Title: Basel II The Implementation Phase Simon Topping Hong Kong Monetary Authority City University of Hong
1Basel II The Implementation PhaseSimon
ToppingHong Kong Monetary Authority /City
University of Hong Kong9 March 2005
Banking Finance Technology Forum 2005
2Basel II The Implementation Phase
- HKMAs approach to implementation
- Timing / available approaches
- Consultation documents / guidance issued
- Hong Kong banking industrys implementation plans
- Choice of approaches
- Progress being made
- Basel II in the context of other concurrent
regulatory initiatives - Is there a danger of over-regulation?
- If so, what can we do about it?
3HKMAs approach to implementation (1)
- Timing / available approaches
- 1 Jan 2007
- Credit risk basic, standardised foundation IRB
approaches - Operational risk basic indicator standardised
approaches - Pillars 2 3
- 1 Jan 2008
- Credit risk advanced IRB approach
- 31 Dec 2009
- End of transitional period
- To be determined
- Operational risk AMA approaches
4HKMAs approach to implementation (2)
- Consultation documents / guidance issued
- October 2001 (12)
- Proposed implementation approach (high level)
- July 2003 (63)
- Proposed implementation approach (detailed)
- August 2004 (200)
- Timing / available approaches
- New basic approach
- Scope of application (e.g. bank holding
companies) - Standardised approach (e.g. retail / SME)
- National discretions under standardised IRB
- Minimum requirements for internal rating systems
/ risk quantification under IRB
5HKMAs approach to implementation (3)
- Consultation documents / guidance issued
- September 2004 (155)
- Standardised approach (RMLs, past dues,
collateral) - IRB application / recognition process
- IRB self-assessment of compliance with qualifying
criteria - December 2004 (42)
- Draft Banking (Amendment) Bill 2005
- Power to make capital rules disclosure rules
- Designation of BHCs
- Upper level for minimum CAR increased to 16
6HKMAs approach to implementation (4)
- Consultation documents / guidance issued
- February 2005 (173)
- Weighting framework for credit risk under
standardised IRB approaches - Credit risk mitigation under standardised
approach - Criteria for transition to IRB approach
- Weighting framework for operational risk
- Coming soon
- Calculation of capital base
- Credit risk under basic approach
- Asset securitisation
- Market risk
- Pillars 2 3
7Hong Kong banking industrys implementation plans
(1)
- HKMA has made adoption of the more advanced
approaches (i.e. foundation / advanced IRB)
optional, stressing that each AI should weigh up
the costs benefits - It transpires that more AIs than originally
expected plan to adopt IRB 17 AIs comprising
mostly the larger banks plus some smaller
subsidiaries of foreign banks - This reflects the fact that there is now wider
acceptance by the industry that Basel II can
deliver real benefits in terms of improved risk
management - market expectations that major
banks will adopt IRB
8Hong Kong banking industrys implementation plans
(2)
- Not all of the 17 will implement IRB immediately
(transitional period runs to end-2009) - A number of small medium-sized banks have also
initiated IRB-type development programmes focused
initially on developing internal ratings - AIs are making extensive use of external
assistance (IT / model vendors, management
consultants, etc.) - Around 40 RLBs DTCs will adopt basic approach
- HKMA has begun bilateral discussions with AIs on
their plans - HKMAs assessment is that the industry has
bought into Basel II is making good progress
on implementation
9Basel II in the context of other concurrent
regulatory initiatives (1)
- In addition to Basel II, AIs also need to make
concurrent changes to systems procedures in
relation to, e.g., changes in international
accounting standards new anti money laundering
requirements - This could place a strain on management / IT
resources, create a cost burden - It also raises system integration
prioritisation issues - Is there, therefore, a danger of over-regulation?
- If so, what can we do about it?
10Basel II in the context of other concurrent
regulatory initiatives (2)
- There are 5 main themes to the regulatory
initiatives being pursued currently - Stability of the banking system / protection of
depositors - Improvement of risk management
- Enhanced public disclosure / market discipline
- Consumer interests
- Wider public interests
11Basel II in the context of other concurrent
regulatory initiatives (3)
- Stability of the banking system / protection of
- depositors initiatives
- Basel II
- Deposit protection scheme
- Improvement of risk management initiatives
- Basel II
- Commercial credit reference agency
- Consumer credit data sharing
- Supervisory policies on interest rate risk, FX
risk, stress-testing, etc.
12Basel II in the context of other concurrent
regulatory initiatives (4)
- Enhanced public disclosure / market discipline
- initiatives
- Basel II (Pillar 3)
- Adoption of international accounting standards
- Listing rules
- Corporate governance initiatives
13Basel II in the context of other concurrent
regulatory initiatives (5)
- Consumer interests initiatives
- Basel II
- Enhancement of securities regulatory regime
- Customer complaints
- Deposit protection
- Code of Banking Practice
- Product regulation
- Wider public interests initiatives
- Anti money laundering terrorist financing
14Basel II in the context of other concurrent
regulatory initiatives (6)
- From this long list it is clear that
- Basel II is a key initiative which is central to
several of the themes - There is a real danger that, unless properly
managed, the regulatory burden on AIs could
become onerous, notwithstanding the worthiness of
each of these initiatives in their own right - In large part this reflects a global trend
towards increased regulation is, therefore,
unavoidable (e.g. adoption of international
standards best practices is necessary in order
to maintain Hong Kongs reputation as a
well-regulated IFC)
15Basel II in the context of other concurrent
regulatory initiatives (7)
- However, in order to keep the regulatory burden
manageable, in keeping with a business-friendly
orientation, the HKMA is committed to working
with the banking industry (, for that matter,
LegCo consumer interest groups) to try to get
the right balance between the risks rewards of
regulation - For example, in relation to Basel II the HKMA
has - Consulted the industry extensively throughout
- Liaised closely with AIs to ensure that the
approaches - offered, the timetable for implementation,
the - qualifying criteria for approval, are
acceptable to the - industry
16Basel II in the context of other concurrent
regulatory initiatives (8)
- Made adoption of the advanced approaches
optional - Developed the basic approach for smaller AIs
- Put on hold the proposed regulatory regime for
BHCs - Liaised closely with other supervisors to try
to - encourage harmonisation of requirements
- Indicated a willingness to be pragmatic in
relation to - use test / validation
- Such an approach a risk-based approach focusing
on cost/benefit analysis, pragmatism,
proportionality, close co-operation with the
industry is aimed at ensuring that Hong Kong
gets the right amount - right type of
regulation
17Basel II in the context of other concurrent
regulatory initiatives (9)
- Basel II, which is modelled on banks own best
practices, can deliver benefits in terms of (1)
stability of the banking system / protection of
depositors, (2) improvement of risk management
(3) enhanced public disclosure / market
discipline (4) consumer interests, is an
example of the right type of regulation - The winners - in terms both of financial centres
of individual institutions - will be those who
implement it most effectively those who have
the best strategy, the best solutions, get
their prioritisation right