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Basel’s Third Quantitative Impact Study: The Results

Basel's Third Quantitative Impact Study (QIS-3) analyzed proposed changes in capital standards, comparing different approaches and their impact on credit, market, and operational risks. The study involved 22 U.S. BHCs and over 350 global participants, highlighting challenges and implications for the transition to Basel II. Participants addressed data issues and varied interpretations of the proposals, emphasizing the need for ongoing calibration and careful management during the transition period.

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Basel’s Third Quantitative Impact Study: The Results

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  1. Basel’s Third Quantitative Impact Study: The Results May, 2003

  2. Purpose & Process of QIS-3 • Understand effect of/recalibrate proposal • Compare current capital standard with each of three potential approaches, showing details for each portfolio • Covered full proposal--all of credit risk, plus market and operational risk • 22 U.S. BHCs, >350 worldwide • Most addressed only standardized approach

  3. Process (continued) • Substantial preparation, domestically and abroad • Data/spreadsheet clean-up, corrections, and changes • Findings used to “tweak” recent CP-3 Modification % Change • LGD floor for mortgages 1% • Revised risk wt curve for credit cards 0% • Revised Std approach for Op Risk 3%

  4. A Challenge to All • Participants generally satisfied with their efforts and results • Questions remain about data • Not surprising at this stage

  5. G10 Results: Effect on Total RWA 1/Portfolio contribution to total credit risk change, percentage points

  6. U.S. Results: Effect on Total RWA (AIRB)

  7. Key Issue/Question--DispersionContributing factors include: • Different assessment horizons or PD estimation methods • Sensitivity of PDs to different rating grades • Selection of stress/non-stress LGDs • Interplay of LGD/EAD • Interpretation/application of draft proposal • Data availability, strength/consistency of each company’s internal process • Actual differences in risk

  8. Conclusion/Issues • All need to gain greater understanding and comfort with the range of results • QIS-3 data on best efforts basis & not subject to supervisory review • Important implications • QIS 3 results for individual banks may have substantial margins for error • Committee’s calibration process should be ongoing--QIS 4? • The transition to Basel II must be managed with care • Potential competitive implications? • Large banks vs small • Product lines (e.g., mortgages)

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