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Charles Littrell Executive General Manager Australian Prudential Regulation Authority 17 October 2003. BASEL II In the Australian Context. What is Basel II?. International Accord on minimum Bank Capital Established 1988 but becoming obsolete Still works for simple ADIs

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Charles Littrell

Executive General Manager

Australian Prudential Regulation Authority

17 October 2003

BASEL II In the Australian Context


What is basel ii
What is Basel II?

  • International Accord on minimum Bank Capital

  • Established 1988 but becoming obsolete

    • Still works for simple ADIs

    • Economic equity models superior for large ADIs

  • Basel II – planned update

  • Final rules and timing uncertain



Apra objectives for adi capital in order
APRA Objectives for ADI Capital (in order)

  • Ensure sufficiency

    • Core issue in avoiding failures

    • International requirement

  • Increase risk sensitivity

    • Basel I too blunt

    • Basel II an improvement

  • Avoid excess

    • Efficiency issue

    • Complacency risk

  • Minimise transition costs

    • Dollars

    • Distraction


Basel ii for sophisticated banks
Basel II for Sophisticated Banks

  • Disaggregates credit, operational, “other” risks

  • Relies on internal risk models

  • Scope for supervisory discretion

  • More disclosure

  • Likely outcomes

    • Lower average capital

    • Higher marginal capital

  • Best of both worlds?

    • Justifies effort and expense


Basel ii for small banks cubs
Basel II for Small Banks & CUBS

  • Update on Basel I

  • Simplistic but workable

  • Increased disclosure applies

  • APRA attempting to minimise transition costs

  • Likely outcome

    • Slightly lower capital

    • More operational risk focus


Why is basel ii good
Why is Basel II Good?

  • Flexible, Dynamic Risk Based

  • Linked to personal incentives

  • Discourages silly risks

  • Reduces failure probability and Capital Requirements

  • Both safety and efficiency


Why isn t basel ii good
Why Isn’t Basel II Good?

  • Model Risk

    • Data and assumptions

    • Response time

    • Model myopia

    • Mathematics

  • Unspecified Risks

    • Cyclicality

    • Strategic/Business

    • Interest Rate Mismatch

  • Supervisory Complexity

  • Cost and Distraction


Competitive effects
Competitive Effects

  • Australia v rest of world

    • Relative improvement

  • Large banks v other ADIs

    • Both do better

  • Continues long term trends


Outstanding issues
Outstanding Issues

  • Conversion uncertainty

    • Schedule

    • Rules

    • Applicability

  • Australian Rules

    • We need to be tougher

    • But not too tough


Summary
Summary

  • APRA supports Basel II

  • Safety and efficiency benefits

  • We are prepared for implementation

  • Not cheap, easy, or risk free…

  • But will be good for Australia


Charles Littrell

Executive General Manager

Australian Prudential Regulation Authority

17 October 2003

BASEL II In the Australian Context


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