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Govt.securities 2.5
Staff advances 20
CGF/FD/LIC policy/NSC 0
(with margin)
RW % for Assets
ASSET RW %
Govt.guaranteed sec of PSU 22.5
The
New Basel
Capital Accord
Minimum capital requirements –
Regulatory and Economic capital
Minimum Capital Requirements
Eligible capital
ON-BALANCE-SHEET = 8%
CREDIT RISK
+
Off-balance-sheet credit risk
+
Market risk
+
OPERATIONAL RISK
Economic Capital
• Economic capital is the capital required
to cover credit, market and operational
risks of a bank
• Economic Capital = Credit Risk Capital
+ market risk capital + operational risk
capital
• The economic capital required to
support the activities of a bank can be
arrived at in a number of ways for
different types of risks faced.
PILLAR I
• Key Changes:
• Wider spectrum of credit risk weights.
• Greater recognition of collaterals.
• More refined treatment of securitisation.
• Charge for Operational Risk introduced
Credit Risk
Quantifying Risk
• Standardized Approach
• Foundation Internal Rating Based Approach
• Advanced Internal Rating Based Approach
All commercial banks in India shall adopt
Standardized Approach (SA) for credit risk to start
with. Banks are required to obtain the prior
approval of the RBI to migrate to the Internal Rating
Based Approach.
Credit Risk Mitigation
• In order to obtain relief for use of CRM techniques,
proper documentation used in collateralized
transactions must be binding on all parties and
legally enforceable.
• Banks in India can adopt Comprehensive approach,
which allows fuller offset of collateral against
exposures by the value ascribed to the collateral.
• Under this approach, banks which take eligible
financial collateral are allowed to reduce their credit
exposure to a counter party to take account of the
risk mitigating effect.
Collaterals
• The following collateral instruments are eligible for
recognition in comprehensive approach:
Cash, Gold, Securities issued by Central/ State
Governments, IVPs, KVPs, NSCs, LIC policies, Debt
securities, equities etc.,
• In case of NPAs, other collaterals viz., land and
building, plant and machinery will be recognized for
assigning lesser risk weight of 100%, when
provisions reach 15%, only where the bank is having
clear title and the valuation is not more than 3 years
old and value of machinery not higher than the
depreciated value.
Risk weights
• Long term ratings of credit rating agencies under
Standardized approach risk weights:
- AAA 20%
- AA 30%
-A 50%
- BBB 100%
- BB & below 150%
- Un rated 100%
Other Risk Weights
• Exposures to Central Govt.& Inv.in St.Govt 0%
• Exposures guaranteed by State Govt 20%
• Exposures on RBI/DICGC/CGTSI 0%
• Exposures on ECGC 50%
• Staff loans secured by superannuation benefits 20%
• Claims on Multilateral Development Banks 20%
• Claims on Banks (based on CRAR of Bank) 20%-625%
• Claims on Corporates(based on ext.rating) 20%-150%
• Unrated claims in excess of Rs.10 cr 150%
• Claims on Commercial Real Estate 150%
• Consumer credit/personal loans/credit cards 125%
• Claims on restructured/rescheduled a/cs 125%*
• *(till satisfactory performance of one year from the date when
• the first payment of interest/instalment falls due)
External Credit Assessments
• RBI has identified the following domestic credit
rating agencies for the purposes of risk
weighting the claims for capital adequacy
purposes:
a)Credit Analysis and Research Ltd.,
b)CRISIL Limited
c)FITCH Ratings and
d)ICRA Limited
External Ratings
• Banks must disclose the names of the credit rating
agencies that They use for the risk weighting of their
assets.
• The rating should be in force and confirmed from the
monthly bulletin of the concerned rating agency. The
rating agency should have reviewed the rating at
least once during the previous 15 months.
• An eligible credit assessment must be publicly
available.
• Even though CC accounts are sanctioned for period
one year or less, these exposures should be reckoned
as long term exposures and accordingly long term
ratings accorded by agencies will be relevant.
• Presently all loans above Re 10 crores will be rated by
outside credit rating agencies under standardized
approach.
What is operational risk ?
• Operational - risk of direct or indirect loss
resulting from inadequate or failed internal
processes, people, & systems or from
external events. E.g. fraud, forgery,
negligence, system failure etc.
• Risk assessment either by standardized or
internal rating based approach
OPERATIONAL RISK
• Basel II framework outlines 3 methods for
calculating operational risk capital charge.
- Basic Indicator Approach
- The Standardized Approach
- Advanced Measurement Approach
To begin with banks are required to adopt Basic
Indicator Approach for capital charge under
Operational risk.
• Banks are required to provide 15% of average gross
income of the previous three years for which gross
income is positive.
