Basel II’s Impact in the Emerging European Markets
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Basel II’s Impact in the Emerging European Markets 15 th International Banking Congress Saint Petersburg , June 7-10, 2006. Piroska M. Nagy EBRD. Outline of presentation. Basel II update Impact of Basel II The EBRD’s role. Basel II timeline.

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Basel II’s Impact in the Emerging European Markets 15th International Banking Congress Saint Petersburg, June 7-10, 2006

Piroska M. Nagy


Outline of presentation
Outline of presentation

  • Basel II update

  • Impact of Basel II

  • The EBRD’s role

Basel ii timeline
Basel II timeline

  • Basel II is designed for large internationally active banks, but it will spread more widely:

    • Compulsory in the EU;adopted by the European Parliament. Implementation from Jan 1, 2007

    • Will be introduced in many advanced economies: Canada, Japan, Switzerland, Singapore, Hong Kong, Australia

    • Delay in the USA: 2009 instead of 2008, and only the most sophisticated method allowed. They will modify Basel I for the other banks

    • Peer pressure will accelerate its introduction in other EMs (Asia, Latin America). In transition economies: Croatia, Albania, other SEEs; Kazakhstan, Russia.

Basel ii will be introduced in stages in many countries
Basel II will be introduced in stages in many countries

  • Full introduction of simple and more sophisticated approaches: Australia, Korea, Singapore, New Zealand, EU

  • First Standardized Approach only, but in a year the Internal-Ratings Based approach: Hong Kong, Japan, Thailand

  • Only Standardized Approach for the time being and later move to advanced ones at a date not yet known: China, India

Basel ii in one picture

Basel II

Pillar 1: Minimum capital requirement

Pillar 2: Supervisory review of capital

Pillar 3: Market discipline

■More risk-sensitive approaches

■Risk assessment is a bank responsibility

■Disclosure requirements used as instrument of “peer pressure”

■ Banks can choose their approach -supervisors to approve

■Supervisors to review banks’ calculations and strategy

■Banks to disclose information on data and modelling

■More recognition of credit risk mitigation

■Bank should hold more capital than the minimum required

■ Banks using more advanced methods have to disclose more

■New capital charge for operational risk

■Supervisors can levy additional capital charge operational risk

Basel II in one picture …

Impact of basel ii
Impact of Basel II

On :

  • Regulatory capital

  • Bank behaviour

  • Industry competition and consolidation

  • Macro economy

  • Special issues in CEEs

Hungary qis3 and qis5 outcomes
Hungary – QIS3 and QIS5 outcomes


Op risk

Credit risk



  • Advanced economies: capital requirement of banks with good risk management and reasonable portfolios will decline

  • Emerging Markets the results will be very diverse


    • Banks that can afford expensive models and IT

    • Banks that improve their risk management and database  Start early with the preparations!

    • Banks with large retail exposures – the winning asset class of Basel II


    • Banks with weak portfolio and risk management quality

    • Banks whose lending is concentrated on low or non-rated corporates and sub-investment grade sovereigns

    • Banks that delay preparations

Impact on bank behaviour
Impact on bank behaviour

  • Big improvement inrisk management. In emerging markets, it is a “mini-revolution”

  • Better risk management will help better pricing of credit risk by business line

  • Use of risk mitigation instruments is expected to jump

  • Possible portfolio shakeouts

  • Results clearly depend on the type of approach chosen

Impact on banking industry
Impact on banking industry

Further bank consolidation can be expected

  • Dispersion is large (remember the Hungarian case) – clear winners and losers

  • Large banks have an edge because only they can afford best IT and models. The result will be freed-up capital for expansion

  • Medium-sized and small banks without a clear niche may be targeted

  • In Central and Eastern Europe and also in Russia, ongoing bank consolidation may get a boost from Basel II

Impact on macro economy
Impact on macro economy

  • Probably positive on growth: better pricing  better capital allocation  higher potential growth

  • Procyclicality: big debate, but probably increases procyclicality

  • Some concerns over systemic risks (home-host; boost to already high household debt)

Special issues in emerging europe
Special issues in emerging Europe

  • In many countries where main banks are foreign-owned, the Basel II process is parent bank-controlled

  • Non-foreign owned, local banks face huge challenges in complying with Basel II

  • Supervisory preparedness is an additional challenge

The home host supervisory issue
The Home-Host Supervisory Issue

  • Basel II’s approach: supervision is based on consolidated banking group

  • Thus, home supervisor takes the lead in supervision and monitoring, and in coordinating with host supervisor

  • Problem: if a country’s banking system is dominated by foreign-owned banks/their subsidiaries, host supervisors lose power while still are responsible by law for financial sector stability

    There should information-sharing but also perhaps cost-burden sharing

Special issue basel ii provides for more mitigation higher level of protection
Special Issue: Basel II provides for more mitigation & higher level of protection

Level of protection

Basel II




Basel I

Range of CRM instruments

What are these crms well known in advanced economies but not yet in emerging europe
What are these CRMs? Well- higher level of protectionknown in advanced economies but not yet in Emerging Europe

  • Credit Risk Mitigation instruments

    • Guarantees

    • Credit derivatives

    • Securitization

    • Netting operations

    • Collateralization

  • For many of these, banks will need high- quality credit enhancers such as the EBRD

  • For many of these, some legal and regulatory adjustments may be needed

  • Why is the ebrd interested in all this
    Why is the EBRD interested in all this? higher level of protection

    • EBRD has a mandate to promote financial sector development and Basel II is the new industry standard

    • Basel II essentially leverages the regulatory system to improve risk management in banks and EBRD supports this

    • Basel II gives incentives for developing capital market products – exactly what is missing to complete “transition” in the financial sector

    What can the ebrd do
    What can the EBRD do? higher level of protection

    • Help develop better risk management practices

    • As part of this, work with banks to introduce properly designed risk mitigation instruments (primarily securitization, some simple credit derivatives)

    • Provide credit enhancement

    • Help address potential need for higher regulatory capital

    • Work with regulators to modify the legal and tax framework.

    Контакные лица higher level of protection