, targeted and rapid distribution, is specifically intended for policy and decision makers in the fields concerned. by This Brief militates for the creation of an Innovation Laboratory Javier Santiso for Development Finance to enhance interactions between public donors and private actors in development finance. It further argues for deeper involvement of actors from emerging and developing countries; multi-directional global alliances between financiers; a ● A large, untapped reservoir of potential partnerships between databank of current best practices and projects in public/private private financial institutions (banks, asset managers, private partnerships for development; and alliances between donors and equity firms, etc.) and aid donors remains to be fully exploited. private banks to alleviate the negative impact of Basel II rules. Finally, the Brief proposes the creation of a Development Finance ● Banks, private equity and asset management firms are Award in recognition of those institutions most prepared to exploit important parts of a broad set of private actors in the field. the synergies between private lenders and the public sector in pursuit of development objectives. -
An Explanatory Note on the Basel II IRB Risk Weight Functions
Basel Committee on Banking Supervision An Explanatory Note on the Basel II IRB Risk Weight Functions July 2005 Requests for copies of publications, or for additions/changes to the mailing list, should be sent to: Bank for International Settlements Press & Communications CH-4002 Basel, Switzerland E-mail: [email protected] Fax: +41 61 280 9100 and +41 61 280 8100 © Bank for International Settlements 20054. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN print: 92-9131-673-3 Table of Contents 1. Introduction......................................................................................................................1 2. Economic foundations of the risk weight formulas ..........................................................1 3. Regulatory requirements to the Basel credit risk model..................................................4 4. Model specification..........................................................................................................4 4.1. The ASRF framework.............................................................................................4 4.2. Average and conditional PDs.................................................................................5 4.3. Loss Given Default.................................................................................................6 4.4. Expected versus Unexpected Losses ....................................................................7 4.5. Asset correlations...................................................................................................8 -
The Basel Games 2012
June 25, THE BASEL GAMES 2012 The Basel Games As the 2012 summer Olympic Games descends upon London, England, national pride and attention grows around the world in anticipation of an elite few chasing international glory. Organization of such an international affair takes a great deal of leadership and planning. In 1894, Baron Pierre de Coubertin founded the International Olympic Committee. The IOC is the governing body of the Olympics and has since developed the Olympic Charter that defines its structure and actions. A similar comparison can be made in regards to the development of The Basel Accords. Established in 1974, The Basel Committee on Banking Supervision, comprised of central bankers from around the world, has taken a similar role as the IOC, but its objective “is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.” The elite participants of “The Basel Games” include banks with international presence. The Basel Accords themselves would be considered the Olympic Charter and its purpose was to create a consistent set of minimum capital requirements for banks to meet obligations and absorb unexpected losses. Although the BCBS does not have the power to enforce the accords, many countries have adopted their recommendations on banking regulations into law. To date there have been three accords developed. The Bronze Metal Our second runner up is Basel I, also known as the 1988 Basel Accord, which culminated as the result of the liquidation of the Herstatt Bank in 1974. With the development of technology and risk management techniques Basel I is considered obsolete by today’s standards.