Standardized Approach for Operational Risk
(Rs in Crores)
Category 31.03.200
31.03.201 9
0
Fund Based 188306.11 156207.37
Non Fund Based 48743.46 42241.11
Geographic distribution of exposures is:
(Rs in Crores)
Category Overseas Domestic
31.03.201 31.03.20 31.03.20
0 31.03.200 10 09
9
Fund Based 6973.14 3825 181333 152273.5
The NPA ratios
Non-fund based are as under: 131.6 162.91 48611.86 42078.2
• Tier I Capital
• Minimum Liquidity Standard
• Leverage Ratio
• Counterparty Credit Risk – Derivatives,
Repos and Securities
• Countercyclical Capital Buffers
Basel II Compliance
Regions Countries
Africa 12
Asia 18
Caribbean 4
Latin America 12
Middle East 8
Non-BCBS Europe 30
Total 84
BASEL II- INDIA
• RBI implemented the BASEL II norms on 31st
March 2009.
• Standardized approach has been used for
measuring Credit risk.
• Basic Indicator approach for measuring
operational risk.
• Advanced Measurement Approach(AMA) for
measuring Operational risk has been mandated
by RBI with in 2013. RBI already sounded the
banks for data collection
Market Overview of BASEL II
Implementation : Indian Context
• Punjab National Bank (PNB)- representative bank of
the Indian banking sector.
RISK MANAGEMENT:
• Policy of total risk management, aiming at increasing
the profitability, reducing the risk, and improving the
return on capital.
• Board level subcommittee namely Risk Management
Committee has the overall responsibility of risk
management functions and oversees the function of
Credit Risk Management Committee (CRMC), Asset
Liability Committee (ALCO) and Operational Risk
Management Committee (ORMC).
CREDIT RISK MANAGEMENT:
•Small loan and retail advances are subjected to Scoring models which
support
“Accept/ Reject” decisions based on the scores obtained.
•For the Market Risk Management of the bank, Mid-Office with separate
Desks for Treasury & Asset Liability Management (ALM) has been established.
OPERATIONAL RISK:
Operational Risk Management Committee (ORMC) headed by CMD is the top
level
functional committee for operational risk. All the operational risk aspects like
analysis of historical loss data (including near miss events, attempted frauds &
robberies, external loss events), etc. are placed to the ORMC on quarterly basis.
PUNJAB NATIONAL BANK
(Rs in Crores)
Category 31.03.200
31.03.201 9
0
Fund Based 188306.11 156207.37
Non Fund Based 48743.46 42241.11
Geographic distribution of exposures is:
(Rs in Crores)
Category Overseas Domestic
31.03.201 31.03.20 31.03.20
0 31.03.200 10 09
9
Fund Based 6973.14 3825 181333 152273.5
The NPA ratios
Non-fund based are as under: 131.6 162.91 48611.86 42078.2
(Rs in Crores)
Category 31.03.200
31.03.201 9
0
Fund Based 188306.11 156207.37
Non Fund Based 48743.46 42241.11
Geographic distribution of exposures is:
(Rs in Crores)
Category Overseas Domestic
31.03.201 31.03.20 31.03.20
0 31.03.200 10 09
9
Fund Based 6973.14 3825 181333 152273.5
The NPA ratios
Non-fund based are as under: 131.6 162.91 48611.86 42078.2
Alan Greenspan
Former Chairman, Federal
Reserve
October 5, 2004
Michael E.O’Neill on SWM (Share
Holder’s Maximization of Wealth)
• The highest potential for increasing
shareholder value is improving the way
allocate capital to businesses,
(including) taking away capital from
businesses that are not achieving return
expectations.
Michael E.O’Neill
CFO, Bank of America
Peter Drucker on SWM
• “What we generally call profits, the
money left to service equity,
is usually not profits at all. Until a
business returns a profit that is greater
than the cost of capital, it operates at a
loss”.
Peter Drucker
BASEL III- conference on 12.09.10
• The draft Basel III regulations include:
– "tighter definitions of Tier 1 capital banks must hold 4.5%
by January 2015, then a further 2.5%, totalling 7%.
– the introduction of a leverage ratio,
– a framework for counter-cyclical capital buffers,
– measures to limit counterparty credit risk,
– and short and medium-term quantitative liquidity ratios.
• November 11-12, 2010 – G 20 Seoul meet
What is Basel II
China Banking Regulatory Commission-
“To a large extent we are convinced that Basel II is
more about risk management than capital
regulation, particularly for the emerging markets”
It will take long time to impliment BASEL III. It Is
difficult to say when China will implement as we
have not execised BASEL II yet – Xiao Gang ,
Chairman , Bank of China
BASEL III
• It will reduce cost of future financial crisis , provide
certainty to market and secure level playing field for
US financial institutions – Timothy Geithner, US
Treasury Secretary.
• Partly banks to retain profits for years which they
cannot use to pay dividends or bonuses. It will make
new crisis less likely. But it cannot be ruled out
completely – Nout Wellink, Head of BCBS
• New proposals challenging but right. We will support
them with all our means –Josef Ackermann, CEO,
Deutsch bank