BASEL II
In the Australian Context
Charles Littrell
Executive General Manager
Australian Prudential Regulation Authority
17 October 2003
1
What is Basel II?
• International Accord on minimum Bank
Capital
• Established 1988 but becoming obsolete
–
–
Still works for simple ADIs
Economic equity models superior for large ADIs
• Basel II – planned update
• Final rules and timing uncertain
2
Australia’s ADIs – a Snapshot
Assets
$bn
% of Total
Typical
Credit
Rating
738
66.0
AA-
4
339
30.3
A
47
42
3.7
N/A
201
# of
Entities
Largest
Banks
Regional
and
Foreign
Banks
Credit
Unions &
Building
Societies
(CUBS)
3
APRA Objectives for ADI
Capital (in order)
• Ensure sufficiency
–
–
Core issue in avoiding failures
International requirement
• Increase risk sensitivity
–
–
Basel I too blunt
Basel II an improvement
• Avoid excess
–
–
Efficiency issue
Complacency risk
• Minimise transition costs
–
–
Dollars
Distraction
4
Basel II for Sophisticated
Banks
• Disaggregates credit, operational, “other”
risks
• Relies on internal risk models
• Scope for supervisory discretion
• More disclosure
• Likely outcomes
–
–
Lower average capital
Higher marginal capital
• Best of both worlds?
–
Justifies effort and expense
5
Basel II for Small Banks &
CUBS
•
•
•
•
Update on Basel I
Simplistic but workable
Increased disclosure applies
APRA attempting to minimise transition
costs
• Likely outcome
–
–
Slightly lower capital
More operational risk focus
6
Why is Basel II Good?
•
•
•
•
Flexible, Dynamic Risk Based
Linked to personal incentives
Discourages silly risks
Reduces failure probability and Capital
Requirements
• Both safety and efficiency
7
Why Isn’t Basel II Good?
• Model Risk
–
–
–
–
Data and assumptions
Response time
Model myopia
Mathematics
• Unspecified Risks
–
–
–
Cyclicality
Strategic/Business
Interest Rate Mismatch
• Supervisory Complexity
• Cost and Distraction
8
Competitive Effects
• Australia v rest of world
–
Relative improvement
• Large banks v other ADIs
–
Both do better
• Continues long term trends
9
Outstanding Issues
• Conversion uncertainty
–
–
–
Schedule
Rules
Applicability
• Australian Rules
–
–
We need to be tougher
But not too tough
10
Summary
•
•
•
•
•
APRA supports Basel II
Safety and efficiency benefits
We are prepared for implementation
Not cheap, easy, or risk free…
But will be good for Australia
11
BASEL II
In the Australian Context
Charles Littrell
Executive General Manager
Australian Prudential Regulation Authority
17 October 2003
12