Presentation on Basel II

NCC Bank Limited

January 7,2009

Presenter:

Md Akhtaruzzaman
Managing Director
SIMARCH Asia Pte Ltd
Singapore

Capital Management

Presentation on Basel II

Why Does A Bank Need Capital?

To absorb unanticipated losses with sufficient margin of

safety to maintain public confidence in the banks ability
to continue as a going concern

To protect uninsured depositors and other creditors in the

event of liquidation of the bank

To assure shareholders of bank solvency

To comply with the requirements of bank regulators

To provide for premises, equipment and other nonearning assets necessary for bank operations

To support the expansion of business

Presentation on Basel II

Increased Regulatory Pressure

Credit

Risk - 1988 Basel Accord

Market

Risk 1996 Amendment

Operational

Risk Basel II 1/1/2007

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Overview of Basel I

Presentation on Basel II

Basel I

Introduced
Market
Basel

by BIS: 1988

Risk incorporated by BIS in 1996

I Implementation in Bangladesh: 1996

Credit

Risk implemented but not Market

Risk'

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Capital Adequacy Ratio

Capital Adequacy Ratio (CAR) in %

Tier I Capital+ Tier 2 Capital

----------------------------------

X 100

Risk Weighted Assets

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Risk Weighted Assets

Amount

Risk
Weight

Risk
Weighted
Assets

Cash Balance

1,000

0%

Balance with Banks

1,000

20%

200

Loans, Advances and

Bills Purchased

1,000

100%

1,000

Total

3,000

1,200

Items

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Limitations of Basel I

One size to fit all

Based on only a certain %

Does not consider the business risk at greater

details

Latest amendment to Basel I in 1996 was not

considered in Bangladesh on Market Risk

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Basel II Framework

Presentation on Basel II

Basel I vs. Basel II

BASEL I
Capital requirements for
market and credit risk only

BASEL II
Additional capital requirements for
operational risk
Introduction of Pillar 2 and Pillar 3

One standard for all

Multiple options + reinforcement of

national discretion

No differentiation per (type of)

client or facility

Client and facility characteristics

determine ultimate capital
requirement
Distinction between Retail and NonRetail

Limited acknowledgement of
collateral

Acknowledgement of collateral
(AIRB: full, provided it is validated)

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New Basel Accord Basel II

3 Mutually Reinforcing Pillars
Scope of Application: Individual, Sub-consolidated & Consolidated Basis
Pillar 1
Quantitative

Pillar 2
Qualitative

Pillar 3
Market Forces

Minimum Capital
Requirements

Supervisory
Review Process

Market
Discipline

Calculation of capital
requirements for
Credit risk
Operational risk
Market Risk (Trading
book changes)

Overview of supervisory
review
Key principles
Capital management
processes (allocation of
capital)
Interest rate risk in the
banking book

Presentation on Basel II

Improvement of
disclosure requirements
Capital structure
Risk exposures
Capital adequacy

Market participants
should be able to assess
a banks capital adequacy

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Pillar I: Minimum Capital Requirements

Credit

Risk

Standardized Approach

Internal Rating Based Approach: Foundation

Internal Rating Based Approach: Advanced

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Pillar I: Minimum Capital Requirements

Operational

Risk

Basic Indicator Approach

Standardized Approach

Advanced Measurement Approach

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Pillar I: Minimum Capital Requirements

Market Risk
-Standardized Measurement Approach
Interest Rate Risk
Equity Position Risk
Foreign Exchange Risk
Commodities Risk

-Internal Models Approach

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Basel II Implementation

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BB Basel II Road Map

Basel II Road Map
Jan 1-Dec 31,2009

Standardized Approach for calculating Risk Weighted Amount

(RWA) against Credit Risk

Standardized Rule Based Approach against Market Risk and

Basic Indicator Approach for Operational Risk

Banks to continue calculation of Minimum Capital Requirement

(MCR) as per existing regulation and simultaneous calculation of
MCR under Basel II during Jan 1-Dec 31,2009

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BB Basel II Road Map

Migration to IRB Approach: By 2012

Developing Data Base
For calculating Minimum Capital Requirement (MCR) under
Foundation IRB approach, banks will derive figure for determining
Probability of Default (PD) on the basis of own database and seek
figure on Loss Given to Default (LGD), Exposure at Default (EAD) &
Maturity (M) of Credit Exposure from Bangladesh Bank. Thus, BB will
develop maintain required loss database to meet the requirements
and banks will be prepared in this regard.

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QIS 5

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Change in Minimum Capital For Credit Risk (%)

Standardized
Approach

FIRB
Approach

AIRB
Approach

Most
Likely
Approach

G10 Group 1

1.7

-1.3

-7.1

-6.8

G10 Group 2

-1.3

-12.3

-26.7

-11.3

CEBS Group 1

-0.9

-3.2

-8.3

-7.7

CEBS Group 2

-3.0

-16.6

-26.6

-15.4

Other Non G10

Group 1

1.8

-16.2

-29.0

-20.7

Other Non G10

Group 2

38.2

11.4

-1.0

19.5

Source: QIS 5, June 2006

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References

www.bis.org

Annual Reports of major banks

Internet - several web sites

Contact details:
akhtar@simarch.com

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