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Basel II

VIEWS: 10 PAGES: 18

									  BASEL II / CAD 3


     COREP
         &
  The New Capital
Adequacy Framework

     Madrid 2005

                     1
Outline


 Why Basel II & CAD 3
 Basics of the future directive
 COREP




                                   2
                         What is it?


 Banking Business is a global business
 Large amounts of money are
  exchanged daily
 Systemic importance

 Need for common rules to avoid a
  global crisis
         => Basel Committee
                                     3
                      Solvency Ratio


 Capital Adequacy Framework
 Minimum requirements to run a Bank

         The most well-known is the:
               Cooke Ratio
         Own Funds / Lending > 8%


                                       4
From Basel I to Basel II

 Objectives of the new Basel capital accord :

  Enhance the sensivity of capital requirements to the
   degree of risk involved in banks’ positions and activities
  Encourage banks to improve their risk measurement and
   management systems
  Increase the role of banking supervisors and the role of
   market discipline
  Constitute a more comprehensive approach to addressing
   risks the banks are exposed to
  Promote safety and soundness in the financial system as
   well as competitive equality
                                                                5
II - Structure of the new accord

                                    Three
                                    Pillars

                  Minimum capital      Supervisory review    Market
                   requirements             process         discipline

                   Risk weighted       Definition of
                      assets             capital

                         Operational          Market
           Credit risk
                            risk               risks

                       Internal
 Standardised
                   Ratings-based
   Approach
                     Approach


                                                                         6
A - Pillar 1

               Minimum capital
                requirements




                                 7
Minimum capital requirements

                  Regulatory Capital
                                                                 8%
Credit Risk                    Market Risk


                          + Standardized Approach
Revised Standardized                       or
Approach                       Internal Models Approach
          or                  Operational risk
Foundation IRBA
                               Basic Indicator Approach
          or              +                or
                               Standardized Approach
Advanced IRBA
                                            or
                               Adavanced Measurement Approach
                                                                 8
Evolutionnary approaches


Capital incentives to move to more advanced approaches


                           Foundation IRB




                                                Advanced IRB
Standardised




                                                               modelling ?
                                                               Credit risk
                                                  Approach
                              Approach
 Approach




              Decreasing capital charges   
                                                                             9
Operational risk

 In line with the approach to credit risk and market risk,
  several options are proposed to minimum capital
  requirements for OpR

               Increasing management standard

 Basic Indicator         The Standardised         Advanced
 Approach (BIA)          Approach (TSA)           Measurement
                                                  Approach (AMA)

                     Increasing capital charges


 Evolutionnary approaches and capital incentives to move
  to the most advanced approach (AMA)                   10
3 - Market risk


 Treatment     remains   unchanged,   that   is   2   options
  available :

   A standardised approach (for specific risk capital
    requirements, risk weights will be based on the external
    assessment of the issuer)

   An internal models approach (VaR)




                                                           11
B - Pillar 2

                 Supervisory
               review process




                                12
Supervisory review process



 Pillar 2 is intended :
   to achieve a level of capital commensurate with a
    bank’s overall risk profile
   to encourage banks to develop and use better risk
    management techniques in monitoring and managing
    their risks


           Only very limited impact on COREP

                                                   13
C - Pillar 3

                Market
               discipline




                            14
Market discipline

 Pillar 3 is intended to provide investors with reliable and
  timely information to understand a bank’s risk profile
 Enhance role of market participants in encouraging banks to
  hold adequate levels of capital
 Pre-condition for the use of some methodologies
  (Internal ratings-based approaches, AMA)
 Qualitative and quantitative disclosures (information on
  methodology and key inputs, e.g. explanation of structure of
  internal rating system and PD, LGD assumptions,…)

            Will not be covered by COREP
                                                           15
                                 COREP


A ratio has been defined

Need to set up a reporting to monitor its
 application

                 COREP


                                       16
                            What has been done


 An informal initiative, followed by an official working
  group
   9 European Countries, gathered on a voluntary basis to study
    the feasibility of a common EU reporting.
   Its main conclusions were presented to the CEBS on July 1st.
    The CEBS agreed that a common reporting was feasible and
    highly desirable and the COREP Group was set up.
 A Draft Framework was designed and included
   A proposed architecture, with
   Draft reporting templates attached, and
   Propose an IT Solutions.

                                                             17
                 Proposed architecture


                                A: Data deemed necessary by
D1                         C1      all supervisors
     B3
                      B2        B: Country Specific Data
D2                              (such as Specific Tier 1 instruments)
                           C2


D3
             A             C3
                                A+B = Common EU Reporting

                                C: Local or Sector-wide
D4
     B1                            taxonomies
                           C4
                                (Developped under the same standard
                                    as the Common Reporting)


                                D: Country specific
                                   requirement outside our
          Reporting                scope

                                                               18

								
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