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Banking & Finance Technology Forum 2005. Basel II – The Implementation Phase Simon Topping Hong Kong Monetary Authority / City University of Hong Kong 9 March 2005. Basel II – The Implementation Phase. HKMA’s approach to implementation: Timing / available approaches

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slide1

Banking & Finance

Technology Forum 2005

Basel II – The Implementation PhaseSimon ToppingHong Kong Monetary Authority /City University of Hong Kong9 March 2005

basel ii the implementation phase
Basel II – The Implementation Phase
  • HKMA’s approach to implementation:
    • Timing / available approaches
    • Consultation documents / guidance issued
  • Hong Kong banking industry’s 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?
hkma s approach to implementation 1
HKMA’s 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
hkma s approach to implementation 2
HKMA’s 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
hkma s approach to implementation 3
HKMA’s 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%
hkma s approach to implementation 4
HKMA’s 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
hong kong banking industry s implementation plans 1
Hong Kong banking industry’s 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
hong kong banking industry s implementation plans 2
Hong Kong banking industry’s 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
  • HKMA’s assessment is that the industry has “bought into” Basel II & is making good progress on implementation
basel ii in the context of other concurrent regulatory initiatives 1
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?
basel ii in the context of other concurrent regulatory initiatives 2
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
basel ii in the context of other concurrent regulatory initiatives 3
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.
basel ii in the context of other concurrent regulatory initiatives 4
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
basel ii in the context of other concurrent regulatory initiatives 5
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
basel ii in the context of other concurrent regulatory initiatives 6
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 Kong’s reputation as a well-regulated IFC)
basel ii in the context of other concurrent regulatory initiatives 7
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

basel ii in the context of other concurrent regulatory initiatives 8
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

basel ii in the context of other concurrent regulatory initiatives 9
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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