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BASLE II : KEY ISSUES

24.02.2004. BASLE II : KEY ISSUES. Agenda. What’s new with Basle II Implementation plan whithin Société Générale group Key issues for implementation Romanian banks. What’s new with Basle II. The three « pilars ». Pilar 1 : New calculation of capital adequacy

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BASLE II : KEY ISSUES

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  1. 24.02.2004 BASLE II : KEY ISSUES

  2. Agenda • What’s new with Basle II • Implementation plan whithin Société Générale group • Key issues for implementation Romanian banks

  3. What’s new with Basle II The three « pilars » • Pilar 1 : New calculation of capital adequacy • Pilar 2 : Re-definition of Central Banks responsibilities : • CB’s should make sure that banks have an appropriate risk evaluation process • Special focus on stress tests scenarios, analysis of risk concentration… Pilar 3 : Enhancement of financial information to ensure • adequate disclosure by banks of risk taking. • Banks are more directly impacted by Pilar 1.

  4. Market risk Operational risk Crédit risk + + What’s new with Basle II New calculation of capital adequacy Equity >/= 8 % • Credit risks :more refined calculation of weighted assets • Market risks : unchanged (limited impacts for Romanian banks) • Operational risks : new category of risk • Minimum value for ratio (8 %) unchanged • Equity : content not yet defined by Basle committee

  5. What’s new with Basle II New calculation weighted assets • Two options : • 1. Standard approach : • very similar to the current situation • more refined calculation of weightings according to each category of assets 2. Internal models, with two different degrees of complexity (IRB Foundation, IRB Advanced) • Need for sophisticated risk measurement models and statistical records over several years (up to 7 years). • Special rules (less favorable than current ones) applicables for structured finance, securitization, equity portfolios (reduced impacts for Romanian banks)

  6. What’s new with Basle II Standard methodology : example of new weightings (*) If external ratings are available (if not : 100 %)

  7. What’s new with Basle II Operational risks 3 options : 1. Basic indicator : 12.5 x 15 % x Net Income 2. Standardized method: different weightings (12 to 15 %) applicable to Net Income generated by each activity. Pre-requisite : appropriate segregation of activities in accounting records. 3. Complex method : based on internal models and exhaustive internal data gathering process of events (operational losses and issues).

  8. What’s new with Basle II Impacts on international banks Impact for G10 international banks with T1 capital over 3 billion € : (predominantly Western European and US exposures)

  9. What’s new with Basle II Calendar • June 2004 : final version of Basle II requirements • December 31st 2005 : first calculation of new ratio along with current one (for banks applying avanced methodologies) • December 31st 2006 : implementation of new Basle II ratio • Local banking authorities may start auditing internal models as soon as 2004.

  10. Implementation strategy in SG A major project involving the entire group… • World wide project initiated in 2003 and driven by a strong Paris based • team with accountable individuals in every entity • Advanced methodologies will be applied to most entities to minimize capital • needs (2006 target : close to 90 % of group assets will be evaluated under • IRB method). • Project is leveraging from existing group risk monitoring and data • gathering systems and process (RAROC…). All operational systems • are reviewed and checked to be « Basle II compliant »

  11. Key issues for Banks in Romania Implementation issues • Need for local requirements to be defined by BNR • Need for consistency between local and international rules to facilitate banchmarking and avoid complex implementation issues for subsidiaries / branches of international groups. • Advanced methodologies will be difficult to implement given : • low level of expertise in risks assesment techniques • lack of appropriate historical data base • significant level of technology investment needed. • Definition of eligible equity : need for • Full and consistent implementation of IAS • BNR rules to be IAS « compliant »

  12. Key issues for Banks in Romania Potential Impacts for Romanian banks • Credit risks on corporates : • if international rules are applied, increase of capital requirements should be expected given country rating, specific company ratings and sizes of corporate customers • Obtaining reliable and widely accepted external ratings is a pre-requisit for standard calculations. • Credit risks on individuals : • potential decrease in capital requirements ranging from 25 % (consumer credits) to 30 % (mortgages) • Operational risks : • Probably the most significant source of additional capitalrequirements

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