Title: Basel II
1Basel IIs Impact in the Emerging European
Markets 15th International Banking Congress
Saint Petersburg, June 7-10, 2006
2Outline of presentation
- Basel II update
- Impact of Basel II
- The EBRDs role
3Basel 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. -
4Basel 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
5Basel II in one picture
6Impact of Basel II
- On
- Regulatory capital
- Bank behaviour
- Industry competition and consolidation
- Macro economy
- Special issues in CEEs
7Impact of Basel II Capital the biggest question
Individual/regional
Global
8Hungary QIS3 and QIS5 outcomes
TOTAL
Op risk
Credit risk
TOTAL
9Summary
- Advanced economies capital requirement of banks
with good risk management and reasonable
portfolios will decline - Emerging Markets the results will be very diverse
- Winners
- 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 - Losers
- 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
10Impact on bank behaviour
- Big improvement in risk 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
11Impact 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
12Impact 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)
13Special 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
14The Home-Host Supervisory Issue
- Basel IIs 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 countrys 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
15Special Issue Basel II provides for more
mitigation higher level of protection
Level of protection
Basel II
Higher Capital Relief
Basel I
Range of CRM instruments
16What are these CRMs? Well- known 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
17Why is the EBRD interested in all this?
- 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
18What can the EBRD do?
- 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.
19 ????????? ????
?????? ??????? ???? ??????? ?????? ? ???????? ??. ????? nagyp_at_ebrd.com ???. (44 207) 338 7861 ?????? ??? ????????? ????????? ?????? ?????????? ??????????? , ?????? ??. ????? tesseymn_at_mos.ebrd.com ???. (7 495) 787 1111