basel 2 group presentation

8/8/2019 Basel 2 Group Presentation

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Group Members

Hassan Mumtaz

Ambar Riaz Sikander Ahmad

Muhammad Asghar

Muhammad Yousaf


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Basel II


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Agenda

Overview of Basel II

Objectives of Basel II

What are the basic aims of Basel II?

Basel II: why we need it ?

Comparison between Basel I & II

Types of Risks

The Three Pillars

Challenges ofBasle II on Financial Institutions

Implementation of BASEL II in Pakistan .

Risk of Not Implementing Basle II


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Objectives of Basel II

To promote safety and soundness in the financial

system

To continue to enhance completive equality

To constitute a more comprehensive approach to

addressing risks

To render capital adequacy more risk-sensitive

To provide incentives for banks to enhance their riskmeasurement capabilities


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What are the basic aims ofBasel II?

To deliver a prudent amount of capital in relation to the risk

that is run

To provide the right incentives for sound risk management

Basel II is not intended to be neutral between different

banks/different exposures

However, there is a desire not to change the overallamount

of capital in the system


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Basel II: why we need it ?Much better capital framework than Basel I.Basel I does not reflect credit quality gradations or

deterioration in asset quality

No explicit capital requirement to account for

operational risk embedded in the many services fromwhich firms generate much of their revenues.

Basel I did not give supervisors a common

framework to engage with banks on other important

issues, like strategic risk.

Basel I had too little risk-sensitivity and it did notgive bankers, supervisors, or the marketplace,

meaningful measures of risk.

Basel II closes the gap. It better aligns capital

requirements and the way banks manage their actual

risk.


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Comparison between Basel I & IIBasel I Basel II

Focus on a single risk measure More emphasis on banks internal methodologies, supervisory

review and market discipline

One size fits all Flexibility, menu of approaches. Provides incentives for better

risk management

Operational risk not considered Introduces approaches for Credit risk and Operational risk in

addition to Market risk introduced earlier.

Broad brush structure More risk sensitivity


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Risks involved in Basel II

As of now 3 types of major risks are addressed in

Basel II:

1. Credit Risk: Default by the borrower to repay the

borrowings 2. Market Risk: Volatility in the banks portfolio due

to change in market factors.

3. Operational risk: Risk arising out of banks

inefficient internal processes, systems,

people or external events like natural disasters,

robbery etc


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The Three Pillars(cont)

Pillar I: Minimum Capital Charges

Minimum capital requirements based on market,

credit and operational risk to:

(a) reduce risk of failure by cushioning against losses(b) provide continuing access to financial markets to

meet liquidity needs

(c) provide incentives for prudent risk management .


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Pillar I: Minimum Capital Charges (conti...)

Operational risk New complex financial products and

strategies

Growing reliance on automated technology

Cost reduction strategies

Mergers

Migration to outsourcing


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The Three Pillars(cont)

Pillar III: Market Discipline

New public disclosure requirements to compel

improved bank risk management


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Challenges ofBasle II on Financial Institutions

Understanding and interpreting the overall effectson each area within your business

Change management in relation to creating a risk

aware culture in your organisation

R

ecognise the new expectations from regulatorssuch as IFSRA, rating agencies and your customers

Review your current products as part of your

business risk assessment

Outline a strategy to utilise any gains that may be

achieved


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Challenges ofBasle II on Other Institutions

Customers

New costs relating to disclosures, internal/external ratings/better

collateralization

Ensuring transparency of transactions/processes Regulators

New costs related to additional resources

Set incentives for banks through stress testing and review processes.

Rating Agencies

Provide an increased transparency with regard to rating components

Maintain a high quality of ratings

Increase competition with entry by other agencies within Europe to the

market


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Implementation of BASEL II in Pakistan

State Bank of Pakistan vide its BSD Circular No. 3 of 2005 dated March 31, 2005 has

decided to adopt the Basel II in Pakistan.

The timeframe for adoption of different approaches under Basel II is as under:-

i) Standardized approach for credit risk and basic indicator / standardized approach for

operational risk from January 1, 2008.

ii) Internal Ratings Based (IRB) approach from January 1, 2010.

Banks/ DFIs will be required to adopt a parallel run of one and a half year for standardized

approach and two years for IRB approach starting from July 1, 2006 and January 1, 2008

respectively.

State Bank of Pakistan has also issued a roadmap for implementation of Basel II requiring all

Banks / Development Financial Institutions (DFIs) to ensure completion of the actions on

their part within the specified timeframe. The roadmap is available on SBPs website


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Risks of not Implementation of BASEL II in

Pakistan

Competitive nature of your institution

Ratings and margins

Confidence and Integrity based on best practices

Standard Setting over time


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Questions from Your Side

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