In fact, many banks have the capital to RWA ratio in excess of provisions.
Reasons for 'excess' capital
- Capital ratio is the ratio of bank capital in which at least should not be below it. Therefore, bank management chose to keep the ratio of capital to RWA was above the minimum conditions set by the supervisor.
- In some countries like America and England, bank supervisors to set capital ratio of RWA to a specific bank. In practice this ratio over the provisions of Basel.
- Many big banks have a world of their own internal risk models, which connect the level of capital requirements for the level of risk undertaken by banks in the business portfolio. Banks then adjust their capital. Model 'Economic capital' will result in greater capital requirements than Basel II. Banks that use this model are required to disclose it in accordance with Basel II, Pillar 2.
- Basel II and economic capital of a bank's model linking a bank's capital with the level and structure of the business. Banks are commercial enterprises and management plans for both organic growth and through acquisitions, require large capital to support the bank's growth plans.
- Access to capital markets can not always be ascertained, especially in terms of cost, because it is common for banks that plan to grow to ensure that: 1) they will not be hindered by a lack of capital; 2) the benefits of their plans will not be influenced by the high cost of capital as a result of factors such as short-term market to compete with government bonds.
Tuesday, September 29, 2009
Thursday, September 24, 2009
Basel II And Capital Adequacy
Capital adequacy of Basel II is a minimum of 8% (same as Basel I), because the Committee believed that the target capital ratio of 8% for international banks are still appropriate. Because each bank to calculate capital needs are different, the actual amount will differ from the provisions of the Basel capital I.
The purpose of Basel II is to make a regulation more in line with the risk profile of each bank. 2 Committee has adopted a transition plan to ensure that Basel II will not reduce the capital requirements of a bank or the banking industry too quickly.
1. Adany multiplier to ensure that the target of a minimum capital ratio of 8% to stay awake. 'Scaling factor' will be applied uniformly to all banks using the IRB approach for credit risk or the Advanced Measurement Approach for operational risk. QIS 3 in accordance with these factors will initially set at 106%.
2. Bank supervisors may prohibit a bank to lower the capital, but the decline in bank capital should be done gradually and approved by the bank supervisors from the year 2005 - 2008
The purpose of Basel II is to make a regulation more in line with the risk profile of each bank. 2 Committee has adopted a transition plan to ensure that Basel II will not reduce the capital requirements of a bank or the banking industry too quickly.
1. Adany multiplier to ensure that the target of a minimum capital ratio of 8% to stay awake. 'Scaling factor' will be applied uniformly to all banks using the IRB approach for credit risk or the Advanced Measurement Approach for operational risk. QIS 3 in accordance with these factors will initially set at 106%.
2. Bank supervisors may prohibit a bank to lower the capital, but the decline in bank capital should be done gradually and approved by the bank supervisors from the year 2005 - 2008
Saturday, September 19, 2009
Basel II And Risk Sensitivity
Breadth of Coverage
The biggest change in the extent of risk in Basel II tercover are additional operational risks. Various types of risks included in operational risk are:
transaction, execution, Business Interruption, settlement and fiduciary risks
People, poor management and inadequate supervision risks
Criminal, fraud, theft and rogue trader risks
Relationship and customer risks
Fixed cost structures, lack of resources, technology and physical assets, risks
Compliance and legal / regulatory risks
Information risk
Basel II also makes the Pillar 2 and 3 as an inseparable part of the process of determining a bank's capital ratio. Pillar 2 in bank supervisors are expected to introduce other risks faced by the possibility of a bank.
Definition of operational risk in Basel II is not comprehensive, because in reality there are significant risks that are not included are: business risk, strategic risk and reputation risk.
Depth of Coverage
Besides the broad range of risk, the Basel II risk dicover also more depth, particularly in credit risk.
Basel I
weight risk is very simple to use depending on the type of asset and the borrower (associated with country risk and the types of institutions or OECD Non-OECD.
Basel II:
weighting of risk that are used based on the quality of the debtor, and is supported by term loans and guarantees quality
allows the use of two approaches to determine the risk weighting of assets (RWA), namely:
- The Standardized Approach (change from 'grid' approach used in the Basel I → See 'Current Exposure Method and The Original Exposure Method in Chapter 2
- The Internal Rating-Based Approach
In this approach, the bank developed a grading of internal models to determine the creditworthiness of the debtor.
