Survey Results on Risk Management and Basel II Jeffrey Carmichael

1
Survey Results on Risk Management and Basel
IIJeffrey Carmichael

• Washington DC
• May 17-21, 2004

2
Overview - Respondents

• 33 countries participated
• 27 regulators (25 from EMs)
• 69 banks (63 EM from 766 total)
• Overlap of 18 countries
• Combined EM assets of 600 b (from 3,000 b)
• Mix of private, public and foreign banks

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Overview Financial Systems

• Institutional investors 30 of bank assets
• Domestic debt 55 of bank assets
• Equity market capitalization 42 of bank assets
• Banks
• 55 local private
• 18 public
• 27 foreign
• 3.7 NPLs
• Derivative positions 151 of assets

4
Basel I Compliance
5
Supervisory Approach and B-II
6
Industry Readiness for B-II
Regulator
Industry
7
Gap Analysis
Regulator
Industry
8
Anticipated B-II Approaches
Regulator
Industry
9
Industry Perceptions of B-II
10
B-II Impact on Business
11
Where B II Will Add Value
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Impact of B-II on Capital - Industry

• The industrys responses to the questions on
  impact analyses were very disappointing
• Over 75 had not yet carried out any impact
  analysis
• Of the 16 who had, they were mostly limited to an
  overall impact on capital
• Only 1 of 5 who claimed to be fully ready for
  B-II could report an impact on capital
• Only 4 of 14 who aspire to IRB advanced could
  report an impact

13
Impact of B-II on Capital - Regulators

• Regulators in much the same position
• 75 had not yet done analysis
• Only 3 could break impact down for the different
  B-II approaches
• None reported an expected capital decrease

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Ranking of B-II Concerns
Regulator
Industry
15
Adequacy of Data Systems
16
Uses of Risk Information
Reporting Frequency
Uses of Reports
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Resource Allocation

• In general, banks that indicated readiness have
  allocated significant staff numbers to credit and
  operational risk though difficult to determine
  from survey
• Average budget for credit risk is 2.5m p.a.
• Average budget for operational risk is 700,000
  p.a.
• Average budget for risk aggregation is 1.1 m
• But there are big divergences

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Industry Action Plans
Regulator
Industry
19
Phasing in of B-II
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Pillars 2 and 3
Pillar 2
Pillar 3
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Regulatory Preparedness
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Regulatory Resources

• 20 have inadequate staff resources
• 30 either have adequate resources or expect to
  complete hiring within one year
• The rest have a recruiting program that should
  produce adequate resources within 3 years
• At the same time, only 1 regulator was able to
  provide a budgetary break down by expenditure on
  technology, consulting, data and training

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Some Reflections

• There are still some significant expectations
  gaps
• Banks and regulators both appear to be overly
  optimistic about implementing B-II on schedule
  especially the more advanced forms
• There is much work to be done yet by the industry
  in terms of
• Gap analysis
• Data systems
• Impact analysis
• Resource allocation
• Action plans

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Some Reflections (Cont.)

• There is much work to be done yet by the
  regulators in terms of
• Informing industry (80 still learn about B-II
  primarily from other sources)
• Providing guidelines to industry for
  accreditation of grading models
• Preparing internal policies and procedures
  manuals
• Assessing and understanding impact on industry
• Allocating sufficient resources
• Finalizing and implementing action plans

25
Thank You