Moving toward global banking compliance
(Conclusion)
Following is an excerpt from the speech given by the author in a recent general membership meeting of the Bankers Institute of the Philippines (BAIPHIL).
A highly anticipated development is the forthcoming transition to Basel II in July 2007. While
The MB has decided to maintain the present minimum overall capital adequacy ratio (CAR) of banks and quasi-banks at 10 percent. However, consistent with Basel II recommendations, the MB approved major revisions to the calculation of minimum capital that universal banks, commercial banks and their subsidiary banks and quasi-banks should hold against actual credit risk exposures. In addition, while
Major changes have also been introduced with respect to credit risk. Basel II presents three options:
1.) Standardized approach (a modified version of the existing Accord) – assigns risk weights applicable to sovereign, bank, corporate, and retail exposures depending on the external credit risk ratings.
2.) Foundation Internal Rating Based (IRB) approach – allows banks to use their internal ratings assessment to determine the appropriate capital charge of their exposures.
3.) The advanced IRB approach – very similar to the foundation IRB. The only difference is that under the advanced IRB, banks are allowed even greater discretion in using their internal ratings model to calculate capital requirements.
Capital treatment for market risk as currently implemented through BSP Circular No. 360 remains generally unchanged except for some minor changes in the standardized computation of specific risk charges. Whereas, specific risk weights in the current market risk framework depend on the type of issuer, Basel II requires that these now depend on the external ratings of the issue to be consistent with the credit risk standardized approach.
An explicit change for operational risk is a new element. Basel II presents three options:
1.) Basic Indicator Approach – a bank’s operational risk charge is computed as a fraction of its gross income.
2.) Standardized Approach – banks’ operations are divided into specific business lines. Operational risk charge for each business line is determined as a fraction of gross income attributed to each line.
3.) Advanced Measurement Approach – operational risk charge would depend on statistics-based measurement models developed by banks themselves or by outside vendors.
The guidelines for allocating minimum capital to cover market risk (BSP Circular No. 360 dated 3 December 2002) was also amended to some extent, primarily to align specific market risk charges on trading book assets with the revised credit risk exposure guidelines. A completely new feature is the introduction of bank capital charge for operational risk. The required disclosures to the public of bank capital structure and risk exposures are also enhanced to promote greater market discipline in line with the so-called Pillar 3 of the Basel II recommendations.
The Monetary Board’s approval of the implementing guidelines for Basel II underscores the BSP’s commitment to deep and far-reaching banking reforms to strengthen the banking industry. It also reflects our basic confidence in the fundamental soundness and ability of the industry to make the necessary adjustments to be fully compliant with international standards. Necessarily, the implementing guidelines have been tailor-fitted to Philippine conditions including pragmatic timing of adjustments.
Conclusion
These are challenging times both for banks and for bank regulators. On the one hand, new technologies and markets create for us exciting opportunities to meaningfully strengthen the risk management capabilities of our financial institutions. On the other hand, the risks of getting it wrong – of failing to keep banks’ risk management practices up-to-date – can only grow as banking becomes ever more complex and sophisticated and as banking systems become more concentrated. This will increase the importance of capital adequacy, risk management, effective supervision, and transparency in fostering and maintaining financial stability in an increasingly integrated and interconnected global financial system.
The challenge is for everyone to see all these not merely as regulatory requirements but as tools that bank management can use to improve their operations and profitability.
(Roberto G. Manabat is the chairman and CEO of Manabat Sanagustin & Co., CPAs, a member firm of KPMG International, a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG international or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. For comments and inquiries, please email [email protected] or [email protected])
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