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Basel ii Accord
Sections 13 to
19 |
13.
The revised Framework presented here reflects
several significant
changes relative to
the Committee’s most recent consultative
proposal in April 2003. A number of
these changes
have already been described in the Committee’s
press statements of October
2003, January
2004 and May 2004.
These
include the changes in the approach to the
treatment of expected losses (EL) and unexpected
losses (UL) and to the treatment of
securitisation exposures. In addition to these,
changes in the treatments of credit risk
mitigation and qualifying revolving retail
exposures, among others, are also being
incorporated.
The
Committee also has sought to clarify its
expectations regarding the need for banks using
the advanced IRB approach to incorporate the
effects arising from economic downturns into
their loss-given-default (LGD)
parameters.
14.
The Committee believes it is important to
reiterate its objectives regarding
the overall
level of minimum capital requirements. These are
to broadly maintain the
aggregate level
of such requirements, while also providing
incentives to adopt the more
advanced risk-sensitive
approaches of the revised Framework.
The
Committee has confirmed the need to further
review the calibration of the revised Framework
prior to its implementation. Should the
information available at the time of such review
reveal that the Committee’s objectives on
overall capital would not be achieved, the
Committee is prepared to take actions necessary
to address the situation. In particular, and
consistent with the principle that such actions
should be separated from the design of the
Framework itself, this would entail the
application of a single scaling factor ─ which
could be either greater than or less than one ─
to the IRB capital requirement resulting from
the revised Framework.
The
current best estimate of the scaling factor
using Quantitative Impact Study 3 data adjusted
for the EL-UL decisions is 1.06. The final
determination of any scaling factor will be
based on the parallel running results, which
will reflect all of the elements of the
Framework to be implemented.
15.
The Committee has designed the revised Framework
to be a more
forward-looking approach
to capital adequacy supervision, one that has
the capacity to evolve with time.
This
evolution is necessary to ensure that the
Framework keeps pace with market developments
and advances in risk management practices, and
the Committee intends to monitor these
developments and to make revisions when
necessary.
In
this regard, the Committee has benefited greatly
from its frequent interactions with industry
participants and looks forward to enhanced
opportunities for dialogue. The Committee also
intends to keep the industry apprised of its
future work agenda.
16.
In July 2005, the Committee published additional
guidance in the document The Application of Basel
II to Treading Activities and the Treatment of
Double Default Effects.
That
guidance was developed jointly with the
International Organization of
Securities Commissions
(IOSCO) and demonstrates the capacity of the
revised Framework to evolve with
time. It refined the treatments of counterparty
credit risk, double default effects,
shortterm maturity adjustment
and failed transactions, and improved the
trading book regime. (3)
(3) The additional guidance does
not modify the definition of trading book set
forth in the revised
Framework. Rather, it focuses on policies and
procedures that banks must have in place to book
exposures in their
trading book. However, it is the
Committee’s view that, at the present time, open
equity stakes in hedge funds,
private equity investments and real estate
holdings do not meet the definition of trading
book, owing to
significant constraints on the ability of
banks to liquidate these positions and value
them reliably on a daily
basis.
17.
One area where the Committee intends to
undertake additional work of a
longerterm nature
is in relation to the definition of eligible
capital. One motivation for this is the
fact that
the changes in the treatment of expected and
unexpected losses and related changes
in the
treatment of provisions in the Framework set out
here generally tend to reduce Tier
1 capital
requirements relative to total capital
requirements.
Moreover,
converging on a uniform international capital
standard under this Framework will ultimately
require the identification of an agreed set of
capital instruments that are available to absorb
unanticipated losses on a going-concern basis.
The Committee announced its intention to review
the definition of capital as a follow-up to the
revised approach to Tier 1 eligibility as
announced in its October 1998 press release,
“Instruments eligible for inclusion in Tier 1
capital”.
It
will explore further issues surrounding the
definition of regulatory capital, but does not
intend to propose changes as a result of this
longer-term review prior to the implementation
of the revised Framework set out in this
document. In the meantime, the Committee will
continue its efforts to ensure the consistent
application of its 1998 decisions regarding the
composition of regulatory capital across
jurisdictions.
18.
The Committee also seeks to continue to engage
the banking industry in a
discussion
of prevailing risk management practices,
including those practices aiming
to produce
quantified measures of risk and economic
capital.
Over
the last decade, a number of banking
organisations have invested resources in
modelling the credit risk arising from their
significant business operations. Such models are
intended to assist banks in quantifying,
aggregating and managing credit risk across
geographic and product lines.
While
the Framework presented in this document stops
short of allowing the results of such credit
risk models to be used for regulatory capital
purposes, the Committee recognises the
importance of continued active dialogue
regarding both the performance of such models
and their comparability across banks.
Moreover,
the Committee believes that a successful
implementation of the revised Framework will
provide banks and supervisors with critical experience
necessary to address such challenges. The
Committee understands that the IRB approach
represents a point on the continuum between
purely regulatory measures of credit risk and an
approach that builds more fully on internal
credit risk models. In principle, further
movements along that continuum are foreseeable,
subject to an ability to address adequately
concerns about reliability, comparability,
validation, and competitive equity.
In
the meantime, the Committee believes that
additional attention to the results of internal
credit risk models in the supervisory review
process and in banks’ disclosures will be highly
beneficial for the accumulation of information
on the relevant issues.
19.
This document is divided
into four parts as illustrated in the
following chart.
The
first part, scope of
application, details how the capital
requirements are to be applied within a banking
group.
Calculation
of the minimum capital requirements for credit
risk and operational risk, as well as certain
trading book issues are provided in part two.
The
third and fourth
parts outline expectations concerning
supervisory review and market discipline,
respectively.
19
(i). This updated version of the revised
Framework, which was initially released in
June 2004,
incorporates the additional guidance set forth
in the Committee’s paper The Application of Basel
II to Trading Activities and the Treatment of
Double Default Effects (July
2005).
The
Amendment to the Capital Accord to incorporate
Market Risks (January 1996) has
also been updated to reflect the changes
introduced by the revised Framework and
the above-mentioned
document.
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