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Overview
Objective of the original Basel Accord
to provide financial stability and minimum prudential standards
to an increasingly international global banking system
Basle I Accord
Restricted to : Market Risk Basic Measures Of Credit Risk One size fits all
Basle II Accord
New Accords objective Align regulatory requirements with economic principles of risk management How? Three Pillars which includes the measurement of Operational Risk. Overall Goal To provide a measurement for financial institutions to quantify their internal controls, the manner in which in they are managed and the level of regulatory capital that they must maintain.
Timelines
First Consultation Paper June 1999
QIS 1
Second Consultation Paper QIS 2 QIS 2.5 QIS 3 (Technical guidance) Third Consultation Paper New Accord
July 2000
January 2001 April 2001 November 2001 October 2002 July 2003 Mid 2004 Thru 2006
Implementation of EU Directive
End 2006
Credit Risk
Standardised Approach ( Risk Weightings) Internal Ratings (Foundation & Advanced Approach)
Operational Risk
Basic, Standardised and Advanced Approaches
Others
Customers
New costs relating to disclosures, internal/external ratings/better collaterialisation Ensuring transparency of transactions/processes
Regulators
New costs related to additional resources Set incentives for banks through stress testing and review processes.
Rating Agencies
Provide an increased transparency with regard to rating components Maintain a high quality of ratings Increase competition with entry by other agencies within Europe to the market
Where to Start?
QIS III analysis
350 Banks from 43 Countries participated
Main Result
Lack of data retained by each of the participating organisations
Getting Started
Senior Management Support
Identify and assign responsibilities at all levels All ratings and estimations must be approved by the board of Directors or a designated committee Senior management must have a good understanding of ratings systems designs and processes Internal ratings must be an essential part of the reporting to these parties
Getting Started
Phase I Supervisory Committee
Cross-functional Identify other regulatory concerns that may overlap in relation to the corporate governance, such as Sarbannes Oxley and IAS. Prepare a Gap Analysis Prepare an Impact Analysis Complete an overall risk assessment of your business Complete a cost benefit related to the enhancements or new processes that need to be introduced to ensure compliant
Getting Started
Phase II Corporate Governance Risk Management Credit Risk Operational Risk Market and Other Risks Capital Planning Disclosure Supervisory Review Process
Concerns
LIBA & BBA August 2003
The new accord , as currently proposed , is unduly complex and will be difficult for our members to implement and for national regulators, even in the G10, to supervise
Why implement?
The top ten banks in US are complying
Control 95% of all foreign capital held in the US Using the AMA approach and Internal Ratings Approach Along with other 10 banks control 66% of total US capital
Why Implement?
Rating Agencies
Even with Basel II in mind, operational risk management should first and foremost be an effort to measure and control operational risk, rather than an exercise in efficient capital allocation
Moodys believe that well calibrated quantitative tools can effectively measure a large segment of operational risk, notably the high-frequency low impact events Many banks have begun in earnest to collect loss data and to build internal loss models A bank with good risk management systems is not necessarily a bank that will be invariably successful in avoiding risks. But good and reliable risk-management systems and processes are nevertheless a very good start.
Data Management
Technology
Based on your institutions requirements
Data Management
Credit Risk
Historical Data Integrity of data Analysis re comparison to current portfolios and lending policies Assessment of capital allocation per loan, per credit portfolio and overall credit risk exposure Create behavioural score models, which provide the likehood of the customer to default
Data Management
Requirement to segment the portfolio by; Product Type Borrower Risk Delinquency Status Vintage Analysis
The IRB methodology requires the calculation of ; Probability of Default (PD)
The likelihood that a loan will default.
Data Management
Credit Risk Gradings are required; Minimum 6 to 9 grades for performing borrowers Minimum 2 grades for non-performing borrowers No more than 30% of gross exposures should fall in any single borrower grade
Credit risk is derived from the analysis of historical data. Requirement to have five years of historical data for validation and calibration in models Banks back test their models over an economic cycle Stress testing every six months going forward Models must be used in normal business decisions
Operational Risk
Initially
May be manual reporting of events Logging of risks Technology Could incorporate this into the overall credit risk system
Data Management
Advanced Measurement Approaches There are three potential approaches under Advanced Measurement Models are based on a banks own internal rating systems and operational loss data 1. Internal Measurement Approach (IMA) Business lines sub-divided by risk type The models are generally based on the following information: Operational Risk is a function of (EI * PE * LGE) EI Exposure Indicator PE Probability of Loss LGE Loss Given Event
Data Management
Loss Distribution Approach
Estimate future operational risk losses by each business line or risk type Forecasting Models are required Dependent on banks foreseeing the unforeseeable
3. Scorecard Approach
Scorecards are developed to rate the risk profile of each business line