Basel II

The term refers to the totality of the Basel II capital adequacy rules, which were proposed by the Basel Committee on Banking Supervision in recent years. The original version of the framework agreement was published in June 2004. The rules must according to EU directives 2006/48/EC and 2006/49/EC since 1 January 2007 in the Member States of the European Union for all credit institutions and financial services institutions ( = institutions ) are applied. While in Switzerland, the implementation by the FINMA is passed, this is done in Germany by the German Banking Act, the Solvency Regulation and the Minimum Requirements for Risk Management ( MaRisk).

Although originally inspired and initiated by the U.S., Basel II has not been implemented in the United States with the same vigor as in Europe. The U.S. government had initially intended to introduce the regulations from 2008 gradually. Meanwhile, a shift also due to the current financial situation has been announced (see implementation below).

  • 2.2.1 Regulations for Banks
  • 2.2.2 Requirements for the supervision 2.2.2.1 Ongoing regular inspection by the Banking Supervision
  • 2.2.2.2 Verification of risk management and reporting
  • 2.3.1 equity structure
  • 2.3.2 Risk exposure and its evaluation
  • 2.3.3 Adequacy of own funds
  • 3.1 QIS studies
  • 3.2 General implications
  • 4.1 schemes for small and medium businesses

Topics

Goals are, as with Basel I, securing a capital adequacy of banks and the creation of a level playing field for both the lending as well as for credit trading. The main objective of the changes made by Basel II compared with Basel I is to refocus the state- required regulatory capital requirements on actual risk and hence approximate the capital requirements internally ascertained by banks. This is the so-called regulatory arbitrage are reduced. The consistent implementation of all regulations of Basel II, the allocation of risky and possibly " bad loans " on a larger scale is relatively unlikely.

The criticism of Basel I is based on three points:

Content

Basel II consists of three mutually reinforcing pillars:

Pillar 1: Minimum Capital Requirements

The previous regulation enticed banks to repel risk looser positions eg by " asset-backed " transactions ( Regulatory Capital Arbitrage ) as they were to be backed by the same amount of own funds as riskier and more profitable positions. Possibly. sensible, low-risk transactions were even prevented altogether, since they were to be backed by relatively large own resources, which connected to the bank with little benefit.

The aim of the first column is now more accurate and more appropriate considering the risks of a bank when calculating their capital adequacy. The following three risks are taken into account:

Credit risk

The capital adequacy in accordance with the minimum capital requirements for credit risks. The credit risk is determined using an internal or external ratings. The external rating ( standardized approach ) is made by a credit rating agency (by a Standard & Poor's, Moody's and Fitch Ratings ). However, there is also the possibility of leaving credit claims uneingestuft. The internal rating, the Bank assesses the risk itself ( IRB approaches: "internal rating based" - on internal ratings based approach ). However, this requires the acceptance and approval by the banking supervisory authority. The bank must be able to demonstrate that they fulfilled certain obligations in terms of methodology and disclosure. For private customers, there is a simplified procedure, the scoring. Here are provided for by regulations on securitization ( asset securitization ).

The maxim of Basel II in the credit default risk is that expected losses ( " expected loss " ) are priced in the form of risk premiums or go for risk management at the expense of the existing shareholders' equity, concretely anticipated losses. In contrast, unexpected losses ( " unexpected loss " ) must be backed by capital. Here, in the approach based on internal risk measurement approaches a confidence level of 99.9 % is given by the supervision and also be sought in the standard approach through the pre- made ​​calibration. This security level corresponded to the formation time of Basel II with a "triple B" ( BBB) rating. The Banking Supervision decided to use this so-called confidence level, because in their view, not a sustainable business model is conceivable that auskäme with a lower level of security.

The more advanced and therefore more risk sensitive the valuation method used by the bank ( standardized approach, Foundation IRB approach, advanced IRB approach ) is, the greater the potential savings in the capital allocation: For example, additional security types can be risk-reducing acknowledged. Thus, inter alia, to provide an incentive for banks to be created to use advanced methods possible.

Market price risks

The market risk was in 1996 added to the original agreements. These rules will change little.

