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Basel II The Implementation Phase Simon Topping Hong Kong Monetary Authority City University of Hong

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City University of Hong Kong. 9 March 2005. Banking & Finance ... become onerous, notwithstanding the worthiness of each of these initiatives in their own right ... – PowerPoint PPT presentation

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Title: Basel II The Implementation Phase Simon Topping Hong Kong Monetary Authority City University of Hong


1
Basel II The Implementation PhaseSimon
ToppingHong Kong Monetary Authority /City
University of Hong Kong9 March 2005
Banking Finance Technology Forum 2005
2
Basel 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?

3
HKMAs 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

4
HKMAs 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

5
HKMAs 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

6
HKMAs 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

7
Hong 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

8
Hong 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

9
Basel 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?

10
Basel 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

11
Basel 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.

12
Basel 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

13
Basel 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

14
Basel 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)

15
Basel 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

16
Basel 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

17
Basel 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
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