Both approaches have much in common with the way agencies do grading on the issuance of bonds. But the criticisms of Basel I as at least grade of credit risk, where this is in contrast with many of the grade range used by the agency.
If the bank chose IRB approach, the number of grade determined by the bank itself (but the bank supervisors have wanted at least 8 grade).
When used Standardized approach, the 'grid' of risk weight calculation in accordance with Basel I. This approach allows the grouping of inter-grade risk weight, but with the difference between the different assets, as Basel I.
The biggest change in the extent of risk in Basel II tercover are additional operational risks. Various types of risks included in operational risk are:
transaction, execution, Business Interruption, settlement and fiduciary risks
People, poor management and inadequate supervision risks
Criminal, fraud, theft and rogue trader risks
Relationship and customer risks
Fixed cost structures, lack of resources, technology and physical assets, risks
Compliance and legal / regulatory risks
Information risk
Basel II also makes the Pillar 2 and 3 as an inseparable part of the process of determining a bank's capital ratio. Pillar 2 in bank supervisors are expected to introduce other risks faced by the possibility of a bank.
Definition of operational risk in Basel II is not comprehensive, because in reality there are significant risks that are not included are: business risk, strategic risk and reputation risk.
Depth of Coverage
Besides the broad range of risk, the Basel II risk dicover also more depth, particularly in credit risk.
Basel I
weight risk is very simple to use depending on the type of asset and the borrower (associated with country risk and the types of institutions or OECD Non-OECD.
Basel II:
weighting of risk that are used based on the quality of the debtor, and is supported by term loans and guarantees quality
allows the use of two approaches to determine the risk weighting of assets (RWA), namely:
- The Standardized Approach (change from 'grid' approach used in the Basel I → See 'Current Exposure Method and The Original Exposure Method in Chapter 2
- The Internal Rating-Based Approach
In this approach, the bank developed a grading of internal models to determine the creditworthiness of the debtor.
Both approaches have much in common with the way agencies do grading on the issuance of bonds. But the criticisms of Basel I as at least grade of credit risk, where this is in contrast with many of the grade range used by the agency.
If the bank chose IRB approach, the number of grade determined by the bank itself (but the bank supervisors have wanted at least 8 grade).
When used Standardized approach, the 'grid' of risk weight calculation in accordance with Basel I. This approach allows the grouping of inter-grade risk weight, but with the difference between the different assets, as Basel I.
Monday, September 14, 2009
Development Of The Basel II Accord
Using the Consultative Committee approach to ensure that the new regulations have a positive impact. Committee issued a Consultative papers and followed by a period for consultation and revision.
Consultation period consists of a series of Quantitative Impact Studies (QIS), which some banks estimate the impact of the implementation of Basel II on the basis of the Consultative paper issued. Consultative papers and QIS has publish are:
Consultative Paper no. 1 - June 1999
QIS No. 1 - Q3/2000
Consultative Paper no. 2 - January 2001
QIS No. 2 - Q2/2001
QIS No. 2.5 - Q4/2001
QIS No. 3 - Q4/2002
Consultative Paper no. 3 - April 2003
The results of this paper is the issuance of the Basel II Accord in June 2004.
Some analysis on the QIS 3 is based on estimates because of the lack of data, so that in 2004 and 2005 several member countries of the Basel Committee issued a 'national impact study'. In Q4 2004 Committee mengelurkan materials and guidance for local bank supervisors as the basis of 'national impact study' them → study was finally called QIS 4 and run by bank supervisors in the USA and Germany.
Consultative approach used by the Basel Committee Committee based on the desire to not change the total capital of the banking industry.
Consultation period consists of a series of Quantitative Impact Studies (QIS), which some banks estimate the impact of the implementation of Basel II on the basis of the Consultative paper issued. Consultative papers and QIS has publish are:
Consultative Paper no. 1 - June 1999
QIS No. 1 - Q3/2000
Consultative Paper no. 2 - January 2001
QIS No. 2 - Q2/2001
QIS No. 2.5 - Q4/2001
QIS No. 3 - Q4/2002
Consultative Paper no. 3 - April 2003
The results of this paper is the issuance of the Basel II Accord in June 2004.