The risks include unforeseen and the expected results of the Bank negatively influencing exchange rate movements, changes in interest rates and any other changes in prices of the capital market. Since it is for the bank only one of many possibilities, about money market transactions to obtain cash ( theory of money market funding), the Bank may waive in-house and commercial transactions in financial derivatives. However, it is not practical that the Bank does not transform services. Thus, the bank is continuously exposed to the price risk and must quantify and control after the risks have been identified this.

  • Determination of net exposures (only auxiliary construct)
  • Sensitivity analysis (only auxiliary construct)
  • Value-at -risk approaches ( concept for the determination of that loss amount, which with a certain probability (confidence level ) is not exceeded in a given period of time ( risk horizon ) )
  • Waiver of transformation services ( not practical )
  • Renunciation of self / trading derivative transactions ( possible)
  • Risk limit systems: fixation of a target variable by value-at -risk approach to limit the overall risk of a bank
  • Additional transaction, the value of which responds in the same, the hedged position that adversely affect the market price as closely as possible in the opposite way, so that the value loss is compensated, for example, interest rate swaps
  • Interest rate cap agreements ( cap, floor, collar )

Operational risks

Another new feature is the inclusion of operational risk. There is the risk of direct or indirect losses resulting from inadequate or failing internal processes, people and systems or from external events bench dar. It is considered by the Basic Indicator Approach, Standardised Approach and Advanced Measurement Approach.

To calculate the total to underlying equity applies:

Pillar 2: Supervisory Review Process

The column 2 provides two requirements for banks:

  • First, they must have a method with which they can assess whether their Eigenkapitalaustattung in relation to their risk profile is appropriate. In addition, they must have a strategy for maintaining their capital levels. This strategy is referred to as the Internal Capital Adequacy Assessment Process ICAAP short or internal capital.
  • Second, the column 2 to the regulatory requirement to subject all banks an evaluation process. On the basis of this process supervision measures may be necessary.

Requirements for banks

The Internal Capital includes all procedures and measures a bank, ensure the following:

  • Appropriate identification and measurement of risks.
  • Adequate of internal capital in relation to risk profile.
  • Application and development of appropriate risk management systems.

This is the column 2 to ensure that all material risks incurred by a bank to be considered. This also applies to risks that are not captured in Pillar 1 (eg interest rate risk in the banking book ).

Requirements to the supervisory

Ongoing regular inspection by the Banking Supervision

The Banking Supervision ( in Germany: BaFin together with Deutsche Bundesbank, in Switzerland: FINMA, in Austria: FMA together with the Austrian National Bank) and to oversee the compliance with the requirements of methodology and disclosure that are necessary so that the bank internal ratings allowed to use. See: special.

Review of the risk control and reporting

The supervisory review process ( Supervisory Review and Evaluation Process, SREP ) calls for the establishment of adequate risk management systems - such as the management of Risk Control (MRC ) - for banks and investment firms and their supervision by a supervisory authority.

It is based on the principle of double proportionality, which states that to be both the control instruments in a bank as well as the intensity of the supervision by the Banking Supervision proportional to the risks of a bank. However, it is difficult to detect the actual risk. As long time were undrawn loan commitments with a maturity of less than one year is not a loan and therefore risk-free. The same is still true for the forward selling of assets.

Pillar 3: Enhanced disclosure / market discipline

The aim of the third pillar is to strengthen market discipline through increased disclosure of information in the context of external financial reporting of banks ( eg in the financial statements in annual reports or annual reports ). Disciplining follows eg from the feared price reactions of own shares. So are the possible reactions from the disclosure incentive for banks to take care of a reasonable equity and venture capital structure.

There are extensive disclosure requirements on

Equity structure

  • Summary information on the terms and conditions of the main features of all capital instruments, especially for innovative, complex or hybrid equity instruments.
  • Paid-up share capital
  • Reserves
  • Minority interests in the equity of subsidiaries
  • Innovative capital instruments
  • Other capital instruments
  • Surplus capital of insurance
  • Regulatory calculation differences, which are deducted from core capital and
  • Other amounts deducted from core capital, including goodwill and investments

Risk exposure and its evaluation

To allow other market participants to allow an assessment of the risk positions of the bank, the techniques that the bank uses to measure risk is to monitor and control to disclose.

