BASEL
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Source: http://www.bis.org/publ/bcbs107.pdf
Basel Accords
- banking supervision Accords
- recommendations on banking regulations (Basel I, Basel II and Basel III)
- issued by the Basel Committee on Banking Supervision
- secretariat at the Bank for International Settlements in Basel (BIS), Switzerland
Which bank must comply
- $250B of total assets or $10B of foreign assets
- Basel II compliance is optional for all others
- examiners can require compliance on a case-by-case basis
Basel Accords History
- 1988 - Basel (I)
- 2004 - Basel II (covered in OCEB v1)
- 2010 - Basel III (covered in OCEB v2)
Basel II goals
- Ensuring that capital allocation is more risk sensitive;
- Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution
- Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques
- Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage
Pillars
- Minimum capital requirements (addressing risk)
- Supervisory review
- Market discipline
First pillar
Regulatory capital is calculated for three major components of risk.
- credit risk
- operational risk
- market risk
- Credit risk
- can be calculated using:
- standardized approach
- Foundation Internal Rating-Based Approach (IRB)
- Advanced IRB
- General IB2 Restriction
- Operational risk]
- Basic indicator approach (BIA)
- Standardized approach (STA)
- Internal measurement approach (advanced measurement approach - AMA).
- Market risk]]
- Value at risk (VaR)
Second pillar
Deals with the regulatory response to the first pillar Provides a framework for dealing with other risks (residual risk):
- Systemic risk
- Pension risk
- Concentration risk
- Strategic risk
- Reputational risk
- Liquidity risk
- Legal risk.
The result of this pillar: Internal Capital Adequacy Assessment Process (ICAAP)
Third pillar
- Complements the minimum capital requirements and supervisory review process
- Develops a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution
- Market discipline
- supplements regulation as sharing of information facilitates assessment of the bank by others including investors, analysts, customers, other banks and rating agencies which leads to good corporate governance
- Market discipline operates by requiring institutions to disclose details on the scope of application, capital, risk exposures, risk assessment processes and the capital adequacy of the institution
- Must be consistent with how the senior management including the board assess and manage the risks of the institution.
- Market Participant assessment
- If market participants have a sufficient understanding of a bank's activities and the controls it has in place to manage its exposures,
- they are better able to distinguish between banking organisations so that they can reward those that manage their risks prudently and penalise those that do not
- Disclosures are required to be made at least twice a year
- Qualitative disclosures (providing a summary of the general risk management objectives and policies ) can be made annually
- Institutions are also required to create a formal policy on what will be disclosed, controls around them along with the validation and frequency of these disclosures.
- Disclosures apply to the top consolidated level of the banking group