Some analysis on the QIS 3 is based on estimates because of the lack of data, so that in 2004 and 2005 several member countries of the Basel Committee issued a 'national impact study'. In Q4 2004 Committee mengelurkan materials and guidance for local bank supervisors as the basis of 'national impact study' them → study was finally called QIS 4 and run by bank supervisors in the USA and Germany.
Consultative approach used by the Basel Committee Committee based on the desire to not change the total capital of the banking industry.
Wednesday, September 9, 2009
Reason For The Development Of Basel II
Credit models - grading or options - based
The increasing use of quantitative methods by banks to calculate and report credit risk in their asset portfolios at the peak publicated Market Risk Amendment, which allows banks to use internal models to calculate the credit risk.
The development of this quantitative method provides a strong foundation for Basel II. Two problems that must be resolved before the Committee, Basel II can process.
Determining the type of 'credit model' will be allowed on Pillar 1. Committee to consider 2 alternatives:
'Full portfolio model' is a technique → option pricing model was developed by Robert Merton in determining prices and calculate the portfolio option.
'grading models' in which risk calculations are based on 'individual obligor base' and portfolio risk is the total of these individual risk → model was also used by rating agencies like S & P and Moody's. It should be noted that the Basel II uses the term 'grades' and not 'rated' even if it means the same.
At the end of the 1990 Committee decided to use a 'credit grading models'. However, there is a trend in the banking sector to use these 2 techniques together.
The extent to which quantitative techniques can be used to cover 'other risks' particularly operational risk. There are some arguments whether these risks should be included in Pillar 2 because very few banks that use quantitative calculations to compute and manage these risks. Concern of bank supervisors that the risk is very significant and if only depend on Pillar 2 will cause 'under capitalization' or 'inconsistent capitalization' of risk.
As a result Committee decided:
Include operational risk as a quantitative calculation of Pillar 1
Defining the broader operational risk but not including the risk of reputation, business and strategic.
Credit risk models in Pillar 1 is 'credit grading techniques'.
The increasing use of quantitative methods by banks to calculate and report credit risk in their asset portfolios at the peak publicated Market Risk Amendment, which allows banks to use internal models to calculate the credit risk.
The development of this quantitative method provides a strong foundation for Basel II. Two problems that must be resolved before the Committee, Basel II can process.
Determining the type of 'credit model' will be allowed on Pillar 1. Committee to consider 2 alternatives:
'Full portfolio model' is a technique → option pricing model was developed by Robert Merton in determining prices and calculate the portfolio option.
'grading models' in which risk calculations are based on 'individual obligor base' and portfolio risk is the total of these individual risk → model was also used by rating agencies like S & P and Moody's. It should be noted that the Basel II uses the term 'grades' and not 'rated' even if it means the same.
At the end of the 1990 Committee decided to use a 'credit grading models'. However, there is a trend in the banking sector to use these 2 techniques together.
The extent to which quantitative techniques can be used to cover 'other risks' particularly operational risk. There are some arguments whether these risks should be included in Pillar 2 because very few banks that use quantitative calculations to compute and manage these risks. Concern of bank supervisors that the risk is very significant and if only depend on Pillar 2 will cause 'under capitalization' or 'inconsistent capitalization' of risk.
As a result Committee decided:
Include operational risk as a quantitative calculation of Pillar 1
Defining the broader operational risk but not including the risk of reputation, business and strategic.
Credit risk models in Pillar 1 is 'credit grading techniques'.
Friday, September 4, 2009
The Three Pillars Of Regulation
Basel II is more complex than Basel I due to:
1. covers an area larger risks;
2. introduced three-tier approach;
using more complex methods of calculating risk.
Basel I → risk of credit and market risk (through the 1996 Market Risk Amendment).
Basel II operational risk → + + 'other risk' to calculate risk-based capital of a bank → (Basel II covers credit, market and operational risk).
Basel II also connects the capital of a bank directly with the risks run by banks
Basel II framework of three concepts developed through regulations known as the Three Pillars are:
Pillar 1 - minimum capital requirement is the development of standardized rules introduced in Basel I.
Pillar 2 - supervisory review of capital adequacy and internal assessment process
Pillar 3 - the implementation of 'market discipline' in an effort to strengthen transparency and encourage safe banking practices (safe) and healthy (sound).
