Risk Management Survey COLOMBIA Challenges in Implementing BaselII

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Risk Management SurveyCOLOMBIAChallenges in
Implementing Basel-II

• Oliver Fratzscher
• World Bank
• Cartagena February 16-18, 2004

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Overview

• Macro- and institutional framework? importance
  of integrated supervision
• Readiness for transition to new framework?
  policy questions on sequencing
• Expected benefits from Basel-II? capital charges
  may increase
• Concerns to be addressed? infrastructure needs
  data, legal, accounting
• Impact on competitiveness and Conclusions

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1. Bank Survey on Basel-II

• 12 Colombian banks, 20 bn assets (60 market),4
  conglomerates, 2 foreign, 2 public, 10 ratings,6
  over 12 CAR and 6 over 15 ROE,2 NPL problems,
  Ø49 derivatives/loans (70)
• 12 South African banks, 120 bn assets (86 m),5
  tier-one, 3 foreign, survey by EY in 2003
• 190 banks, 63 European, 37 retail banks,14
  cooperatives, 22 assets under 2.5 bn,survey by
  KPMG in 2002

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Colombia versus Chile
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Integrated Supervision

• Framework adopted for Basel-II
• 46 countries have 1or 2 supervisors
• 22 countries have single supervisor
• Integration typically BS then I
• CP 20 shows 53 non-compliance
• Main obstacles weak institutions, legal basis,
  accounting, cross-border, cross ownership,
  transparency
• Risk-Shifting is big business

Source Martinez and Rose, World Bank WP 3096,
7/2003
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Risk-Shifting in Conglomerates
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2. Choice of Basel Approach
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Policy choices for transition

• Timing 8 banks ready by 2008, regulator 2009 ?
• Phasing can small banks remain on Basel-I ?
• Choices does regulator allow advanced-IRB ?
• Selection do banks jump or graduate ?
• Discretion which options will be restricted ?
• Priorities Credit Market Operational
  Liquidity Systemic Accounting Risks

Source Enterprise risk management priorities,
PWC (2002)
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Readiness to be (re)defined
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3. Expected benefits
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Lower capital charges ?
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Efficient use of capital ?
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4. Concerns with Basel-II
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Infrastructure bottlenecks
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5. Competitiveness
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Market commentary

• Basel-II could have a deeper and more lasting
  impact in the emerging market universe than in
  the developed world
• Uneven application of Basel-II will distort
  borrower behavior foreign banks using advanced
  IRB offer more attractive funding
• NPLs of gt7 in EM compare with lt3 in US and
  Europe but EM tier-1 capital ratios of gt11
  compare with 8 in US EU
• Most EM are fragmented and over-banked, Basel-II
  could facilitate further consolidation and
  takeover of smaller banks
• Basel-II likely to lead to more active balance
  sheet restructuring and could significantly
  reduce risk premiums for EM banks

Source UBS Basel II Emerging Market Banks
(Sep 2003)
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Conclusions

• MARKET CONSOLIDATION and competitive pressures
  may rise from increased risk arbitrage in
  conglomerates and cross-border
• INTEGRATED SUPERVISION and Quality of Pillar-2
  are critical to enable risk innovation and
  contain potential systemic risks
• TRANSITION TO IRB shall be gradual and aligned to
  capacity in markets supervisors, using national
  discretion in high-risk areas
• CAPITAL ALLOCATION by business lines may enhance
  efficiency and better align economic with
  regulatory capital
• RISK INFRASTRUCTURE for operational risk must be
  improved, insurance is insufficient, and capital
  charges are likely increasing
• ACCOUNTING STANDARDS need to be upgraded to IAS,
  with careful monitoring of risk arbitrage through
  credit derivatives

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