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COREP&

The New Capital Adequacy Framework

Madrid 2005

BASEL II / CAD 3

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Outline

Why Basel II & CAD 3 Basics of the future directive COREP

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What is it?

Banking Business is a global business

Large amounts of money are exchanged daily

Systemic importance

Need for common rules to avoid a global crisis

=> Basel Committee

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Solvency Ratio

Capital Adequacy Framework Minimum requirements to run a Bank

The most well-known is the: Cooke Ratio

Own Funds / Lending > 8%

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From Basel I to Basel II

Objectives of the new Basel capital accord :

Enhance the sensivity of capital requirements to the degree of risk involved in banks’ positions and activities

Encourage banks to improve their risk measurement and management systems

Increase the role of banking supervisors and the role of market discipline

Constitute a more comprehensive approach to addressing risks the banks are exposed to

Promote safety and soundness in the financial system as well as competitive equality

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II - Structure of the new accord

ThreePillars

Minimum capitalrequirements

Supervisory reviewprocess

Market discipline

Risk weightedassets

Definition ofcapital

Credit riskOperational

riskMarketrisks

Standardised Approach

InternalRatings-based

Approach

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A - Pillar 1

Minimum capital

requirements

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Minimum capital requirements

Credit Risk

Market Risk

Regulatory Capital

Revised Standardized Approach

Standardized Approach

Internal Models Approach

8 %

Foundation IRBA

Advanced IRBA

Operational risk

Basic Indicator Approach

Standardized Approach

Adavanced Measurement Approach

or

or

or

or

+

+

or

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Evolutionnary approachesS

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Capital incentives to move to more advanced approaches

Decreasing capital charges

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Operational risk

In line with the approach to credit risk and market risk, several options are proposed to minimum capital requirements for OpR

Evolutionnary approaches and capital incentives to move to the most advanced approach (AMA)

Basic Indicator Approach (BIA)

The Standardised Approach (TSA)

Advanced Measurement Approach (AMA)

Increasing management standard

Increasing capital charges

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3 - Market risk

Treatment remains unchanged, that is 2 options available :

A standardised approach (for specific risk capital requirements, risk weights will be based on the external assessment of the issuer)

An internal models approach (VaR)

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B - Pillar 2

Supervisory review process

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Supervisory review process

Pillar 2 is intended :

to achieve a level of capital commensurate with a bank’s overall risk profile

to encourage banks to develop and use better risk management techniques in monitoring and managing their risks

Only very limited impact on COREP

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C - Pillar 3

Market discipline

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Market discipline

Pillar 3 is intended to provide investors with reliable and timely information to understand a bank’s risk profile

Enhance role of market participants in encouraging banks to hold adequate levels of capital

Pre-condition for the use of some methodologies (Internal ratings-based approaches, AMA)

Qualitative and quantitative disclosures (information on methodology and key inputs, e.g. explanation of structure of internal rating system and PD, LGD assumptions,…)

Will not be covered by COREP

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COREP

A ratio has been defined

Need to set up a reporting to monitor its application

COREP

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What has been done

An informal initiative, followed by an official working group 9 European Countries, gathered on a voluntary basis to

study the feasibility of a common EU reporting. Its main conclusions were presented to the CEBS on

July 1st. The CEBS agreed that a common reporting was feasible and highly desirable and the COREP Group was set up.

A Draft Framework was designed and included A proposed architecture, with Draft reporting templates attached, and Propose an IT Solutions.

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Proposed architecture

A: Data deemed necessary by all supervisors

B: Country Specific Data(such as Specific Tier 1 instruments)

A+B = Common EU Reporting

C: Local or Sector-wide taxonomies

(Developped under the same standard as the Common Reporting)

D: Country specific requirement outside our scope

Reporting

D4

C1

C2

C3

C4

B 3B 2

B 1

AD2

D3

D1