Basel-I--Basel-II-and-Basel-III

BaselIIVSBaselIIICHAOHUAHE,Ph.D.,FRMSITE,UIBEBaselII&BaselIII---OfficialducomentsAllofficialdocumentsregardingBaselIIandBaselIIIareaccessiblefromtheofficialwebsiteoftheBankforInternationalSettlements(BIS).Websitelink:PetrTeplýMichalMejstříkMagdaPečená,BasicprinciplesofbankingCapitalThebasicaimofbankingisasset-liabilitymanagement(ALM)inordertokeeptheliquidity,solvencyandprofitabilityofabankinthesenseof:1.Capitalmanagementoftheequity-liabilitiesrelationship,i.e.managingthecapitalstructureunderriskconditions;2.Assetsmanagement,theirliquidity,profitabilityandrisk;3.ALM,liabilityandoff-balancesheetmanagement.CapitalDefinitionsa)accountingcapitalb)regulatorycapitalc)economiccapitalCapitalrequirementgenerallyreferstob)andc)AccountingCapitalRegulatoryCapitalb)RegulatorycapitalDefinedbyPrudentialrules-DecreeNo.123/2007Coll.,stipulatingtheprudentialrulesforbanks,creditunionsandinvestmentfirms.•Tier1–Corecapital-themostimportantcomponentofbank’scapitalandconsistsprimarilyofpaid-upequitycapital,sharepremiumandretainedearningsRegulatoryCapital•Tier2–Supplementarycapital-loanlossreserves,convertiblebondsorsubordinatedebtwithamaturityofatleastfiveyearsTotalCapital(CAP)=Tier1+Tier2–DeductiblesRegulatoryCapitalCapitaladequacyratio•Regulatorycapitalisusedforthecomputationofcapitaladequacy,theratioofcapitaltotherisksundertakenbyagivenbank8%CAPITALCADRWACAD–-capitaladequancyCAPITAL–-totalcapitalRWA–-risk–weightedassetsRegulatoryCapital•Capitaladequacyratioisoneofthemeasuresregulatedbytheprudentialrulesandmustbeatleast8%.Economiccapitalc)EconomiccapitalAbufferagainstfutureunexpectedlossesbroughtaboutbycredit,market,andoperationalrisksinherentinthebusinessoflendingmoney.EconomiccapitalSource:Chalupka,R.,Teplý,P.(2008).“OperationalRiskManagementandImplicationsforBank’sEconomicCapital–ACaseStudy”IESWorkingPaper17/2008.IESFSVEconomiccapitalSource:DPVejdovec(2011)EconomiccapitalRegulatoryvs.EconomiccapitalThegoalofregulationistosettheregulatoryrequirementsintheway,thatmostreflectstherealriskthebankisfacing.Economiccapitalfunctionsasabuffertounexptectedlosses,espeicallyextremelosses.BaselAccordEvolutionBankforInternationalSettlement(BIS)BasleCommitteeonBankingSupervision(BCBS)•1988–BaselI(creditrisk)•1996–BaselI(creditandmarketrisk)•2007–BaselII(credit,marketandoperationalrisk,3Pillars)•2010–BaselIII(credit,marketandoperationalrisk,liquidityrisk)BaselIIObjective•Toincreasethesafetyandsoundnessoftheinternationalfinancialsystembymakingcapitalrequirementsforbanksmorerisksensitivewhilemaintainingthesamelevelofoverallaverageregulatorycapitalinthebankingsystem(BIS,2006)BaselIIImprovementsincomparisontoBaselI•amore“menu-like”approach•differentrisk-weights•operationalrisk•owninternalratingmodelsetc.)BaselIIThreepillarsPillarIMINIMUMCAPITALREQUIREMENTSCreditrisk(newmeasurement)MarketRisk(unchanged)OperationalRisk(new)PillarIIITRANSPARENCYANDMARKETDISCIPLINE•IncreasingdisclosureofcapitalrequirementsaswellmethodsofriskassesmentPillarIISUPERVISORYREVIEWPROCESS•Assesmentofrisksandcapitaladequacyoftheindividualbanks•ConstantcontactwithbanksBaselIIBaselI–Harmonizingbankregulation,internationallystandardisedcapitalrequirements*Exceptforinterestrateriskinthebankingbook.Source:Teplý,Černohorská,Diviš(2007)BaselIIPillarI-CapitalRequirementsSource:Teplý,Černohorská,Diviš(2007)BaselIICalculatingrisksCreditrisk•StandardizedApproach•FoundationIRBApproach(transformationofPDintoRW)•AdvancedIRBApproachMarketrisk•StandardizedApproach•InternalModelsOperationalrisk•BasicIndicatorApproach(BIA)•StandardizedApproach(STA)•AdvancedMeasurementApproach(AMA)BaselIIBaselIIBreakdownofcapitalrequirements(EUbanksin2008)Source:DBResearch(2007)BaselIIIAnewregulatoryframeworkissuedbytheBaselCommitteeonBankingSupervisionin2010whichsetsstandardsforcapitaladequacyofbanksandnowalsofortheirliquidity.Overall,BaselIIIintroducesstricterrulesthanthepreviousframeworkandcameintoexistencemainlyasareactiontothefinancialcrisis.BaselIIIAccordingtotheBCBS,BaselIIIhasthefollowinggoals:BaselIIIisacomprehensivesetofreformmeasures,developed…tostrengthentheregulation,supervisionandriskmanagementofthebankingsector.Thesemeasuresaimto:•improvethebankingsector'sabilitytoabsorbshocksarisingfromfinancialandeconomicstress,whateverthesource,•improveriskmanagementandgovernance,•strengthenbanks'transparencyanddisclosures.BaselIIIThereformstarget:•bank-level,ormicro-prudential,regulation,whichwillhelpraisetheresilienceofindividualbankinginstitutionstoperiodsofstress.•Macro-prudential,system-widerisksthatcanbuildupacrossthebankingsector,aswellasthepro-cyclicalamplificationoftheserisksovertime.BaselIIIQualityofcapitalshallberaised(strongfocusoncommonequity,amoveawayfromcomplexhybridinstruments(coreTier14%,Tier17%)Introductionofliquiditystandards(LiquidityCoverageRatio(LCR),NetStableFundingRatio(NSFR))BaselIIIPromotingbuildingupcapitalbuffersingoodtimes,thatcanbedrawndowninperiodsofstress)Significatincreaseinriskcoverage,withafocusonareasthatweremostproblem