basel ii

Mohammed Alshetwey's Project Poly ID 0349913

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FRE 6791Prof: Roy Freedman

BASEL II


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• Basel II is the second of the Basel Accords.

• The purpose of Basel II is to create a standard about how much capital need to put aside against operational risks.

• Basically , these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold.


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BASEL II aims• Ensuring that capital allocation is

more risk sensitive.• Separating operational risk from

credit risk, and quantifying both.• Attempting to economic and

regulatory capital more closely to reduce the scope for regulatory arbitrage.


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Basel II concepts

• (1) Minimum capital requirements.• (2) Supervisory review.• (3) Market discipline.


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Minimum capital requirements

The first concept deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces:

• credit risk.• Operational risk.• market risk.


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Supervisory review• The second concept deals with the

regulatory response to the first one.• Giving regulators much-improved 'tools'

over those available to them.• It also provides a framework for dealing

with all the other risks a bank may face.• Such as liquidity risk and legal risk


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Market discipline

• The third concept greatly increases the disclosures that the bank must make.

• This is designed to allow the market to have a better picture of the overall risk position of the bank.

• To allow the counterparties of the bank to price and deal appropriately.


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How to calculate the risk?

• The new Accord maintains the current definition of total capital and the minimum 8% requirement.


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Standardized Approach

• Organization is treaded as a single entity

• Single Factor Calculation ﾐ Gross Income

• Risk is represented Alpha (α)

• Costly.


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Advanced Measurement Approach

• Organization divided into Business Units.

• The Indicator varies between Business Units.

• Risk is represented in each Business Unit by a Beta .

• Less Costly


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Example (1)

Standardized Approach:

= 30 “Basel Standard”• Gross Income = 100 million $• Capital Requirement = 30 million $


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Example (2)

Advanced Measurement approach:

• = 8 % “Minimum”• Gross Income = 100 million $• Capital requirement = 8 million $


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Benefits of using AMA

• Assume 10 % Return on Investment

• Capital Req. saving = 8 Million $

• Opportunity Benefit = 0.8 million $


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Summarizing

• Basel II is good for diversified the risk approaches.

• Basel II gives a specific ratio to each risk.• They have now proposed changes in

America's version of Basel 2 that will delay its implementation until at least January 2009.

• Note: Best practices doesn’t work always.


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Thank you

Happy Holiday


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Refrences

• www.bis.org

• http://en.wikipedia.org/wiki/Basel_2

• Mr. David Coriat. A project on Basel II

• http://inductive.net/fe/675/samples/

http://www.bis.org/

http://en.wikipedia.org/wiki/Basel_2

http://inductive.net/fe/675/samples/

basel ii

Economy & Finance