9. basel ii presentation

TABLE OF CONTENT

3 pillars in basel ii

motives for basel II

Application in VIetnam

1. Motives for basel ii

Problems with Basel I (1988)• Club-rules (OECD) isn’t meaningful in terms of

riskiness• Capital Requirement: One size fits all• Inadequate recognition of advanced CRM such as

CDS/securitization

Objectives• Eliminate regulatory arbitrage by getting RWA right• Provide banks incentives to enhance risk

management

1. Motives for basel II

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Text Liquidity Risk

Reputation Risk

Credit Risk

Market Risk

Operational Risk

2. Three pillars in basel II

  Basel I (1988) Basel II (2004)

Pillar(s) Minimum Capital Requirement (one for all)

- Minimum K requirement- Supervisory Review- Market discipline & disclosure (more flexible)

Risk(s) Credit Risk

Credit Risk (SA, FIRB, AIRB)* SA: based on type of entity, credit rating (S&P, Moody, Fitch)* FIRB: uses loss probability model, prescribed LGD* AIRB: uses loss probability model and LGD modelOperational Risk (BIA, SA, AMA)* BIA: α * Gross Rev.* SA: β * Gross Rev./Unit Line* AMA: measured by its own systemMarket Risk (SA, Internal VaR Model)* VaR is preferred, stress test and scenario analysis

RWA(s) 0~100%, OECD is more preferred0~150% or more, no exclusive rightsTier 2 K is limited to 100% of Tier 1 K

CAR=>=8% =>=8%

  * Simple measure for credit risk* Not risk sensitive* No measure for operational risk

* Significant changes to measure credit risk

basel I vs. basel II

Pillar 1: Minimum capital requirement

 8%

Total Capital:Tier 1 Capital

• Common shareholder equity

• Disclosed Reserves• Non-cumulative perpetual

preferred stocks

Tier 2 & 3 Capital

• Tier 2 cannot exceed 100% tier 1

• Subordinated debts• General loans loss

reserves• Hybrid debt-equity capital

instruments

Pillar 1: Credit riskCredit Risk:• SA

- Based on external credit rating- Apply fixed risk weighting

• IRB (FIRB, AIRB)• CRM (CDS, Securitization)

Pillar 1: Market risk

Pillar 1: Operational risk

IN VIETNAM

Regulatory Framework

BASEL II Implementation

1. Regulatory framework

2005 2014

Decree 457/2005CAR: 8%

(except for foreign bank branches)

  Circular 13/2010: CAR: 9% (all)  Updated Circular 36/2014

1. Regulatory framework

CAR >= 9%

2. BASEL II Implementation

Credit Risk Awareness

Lending activities: 90%

Bad debt ratio is pretty high

Phase 1:2013 -2015

Phase 2:2016 - 2018

THANK YOU FOR YOUR ATTENTION

Q & A