1

BASEL – HISTORY

By: Mr. Tariq

2

BANK FOR INTERNATIONAL SETTLEMENT - STRUCTURE

1988 2004-2009 2010/2.5

3

BCBS – ORGANIZATION STRUCTURE

» (1966) – SAMA Banking Control law applied to banking sector which had modern regulatory concepts such as solvency, liquidity, leverage, large exposures, and related party lending. This law is binding in terms of minimum requirements resulting in penalties for violations.

[achievement for Saudi Arabia that we had these rules much before Basel I was published]» (1981 – 82) – SAMA Governor becomes an observer to G10 forum» (1988) – Basel I rules published

» SAMA given a 0% risk weight like the G10 countries» (1992) – Implementation of Basel I rules in Saudi Arabia» (1992-93) – International accounting standards (IFRS – International Financial

Reporting Standards) followed» (1992) – Process of adopting and implementing Basel Standards commenced» (1996) – Market Risk amendment – 2004 - SAMA’s implementation

SAMA RELATIONSHIP WITH BIS AND BCBS

4

5

BASEL 1 - 1988Basel I - since 1988 after failure of

a German BankSimple risk weightings by asset

classes as risk sensitivity of assets was recognised

Differentiated percentages applied to five asset categories (0%, 10%, 20%, 50% & 100%) to compute Risk Weighted Assets (RWA)

RWA included only credit riskMinimum capital requirements

introduced – 8%Market risk added in 1996

Inability to reflect true credit risk sensitivity

Not capturing operational riskEmphasis on book value and not

market valueInadequate assessment of new and

complex financial products i.e. derivatives

Min. 8%

6

BASEL 2 – 2005-06

Basel II strengthens international capital standards by:Separating operational risk from credit risk and market risk and quantifying all three Pillars (1,2,3) as on next page

Introduction and reliance on Internal Models for credit, market and operational risk

Enhanced risk sensitivityStrengthening supervisory process – Pillar 2Enhancing disclosure of bank’s risk information – Pillar 3

Min. 8%

7

BASEL 2 – THREE PILLARS

to cover all risk

»(2005-6) – Basel II rules issued

»(2008) – Basel II implemented in Saudi Arabia (Implementation in Basel countries 2007)

BASEL RELATIONSHIP HISTORY IN SAUDI ARABIA

8

9

FAILURE OF BASEL II – FINANCIAL CRISISExcessive reliance on Internal ModelsBuild up of excessive on and off balance sheet leverage

Gradual erosion of level and quality of capital base

Insufficient liquidity buffersInability to absorb systemic trading and credit losses

Deleveraging processes causing damage to the banking sector financial system and economies

Formation of GSIBs which were too big to failInterconnectedness of systemic institutions through complex transactions

10

BASEL 2.5 - 2011

In addition, introduced:

a. More disclosures around market risk and securitisation

b. Enhanced Disclosures Task Force (EDTF) requirements

during the financial crisis

• Basel Senior Supervisors Committee initiated this work

» (1998-04) – Member of core principles and international liaison group

» (2004) – Basel market risk rules published and applied in Saudi Arabia

» (2005-6) – Basel II rules issued» (2008) – Basel II implemented in Saudi Arabia» (2009) – SAMA invited to join BCBS. Basel II.5 rules published» (2012) – Basel III published» (2013) – Basel II.5 and III implemented and no major issues as Saudi Banks have highest capital, liquidity and leverage ratios

» (2013) – Many other Basel principles and standards implemented» (2015 onwards) – Looking ahead into Basel IV and new approaches

SAMA PARTICIPATION IN BASEL WORK AND IMPLEMENTATION OF BASEL III IN SAUDI ARABIA

11

Process followed for Basel rulesBasel rules too

detailed to provide

relevant

guidance to

local banks

a. SAMA issue

s detail

ed paper

s, circulars and

specific

guidance

(returns)b.

Surveys for bilate

ral dialogue, scopi

ng and

planning

Consultati

on proce

ss throu

gh vario

us worki

ng group

s, QISs i.e.

Capital,

Liquidity,

Leverage, Risk etc. (over 100

meetings held on

Basel 2

project)

Parallel run and finall

y adopt

12