For this purpose, for credit institutions in each area of ​​risk ( eg credit risk, market risk, operational risk, interest rate risk in the banking book and equity) describe the internal objectives and principles of risk management. These include:

  • Strategies and processes
  • Structure and organization of the relevant risk management function
  • Nature and extent of risk reporting and / or measurement systems
  • Principles of hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants

Adequacy of own funds

An effective disclosure is to ensure that market participants gain a better insight into the risk profile and capital adequacy of a bank. In detail, the following must be disclosed:

  • An overall discussion of the bank's approach to assessing the adequacy of the capital to underpin current and future business.
  • Individual portfolios in accordance with the standard and simplified standardized approach, for each portfolio
  • Portfolios under the IRB approaches, separately for each portfolio according to the foundation IRB approach and for each portfolio using the advanced IRB approach: Enterprises (including special financing that do not comply with the relevant regulatory requirements ), banks and governments
  • Mortgages
  • Qualifying revolving retail exposures; and
  • Other retail exposures
  • Investments according to market approaches: Investments according to the simple risk weight approach; and
  • Investments in the banking book according to the internal model approach ( for banks using the IMA for equity investments in the banking book )
  • Standard approach
  • Internal models approach - trading book
  • Basic Indicator Approach
  • Standard approach
  • Advanced Measurement Approach ( AMA)
  • The consolidated group as a whole; and
  • ( individually or consolidated in accordance with the application of the framework agreement ) of the major banking subsidiaries.

Effects

QIS studies

To estimate the impact of Basel II on the German banks, the German Federal Bank has conducted a series of impact studies ( QIS Quantitative Impact Study ). The results of QIS4 are. In the spring of 2006, the fifth study ( QIS5 ) was performed.

After that, the capital requirements of banks under the standardized approach to increase slightly in the two IRB approaches, the capital requirement decreases slightly. More interesting is the analysis of the individual customer groups:

Strong decrease the capital requirements for mortgage loans. In the area of corporate lending, particularly small and medium-sized enterprises, a discharge is noted. Strong increase the burden on loans to banks and especially to states.

General consequences

In general, higher risks could cause higher interest rates. If the bank has failed more equity in a bad credit rating, also increase their capital costs. These increased costs may be passed on through higher (credit) interest rates to the borrower. Conversely benefits a borrower with good credit rating of lower interest rates because the bank is required to deposit lower own funds for the loan. The Basel rules themselves, however, find no provisions for loan pricing. That is, whether the bank requires in accordance with the cost of own funds interest rates depends on the earnings and other considerations ( competitive position, etc.) of the banks.

According to Basel I each credit was to be backed by a uniform 8 % of own funds. At this approach has not changed fundamentally with Basel II. However, the outstanding claims of the bank now, depending on the rating of the counterparty, weighted by a percentage between 0% ( for example, claims on OECD countries ) and 1250 %. The resulting " risk weighted assets " must be backed with 8 % equity. The statements made here are based on the standard approach. The procedure in the IRB approaches is much more complex.

Criticism

  • The problem is the rules for companies from the SME sector may turn out, as these are short on equity typically. This is to be expected for them rather a bad rating. To account for this peculiarity of the German economy, an agreement was reached with the Basel Committee, in which the capital requirements for small and medium-sized enterprises (SMEs ) is significantly lower. This SME loans from the banks' perspective are cheap because own funds -saving borrower group. However, the same credit claims are created as to the other companies (eg scoring procedures) so that their access to the credit market is difficult.
  • However, a solution to this dilemma could offer modern refinancing products such as securitization under certain circumstances. How SMEs can securitize their receivables. This releases latent liquidity can use, for example, according to a credit of entrepreneurs. However, the small and medium enterprises would bind directly to the unpredictable international capital markets. This would threaten the existence of enterprises.
  • Similarly, banks are in a position to an existing capital by means of a credit portfolio securitization or forward selling the same to take from the balance sheet and thus free up capital. However, this would jeopardize the banks then, if the buyer of the receivables can no longer meet its obligations. This is often due to the unpredictable international capital markets.
  • Basel II affects the national economy existing structures. Companies with the best credit rating, which is the best credit rating to get the best loan terms. However, these businesses are inherently also the companies that need the least loans.
  • Basel II causes credit rationing, as loan applications no longer an individual basis, but are statistically evaluated. The relationship between the bank and the borrower is anonymous.
  • Basel II disadvantage small banks, as they may not be statistically evaluated portfolios build up and causes their case-specific evaluation increased cost of equity.
  • Basel II affects cyclical pro-cyclical, as for example increasing loan default rates of banks lead to a higher capital requirement, which on the one hand the other hand, leads to an upward trend in interest rates to low funding of banks.

