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The Basel Committee’s Approach

The Basel Committee’s Approach. Measures taken by International Organisations and Central Banks to establish a sound banking system Damascus 2 July 2005. Karl F. Cordewener Deputy Secretary General. Basel Committee – an overview.

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The Basel Committee’s Approach

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  1. The Basel Committee’s Approach Measures taken by International Organisations and Central Banks to establish a sound banking system Damascus 2 July 2005 Karl F. Cordewener Deputy Secretary General

  2. Basel Committee – an overview • Established at the end of 1974 by Central Bank Governors of G10 • Committee started as forum for discussion and information-sharing among banking supervisors • Over time, it has become standard setter • Most noticeable when 1988 Capital Accord was published

  3. Basel Committee – its main goals • Improve the quality of banking supervision worldwide • Promote more effective corporate governance • Close gaps in international supervisory coverage • Level the playing field among international banks • Establish a safer and sounder banking system as a precondition for sustainable growth of an economy

  4. Committee‘s worldwide focus • Committee tries to address issues relevant for all jurisdictions worldwide • Committee has developed over time close cooperation with non-members • Core Principles Liaison Group (16 jurisdictions, IMF, WB) • Sixteen Regional Groups of Banking Supervisors • International Conferences of Banking Supervisors (ICBS)

  5. Principal policies developed by the Committee • Core Principles for Effective Banking Supervision • Capital Adequacy Framework • Principles for sharing supervisory responsibility for banks’ foreign establishments • Many other policy papers, e.g. risk management guidelines, on the Committee’s website (www.bis.org/bcbs)

  6. Core Principles • Committee released in 1997 a set of Core Principles for Effective Banking Supervision • Developed in close cooperation with supervisors from non-member countries • Comprehensive set of supervisory guidelines • Methodology issued in 1999 • IMF and World Bank monitor implementation

  7. Capital Adequacy • 1988 Capital Accord established minimum capital requirements for banks • In 1998, Committee started revising the 1988 Accord, in order to make • It more risk sensitive and • More consistent with current best practice in banks’ risk management Capital Risk weighted assets Minimum ratio:  8 %

  8. What are the basic aims of Basel II? • To provide the right incentives for sound risk management • To deliver a prudent amount of capital in relation to the risk that is run • To maintain a reasonable level playing-field for all banks to operate in

  9. Main elements of Basel II • Based on three pillars • Specific minimum capital requirements • Supervisors‘ evaluation of banks‘ own assessment of risks • Disclosure requirements to foster market discipline • Revised capital requirements for credit risk, new ones for operational risk, and hardly changed ones for market risks • Menu of approaches for the measurement of risks • Introduction of increasingly reliable estimates of the drivers of credit risk • More emphasis on operational risk

  10. Pillar 2 – Supervisory review process • Pillar 2 is based on four key principles: • Banks‘ own assessment of capital adequacy • Supervisors‘ review of banks‘ capital adequacy assessment • Supervisory response • Capital above regulatory minima • Supervisory intervention

  11. Pillar 3 – Market discipline • Another lever to strengthen the safety and soundness of the system • Complements regulatory capital requirements and the supervisory review process • Reliable and timely information allowing well founded counterparty risk assessments • Strong incentive for banks to conduct business in a safe, sound and efficient manner

  12. End 2006 End 2007 2007 - ? Committee member implementation of simpler approaches Committee member implementation of advanced approaches Extended transition period for other countries Implementation - the current process • Implementation means • transforming the framework into enforceable rules and • adjust it to national circumstances • Time schedule for implementation

  13. Time schedule for implementation • When should Basel II be implemented? • Only national authorities can answer this question • Timing should be determined by a country‘s own circumstances • Basel II may be a lesser priority compared to other efforts • For a successful implementation, greater cooperation among supervisors across jurisdictions is necessary

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