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Risk Management Survey C OLOMBIA Challenges in Implementing Basel-II

Risk Management Survey C OLOMBIA Challenges in Implementing Basel-II. Oliver Fratzscher World Bank Cartagena February 16-18, 2004. Overview. Macro- and institutional framework  importance of integrated supervision Readiness for transition to new framework  policy questions on sequencing

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Risk Management Survey C OLOMBIA Challenges in Implementing Basel-II

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  1. Risk Management SurveyCOLOMBIAChallenges in Implementing Basel-II Oliver Fratzscher World Bank Cartagena February 16-18, 2004

  2. Overview • Macro- and institutional framework importance of integrated supervision • Readiness for transition to new framework policy questions on sequencing • Expected benefits from Basel-II capital charges may increase • Concerns to be addressed infrastructure needs: data, legal, accounting • Impact on competitiveness and Conclusions Survey Results

  3. 1. Bank Survey on Basel-II • 12 Colombian banks, $20 bn assets (60% market),4 conglomerates, 2 foreign, 2 public, 10 ratings,6 over 12% CAR and 6 over 15% ROE,2 NPL problems, Ø49% derivatives/loans (+70%) • 12 South African banks, $120 bn assets (86% m),5 tier-one, 3 foreign, survey by E&Y in 2003 • 190 banks, 63% European, 37% retail banks,14% cooperatives, 22% assets under $2.5 bn,survey by KPMG in 2002 Survey Results

  4. GDP Monetization (M2/GDP) $76bn $69bn USA 80% South- 60% Africa Brazil Deposits 40% Argentina 24% Chile 20% 40% Colombia 0% 1994 1980 1982 1984 1986 1988 1990 1992 1996 1998 2000 2002 Capital Markets Institutional Investors Bank Performance (Colombia / Chile ) 26% 30% 30% 85% COL NPL 60% 190% 25% 20% COL NPL- Mortgage 20% 10% Chile-NPL 15% 0% 10% -10% COL ROE 5% -20% Chile ROE 0% -30% 1999 2000 2001 2002 2003 Colombia versus Chile Survey Results

  5. Multiple: BRA, USA Single: KOR, UK B&S: MEX S&I: CHL,ZAR B&I: COL,CAN N/A 7 Comply 14 NonComply 14 Largely 7 MateriallyNon-Comply 18 Integrated Supervision • Framework adopted for Basel-II • 46 countries have 1or 2 supervisors • 22 countries have single supervisor • Integration typically B+S then +I • CP 20 shows 53% non-compliance • Main obstacles: weak institutions, legal basis, accounting, cross-border, cross ownership, transparency • Risk-Shifting is big business Source: Martinez and Rose, World Bank WP 3096, 7/2003 Survey Results

  6. Option 80 Op-Risk Insured Loan 100 CDS 100 Capital 2 Capital 2 Capital 2 Risk80 ? Risk 0 ? Risk20 ? Capital 12 Insurance Company Securities Firm Commercial Bank Corporation Counterparty Risk Accounting Issues System Capital Risk Takers Risk-Shifting in Conglomerates Survey Results

  7. very ambitious conservative regulator 2. Choice of Basel Approach Survey Results

  8. Policy choices for transition • Timing: 8 banks ready by 2008, regulator 2009 ? • Phasing: can small banks remain on Basel-I ? • Choices: does regulator allow advanced-IRB ? • Selection: do banks jump or graduate ? • Discretion: which options will be restricted ? • Priorities: Credit … Market … Operational …Liquidity … Systemic … Accounting Risks Source: Enterprise risk management priorities, PWC (2002) Survey Results

  9. sources of information readiness of banks RM staff: credit > operational gap analysis Op-risk staff: 7% Op-risk budget: 6% Major concern Readiness to be (re)defined Survey Results

  10. What benefits ? 3. Expected benefits Survey Results

  11. IRB will require higher capital Sources: BIS (QIS3), Mercer Oliver Wyman, BCB (Brazil) Portfolio G10 EU EM Brazil Group1 Group2 Group1 Group2 All QIS3 Corporate 1% -1% -1% -1% 0% 2% Banks 2% 0% 2% 1% 2% 1% Retail -5% -10% -5% -7% -4% -4% Expect 12% rise in op-risk charges SME -1% -2% -2% -2% -1% -1% Overall credit (stan) 0% -11% -3% -1% 2% -2% Overall credit (found) -7% -27% -13% -27% -3% -4% Operational (stand) 10% 15% 8% 12% 11% 11% Operational (found) 10% 7% 9% 6% 7% 13% Overall change (stan) 11% 3% 6% 1% 12% 8% Overall change (found) 3% -19% -4% -20% 4% 9% Lower capital charges ? Survey Results

  12. Now only 3 banks allocate capital by business lines, but in future 10 banks intend to do so. concern No outsourcing of high-capital business planned, but 7 banks want to insure op-risk who wants credit risk ? Efficient use of capital ? Survey Results

  13. Complexity and Pillar-2 are major concerns 4. Concerns with Basel-II Survey Results

  14. Are resources adequate ? Colombian GAAP needs major revision Only two banks collect op-risk data IT still has gaps 5 yrs data 3 yrs data Infrastructure bottlenecks Survey Results

  15. Alignment of economicand regulatory capital • Selecting market segments with lower capital needs • Portfolio approach tocredit risk, diversification • Reduced funding expenses by improved credit rating • Better operational efficiency and less share price volatility • Improved reputation drivingmarket share & composition Strong optimism:better risk mgmt=> lower capital=> competitiveness=> market share Value creation, higher ROE,improved risk management 5. Competitiveness Survey Results

  16. Market commentary • Basel-II could have a deeper and more lasting impact in the emerging market universe than in the developed world • Uneven application of Basel-II will distort borrower behavior: foreign banks using advanced IRB offer more attractive funding • NPLs of >7% in EM compare with <3% in US and Europe but EM tier-1 capital ratios of >11% compare with 8% in US & EU • Most EM are fragmented and over-banked, Basel-II could facilitate further consolidation and takeover of smaller banks • Basel-II likely to lead to more active balance sheet restructuring and could significantly reduce risk premiums for EM banks Source: UBS: Basel II – Emerging Market Banks (Sep 2003) Survey Results

  17. Conclusions • MARKET CONSOLIDATION and competitive pressures may rise from increased risk arbitrage in conglomerates and cross-border • INTEGRATED SUPERVISION and Quality of Pillar-2 are critical to enable risk innovation and contain potential systemic risks • TRANSITION TO IRB shall be gradual and aligned to capacity in markets & supervisors, using national discretion in high-risk areas • CAPITAL ALLOCATION by business lines may enhance efficiency and better align economic with regulatory capital • RISK INFRASTRUCTURE for operational risk must be improved, insurance is insufficient, and capital charges are likely increasing • ACCOUNTING STANDARDS need to be upgraded to IAS, with careful monitoring of risk arbitrage through credit derivatives Survey Results

  18. + WEI-JI DANGER OPPORTUNITY RISK MANAGEMENT Gracias ! www.worldbank.org/finance Survey Results

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