Schemes for small and medium businesses

As part of the consultation process to Basel II regulations were introduced to reduce the risk weight of small and medium-sized enterprises:

  • Loans to businesses and smaller companies are assigned to the IRB retail approach, if the total credit exposure is less than 1 million euros per borrower unit with a bank group. In this approach comes another risk weighting function used, which leads with the same probability of default and the same collateral to lower risk weights in the IRB approach for " Corporates ".
  • The IRB risk weights are reduced for companies with annual sales of 5 to 50 million euros, by enabling them to be combined in a SME portfolio. The discharge is dependent on conversion and can reach up to 20 % compared to the capital requirement for large companies. On average, the discharge should be at 10% (so-called SME package).
  • It is given the possibility of suspending the maturity adjustment on loans to groups of companies with an annual turnover of less than EUR 500 million by national authorities of banking supervision.

Implementation

The EU legal requirements for minimum capital adequacy of credit institutions for credit and counterparty risk and operational risk can be found in the recast Directive 2006/48/EC ( Banking Directive ) of 14 June 2006, those for minimum capital adequacy of credit institutions and certain financial services institutions for the market price risk as well as the extension of the rules regarding credit and operational risk for financial services institutions in the recast Directive 2006/49/EC ( CRD ) of 14 June 2006 - together as the Capital Requirements Directive (CRD ) refers. The reaction in Germany is regulated by the "Law for the implementation of the recast Banking Directive and the recast Capital Adequacy Directive " of 17 November 2006, which stipulates comprehensive adjustments of the Banking Act and mainly comes into force on 1 January 2007.

The legal changes are complemented by two regulations:

  • The new Solvency ( Solvency Regulation ), as well as
  • The revised large exposures and credit regulation GroMiKV.

The Solvency Regulation replaces the existing own resources base set I. The Solvency essentially regulates the detailed regulations concerning the capital adequacy (solvency) of credit institutions and groups of institutions and financial holding groups. The Regulation also establishes the composition, leadership and management of the trading book of credit institutions and contains rules for the application of rules on the trading book in groups of institutions and financial holding groups.

The GroMiKV contains more detailed rules

  • For determining the credit capital charges and the borrower,
  • For credit risk mitigation,
  • To distinguish between the trading book and non-trading book institutions,
  • To organizational requirements and measures
  • To decision-making responsibilities and to back the excesses of large exposure limits,
  • For trading book overall position of a trading book institution and for the evaluation of positions in the trading book,
  • Notification as part of the millions of credit process, and
  • For display of large exposures and millions of credits granted by banks.

The new GroMiKV to replace the current large exposures and credit regulation.

After completion of the legislative process, the application of the new capital requirements should be mandatory by all institutions on January 1, 2007. It started the floor rules. The additional regulatory areas of Pillar II and the disclosure requirements apply. On 1 January 2008 the new GroMiKV enters into force.

Delays

In September 2006, the United States sought a postponement of the entry into force of the rules, which was scheduled for 1 January 2007 to 1 January 2009. This was seen by various bank representatives in Europe as a critical factor for the whole package and even a failure of Basel II has not been excluded.

Basel III

Due to the financial and economic crisis and the light of experience and the supervisory framework has been further developed. To this end, a draft ( Consultative Document ), the Basel Committee on Banking Supervision had submitted in December 2009 initially. The measures presented are complex and interdependent in the effect. To get an overview of the action of the individual rule proposals, 2010 impact study was carried out.

Under the Basel III headline a new set of rules was published in December 2010, which is the international standard since early 2013. While Basel II in particular, the risk assessment for the subject, it goes into the new rules to the definition of capital and the required minimum ratios. The existing rules of Basel II, this revised and supplemented by the new package. Even if a leverage ratio ( "Maximum debt ratio " ) were added and rules for minimum liquidity to address new issues, it is near Basel III is a further development of Basel II, the principle further remains valid.

In the European Union, Basel III will be implemented by the CRR I and CRD IV. Because of delays in political decision making, the new law is expected to come into force until 2014.

Equity (finance) Nick Leeson Value at Risk Interest rate cap and floor Mittelstand
107984
de