• What is Basel II? • Changes to Basel II pillar 1 • Suggestions for Basel III • Discussion
• International framework • Not compulsory • Domestic implementation by FINMA
• ERV (Eigenmittelverordnung & Risikoverordnung) • FINMA circular
Minimum capital requirements
The supervisoryreview process
Disclosure proposals for pillar 1 & 2
Pillar 1: minimum capital
Balance Sheet A Loans P Deposits
Equity required capital
Sum of credit risk-weightedassets + (capital charges for market risk + operational risk) x 12.5
Pillar 1: Minimum capital calculation
• Standard approach • Internal ratings-based (IRB)
Market risk • Standard approach
• Internal models (V-a-R)
• Basic indicator approach • Standardised approach
To determine regulatory capital
Pillar 1: Credit risk
Standard approach • Internal ratings-based (IRB) Internal system which rates borrower (retail, companies, sovereigns) examples of rating factors: • soft (management) • hard (debt rate, income, income rate)
CreditAssessment Based on external ratings (S&P, Moody‘s)
• Internal risk weights
Pillar 2: The supervisory review process
Enough equity capital?Additional capital required above the 8% mark?
Judge management and its risk management practices.
Advises Banks for better risk management processes.
Recognise critical factors early enough andstep in.
Pillar 3: Disclosure
Banks disclose information to other market participants => To enhance market discipline => Transparency on internal models used for assessment of required capital
Subprime crisis 07/08
Proposed changes to Basel II
• Strengthened risk coverage of capital framework • Quality, consistency & transparency of capital base
• Leverage ratio