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Framework of Basel Iv MultiScience - XXXIII. microCAD International Multidisciplinary Scientific Conference University of Miskolc, 23-24 May, 2019, ISBN 978-963-358-177-3 FRAMEWORK OF BASEL IV. Klaudia Murányi Assistant Lecturer University of Miskolc, Faculty of Economic INTRODUCTION The prudential conditions of the operation of credit institutions and its development including the structure of credit institutions and emerging financial services, assets, is influenced by several factors: success, failure, crisis or globalization. In this study, I will deal with the new Basel rules which is published in December 2017 by the Basel Committee on Banking Supervision. In more detail, I present the previous Basel rules, considering that the standards are built on each other and complement each other according to market and economic conditions. In order to introduce the new rules, the Committee has set a later and gradual deadline to make credit institutions can adapt them more smoothly. WAY TO BASEL IV. In the second half of the 20th century, during the period of establishment of The Basel Committee on Banking Supervision as an organization, there was a tendency to see financial sector development and internationalization of banks. First of all, this international character and globalization had led to the creation of an international regulatory framework. The establishment of the Basel Committee on Banking Supervision ('the Committee') took place in 1975, with the acceleration of the emergence of more serious international bankruptcies, such as the bankruptcy of Bankhaus Herstatt based in West Germany. The Committee was set up by the Bank for International Settlements with the participation of the heads of central bank and banking supervisors in 13 countries (Belgium, Canada, France, Federal Republic of Germany, Italy, Japan, Netherlands, Luxembourg, Sweden, Switzerland, USA, United Kingdom, Spain) as an advisory body. The main purpose for which they have been set up is to harmonize the activities of banking supervisors and to improve their quality and efficiency. Its most important task is to formulate recommendations in line with its objectives, but these documents cannot legally be enforced by the Member States, but many Member States apply it for incorporation into their national legal systems. [1] Currently, the Committee is the primary global norm creator for the prudential regulation of banks and provides a forum for banking supervisory cooperation. His mandate and purpose are fundamentally unchanged, and nowadays it is about strengthening regulation, supervision and the practice of banks to increase financial stability. [2] The Committee (Cook Committee, named after the President of the Committee, Peter Cook) in 1988 established the first international recommendation on prudent regulation. [3] With regard to this document, the Committee has set out objectives to ensure the long-term solvency of credit institutions or prudent operation and stability. For each institution, it has established an 8% capital adequacy requirement for credit risk, regardless of the actual risk assumed or the specific features of the credit institution in DOI: 10.26649/musci.2019.069 operation. [3] Countries accepting the recommendation had to comply with the capital requirement by the end of 1992. Several criticisms have been made against Basel I, which the Committee had tried to address with the additions. Criticism was mainly due to the fact that, in the case of risk weights, the defined categories were homogeneous, for example, the company was given the same risk weight (100%) within the corporate category as the small company. The calculation did not deal with portfolio diversification or the risk mitigation tools used in practice, ie the scope of collateral was only limited. The most significant criticism, however, was that only the credit risk was regulated, despite the fact that banks also encounter many other risk factors in their daily business. [4] Basel II. standard is based primarily on Basel I criticism, which, despite its additions, could not fulfill its expected role properly. Basel II. took a long time to create and publish, a final period from 1999 until 2006, to finalize the material. In this period, documents are already produced that predict the structure of the recommendation, the response to criticism. The Committee itself was aware of the errors and responded to this by developing a much broader, reflective document that was adapted to the changes in the financial system and institutional diversity. In terms of its structure, it consists of Pillar III, specifically discusses the Minimum Capital Requirement in Pillar I in relation to credit, market and operational risk, in Pillar II supervisory supervision and authority, and in Pillar 3 the disciplinary power of the market as the regulatory power of the public. [5] 1. figure Structure of Basel II. standard Source: own editing Basel II. standard provides solutions to, among other things, risk management processes and systems, more flexible because credit institutions can decide for themselves which method to use, the calculations are based on risk, and thus, with more accurate calculations, they are able to determine more accurate capital size, risk mitigation techniques and tools are expanded and, most importantly, operational risk is highlighted in addition to market risk. [6] The Basel II. is being adopted in Europe by the European Union as Capital Requirements Directives, which has been introduced as a binding directive in all Member States from 2007. [7] According to a 2008 survey, it was introduced in more than a hundred countries, however, the detailed rules, the applicable methods and the timing of the introduction differed by country. One of the main lessons of the 2007 economic crisis is that the existing international banking prudential regulatory framework, Basel II. standard was not able to prevent serious systemic problems. The loss-absorbing capacity of the solvency margin as set out in the Basel II standard proved to be weak. It has become clear that the importance of maintaining adequate liquidity levels for individual banks, managing liquidity and identifying risks is essential for the sound operation of credit institutions. Since 2009, the Basel Committee on Banking Supervision has launched a number of innovations to reduce bank resilience and reduce systemic risk. At the G20 Summit in November 2010, the participants agreed on the planned reforms. The Basel III goal is twofold: At the micro-prudential level, the resilience and stability of individual banks, even in a stress situation and at the macro-prudential level, systemic risks and procyclicality need to be addressed. In order to achieve these goals, it has formulated many new regulatory elements: • Introduces an anti-cyclical and capital maintenance capital reserve for safer operation and shock-tolerance. • Introduces the concept of leverage ratio, which regulates the ratio of primary equity to off-balance sheet items and total assets. • Two indicators to manage liquidity: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NFSR). • In order to explore systemic risks more effectively, banks are assigned to this category by defining five different indicators: International impact, size, degree of concentration with other banks, substitutability, complexity. [8] BASEL III: FINALISING POST-CRISIS REFORMS As the standard name shows - Basel III: Finalising post-crisis reforms - the Basel III rules are supplemented with the new regulation package. This standard was released in December 2017. One of the main objectives of the amendments is to reduce the excessive volatility of risk-weighted assets (RWAs). The Committee's own empirical analyzes have highlighted the variety of RWAs computed by banks. So the Committee has published several documents containing minimum capital adequacy limits and revised requirements for RWA calculation. What does it mean RWA and where we can find it? The essence is that the expected capital requirements will be met for all risk sectors. The prudent and credible calculation of RWAs is an integral part of the risk-weighted capital structure. The risk weighted capital ratios reported by banks must be sufficiently transparent and comparable to allow stakeholders to assess their risk profile. The legislator assigns different risk weights to the exposure and coverage used in the capital calculation, so it is difficult to be comperable. [9] In accordance with the rules effective from 1 January 2019 three different calculations have been developed for the three different risks (operational risk, market risk and credir risk). „Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.” [10] To calculate the operational risk capital requirements, the banks can choose from three methods: (1) the Basic Indicator Approach: must hold capital for operational risk equal to the average over the previous three years of a fixed percentage of positive annual gross income. (2) the Standardised Approach: it is based on banks’ activities, which can be classified into 8 categories, business lines: corporate finance, trading and sales, retail banking, commercial banking, payment and settlement, agency services, asset management, and retail brokerage. (3) Advanced Measurement Approaches: the regulatory capital requirement will equal the risk measure generated. The AMA has qualitative and quantitative criteria too. Use of
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