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9. Basel II Presentation

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Elly Quan (Quan Thi Hanh Mai)
Elly Quan (Quan Thi Hanh Mai)

Basel II has three pillars and aims to better align capital requirements with risks. Pillar 1 updates minimum capital requirements to use more risk-sensitive approaches for credit, market, and operational risk. Pillar 2 requires banks and supervisors to review risk management and capital adequacy. Pillar 3 promotes market discipline through disclosure. Vietnam is implementing Basel II in phases, with the goal of fully adopting the three pillar framework by 2018 to strengthen its banking system.

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TABLE OF CONTENT 3 pillarsinbaselii motivesfor baselII ApplicationinVIetnam
1. Motives for basel ii Problems with Basel I (1988) • Club-rules (OECD) isn’t meaningful in terms of riskiness • Capital Requirement: One size fits all • Inadequate recognition of advanced CRM such as CDS/securitization Objectives • Eliminate regulatory arbitrage by getting RWA right • Provide banks incentives to enhance risk management
1. Motives for basel II Text Text Text Text Text Liquidity Risk Reputation Risk Credit Risk Market Risk Operational Risk
2. Three pillars in basel II
Basel I (1988) Basel II (2004) Pillar(s) Minimum Capital Requirement (one for all) - Minimum K requirement - Supervisory Review - Market discipline & disclosure (more flexible) Risk(s) Credit Risk Credit Risk (SA, FIRB, AIRB) * SA: based on type of entity, credit rating (S&P, Moody, Fitch) * FIRB: uses loss probability model, prescribed LGD * AIRB: uses loss probability model and LGD model Operational Risk (BIA, SA, AMA) * BIA: α * Gross Rev. * SA: β * Gross Rev./Unit Line * AMA: measured by its own system Market Risk (SA, Internal VaR Model) * VaR is preferred, stress test and scenario analysis RWA(s) 0~100%, OECD is more preferred 0~150% or more, no exclusive rights Tier 2 K is limited to 100% of Tier 1 K CAR = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑟𝑑𝑖𝑡 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+𝑀𝐾 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴 >=8% = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑟𝑑𝑖𝑡 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+12.5%∗ 𝑀𝐾 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+12.5%∗ 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑅𝑖𝑠𝑘 𝑅𝑊𝐴 >=8 % * Simple measure for credit risk * Not risk sensitive * No measure for operational risk * Significant changes to measure credit risk basel I vs. basel II
Pillar 1: Minimum capital requirement • 𝐶𝐴𝑅 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+12.5%∗ (𝑀𝐾 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑅𝑖𝑠𝑘 𝑅𝑊𝐴)  8% Total Capital: Tier 1 Capital • Common shareholder equity • Disclosed Reserves • Non-cumulative perpetual preferred stocks Tier 2 & 3 Capital • Tier 2 cannot exceed 100% tier 1 • Subordinated debts • General loans loss reserves • Hybrid debt-equity capital instruments
Pillar 1: Credit risk Credit Risk: • SA - Based on external credit rating - Apply fixed risk weighting • IRB (FIRB, AIRB) • CRM (CDS, Securitization)
Pillar 1: Market risk
Pillar 1: Operational risk
IN VIETNAM Regulatory Framework BASEL II Implementation
1. Regulatory framework 2005 2014 Decree 457/2005 CAR: 8% (except for foreign bank branches)  Circular 13/2010: CAR: 9% (all)  Updated Circular 36/2014
1. Regulatory framework CAR >= 9%
2. BASEL II Implementation Credit Risk Awareness  Lending activities: 90%  Bad debt ratio is pretty high Phase 1: 2013 -2015 Phase 2: 2016 - 2018
9. Basel II Presentation

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9. Basel II Presentation

  • 1. TABLE OF CONTENT 3 pillarsinbaselii motivesfor baselII ApplicationinVIetnam
  • 2. 1. Motives for basel ii Problems with Basel I (1988) • Club-rules (OECD) isn’t meaningful in terms of riskiness • Capital Requirement: One size fits all • Inadequate recognition of advanced CRM such as CDS/securitization Objectives • Eliminate regulatory arbitrage by getting RWA right • Provide banks incentives to enhance risk management
  • 3. 1. Motives for basel II Text Text Text Text Text Liquidity Risk Reputation Risk Credit Risk Market Risk Operational Risk
  • 4. 2. Three pillars in basel II
  • 5. Basel I (1988) Basel II (2004) Pillar(s) Minimum Capital Requirement (one for all) - Minimum K requirement - Supervisory Review - Market discipline & disclosure (more flexible) Risk(s) Credit Risk Credit Risk (SA, FIRB, AIRB) * SA: based on type of entity, credit rating (S&P, Moody, Fitch) * FIRB: uses loss probability model, prescribed LGD * AIRB: uses loss probability model and LGD model Operational Risk (BIA, SA, AMA) * BIA: α * Gross Rev. * SA: β * Gross Rev./Unit Line * AMA: measured by its own system Market Risk (SA, Internal VaR Model) * VaR is preferred, stress test and scenario analysis RWA(s) 0~100%, OECD is more preferred 0~150% or more, no exclusive rights Tier 2 K is limited to 100% of Tier 1 K CAR = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑟𝑑𝑖𝑡 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+𝑀𝐾 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴 >=8% = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑟𝑑𝑖𝑡 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+12.5%∗ 𝑀𝐾 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+12.5%∗ 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑅𝑖𝑠𝑘 𝑅𝑊𝐴 >=8 % * Simple measure for credit risk * Not risk sensitive * No measure for operational risk * Significant changes to measure credit risk basel I vs. basel II
  • 6. Pillar 1: Minimum capital requirement • 𝐶𝐴𝑅 = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑟𝑒𝑑𝑖𝑡 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+12.5%∗ (𝑀𝐾 𝑟𝑖𝑠𝑘 𝑅𝑊𝐴+𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑅𝑖𝑠𝑘 𝑅𝑊𝐴)  8% Total Capital: Tier 1 Capital • Common shareholder equity • Disclosed Reserves • Non-cumulative perpetual preferred stocks Tier 2 & 3 Capital • Tier 2 cannot exceed 100% tier 1 • Subordinated debts • General loans loss reserves • Hybrid debt-equity capital instruments
  • 7. Pillar 1: Credit risk Credit Risk: • SA - Based on external credit rating - Apply fixed risk weighting • IRB (FIRB, AIRB) • CRM (CDS, Securitization)
  • 11. 1. Regulatory framework 2005 2014 Decree 457/2005 CAR: 8% (except for foreign bank branches)  Circular 13/2010: CAR: 9% (all)  Updated Circular 36/2014
  • 13. 2. BASEL II Implementation Credit Risk Awareness  Lending activities: 90%  Bad debt ratio is pretty high Phase 1: 2013 -2015 Phase 2: 2016 - 2018