Pillar 1 - Minimum Capital Requirement
Within Pillar 1, banks are required to calculate the minimum capital for credit risk, market risk and operational risk (development of the Basel I). For 'traded market risk' there is no change from the Market Risk Amendment in 1996. Interest rate risk in the banking book are not tercover in Pillar 1.
Pillar 2 - Supervisory Review
Pillar 2 is intended to formalize the practice of supervision by bank supervisors today. The concept of Pillar 2 have been found on the Basel I, and is intended to determine the minimum standards that can be applied according to the bank-by-bank basis. 'Supervisory Review' on Pillar 2 applied the same as that of the Federal Reserve Board (USA) and the Financial Services Authority (UK).
Supervisory reviews arranged to focus on:
Each above the minimum capital requirement according to Pillar 1 level, and
Initial actions needed to overcome the risks that will arise.
Pillar 2 also covers review of the interest rate in the banking book. Basel Committee paper "Principles for the Management and Supervision of Interest Rate Risk" which was published in July 2004 containing details of how to manage interest rate risk in the trading book.
Pillar 3 - Disclosure
Pillar Pillar 3 is about market discipline. The Bank for International Settlements (BIS) defines market discipline as a good corporate governance mechanisms of internal and external to the free market economy without government interference.
Pillar 3 is structured to:
1. help bank shareholders and market analysts;
2. increase transparency on issues such as:
Bank asset portfolios, and
The bank's risk profile
Basel I only includes Pillar 1. In practice Pillar 2 and 3 will be found in all countries, although different approaches and their application far.
Risk Coverage - credit, market, operational and other risks
Basel Committee Pillar 1 focuses on credit risk and operational while the Market Risk Amendment does not change. Pillar 1 marked the first time by dicover operational risk quantitative approach. In addition, the Basel Committee to cover 'other risks' on Pillar 2 and 3.
1. covers an area larger risks;
2. introduced three-tier approach;
using more complex methods of calculating risk.
Basel I → risk of credit and market risk (through the 1996 Market Risk Amendment).
Basel II operational risk → + + 'other risk' to calculate risk-based capital of a bank → (Basel II covers credit, market and operational risk).
Basel II also connects the capital of a bank directly with the risks run by banks
Basel II framework of three concepts developed through regulations known as the Three Pillars are:
Pillar 1 - minimum capital requirement is the development of standardized rules introduced in Basel I.
Pillar 2 - supervisory review of capital adequacy and internal assessment process
Pillar 3 - the implementation of 'market discipline' in an effort to strengthen transparency and encourage safe banking practices (safe) and healthy (sound).
Pillar 1 - Minimum Capital Requirement
Within Pillar 1, banks are required to calculate the minimum capital for credit risk, market risk and operational risk (development of the Basel I). For 'traded market risk' there is no change from the Market Risk Amendment in 1996. Interest rate risk in the banking book are not tercover in Pillar 1.
Pillar 2 - Supervisory Review
Pillar 2 is intended to formalize the practice of supervision by bank supervisors today. The concept of Pillar 2 have been found on the Basel I, and is intended to determine the minimum standards that can be applied according to the bank-by-bank basis. 'Supervisory Review' on Pillar 2 applied the same as that of the Federal Reserve Board (USA) and the Financial Services Authority (UK).
Supervisory reviews arranged to focus on:
Each above the minimum capital requirement according to Pillar 1 level, and
Initial actions needed to overcome the risks that will arise.
Pillar 2 also covers review of the interest rate in the banking book. Basel Committee paper "Principles for the Management and Supervision of Interest Rate Risk" which was published in July 2004 containing details of how to manage interest rate risk in the trading book.
Pillar 3 - Disclosure
Pillar Pillar 3 is about market discipline. The Bank for International Settlements (BIS) defines market discipline as a good corporate governance mechanisms of internal and external to the free market economy without government interference.
Pillar 3 is structured to:
1. help bank shareholders and market analysts;
2. increase transparency on issues such as:
Bank asset portfolios, and
The bank's risk profile
Basel I only includes Pillar 1. In practice Pillar 2 and 3 will be found in all countries, although different approaches and their application far.
Risk Coverage - credit, market, operational and other risks
Basel Committee Pillar 1 focuses on credit risk and operational while the Market Risk Amendment does not change. Pillar 1 marked the first time by dicover operational risk quantitative approach. In addition, the Basel Committee to cover 'other risks' on Pillar 2 and 3.
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