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BASEL I and BASELII: HISTORY OF AN

EVOLUTION

SEP 30, 2015

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HISTORY OF CAPITAL

ADEQUACY RULES IN THEU.S.

1900-late 1930s: Capital to Deposit Ratio(The Ofice o Copt!olle! o the C"!!e#c$%OCC& a'opte' the 10 i#i")

*ate 1930s: Capital to Total +ssets (DC)

..: /o capital !atios (a#s e!e "$i#4

S 6o7e!#e#t o#'s) 1985-late 190s: Capital to Ris +ssets;

Ratio (ED a#' DC), Capital to Total+ssets Ratio (DC)

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BANK SAFETY ANDSOUNDNESS

Capital a'e

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INTERNATIONALREGULATION

19>> asel +cco!' (asel-)

1993 P!oposal: Sta#'a!' ?o'el

199@ ?o'iAcatio#: #te!#al ?o'el

/e asel +cco!' (asel-)

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THE FIRST BASEL ACCORD

The A!st asel +cco!' (asel-)

as coplete' i# 19>>

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WHY BASEL-I WASNEEDED?

The !easo# as to c!eate a le7el

pla$i#4 Ael' o! i#te!#atio#all$acti7e a#s;

a#s !o 'ife!e#t co"#t!iescopeti#4 o! the sae loa#s o"l'ha7e to set asi'e !o"4hl$ the saeao"#t o capital o# the loa#s

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1!! BASEL ACCORD"BASEL-I#

1)The p"!pose as to p!e7e#t i#te!#atio#ala#s !o "il'i#4 "si#ess 7ol"eitho"t a'e

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A NEW CONCEPT: RISKBASED CAPITAL

asel- as haile' o!

i#co!po!ati#4 !is i#to thecalc"latio# o capital !e

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$COOKE% RATIO

/ae' ate! Pete! Cooe (a# o E#4la#'),the chai!a# o the asel coittee)

Cooe RatioBCapital Ris .ei4hte'+ssets>

DeA#itio# o Capital

CapitalB Co!e Capital S"pplee#ta!$ Capital

- De'"ctio#s

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BASEL-I CAPITALREQIRE&ENTS

Capital as set at > a#' as

a'F"ste' $ a loa#Gs c!e'it !isei4ht

C!e'it !is as 'i7i'e' i#to 5cate4o!ies: 0, 10, 20, 50,a#' 100

Coe!cial loa#s, o! e=aple, e!e assi4#e'to the 100 !is ei4ht cate4o!$

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CALCULATION OFREQUIRED CAPITAL

To calc"late !e

Th"s a H100 coe!cial loa# o"l' e"ltiplie' $ 100 a#' the# $ >,!es"lti#4 i# a capital !e

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CORE ' SUPPLE&ENTARYCAPITAL

1# C()* Ca+,a "T,*) I Ca+,a# i) Pai' p Capital

ii) Disclose' Rese!7es (6e#e!al a#' *e4al Rese!7es)

/# S0++**na)2 Ca+,a "T,*) II Ca+,a# i) 6e#e!al *oa#-loss P!o7isio#s

ii) #'isclose' Rese!7es (othe! p!o7isio#s a4ai#st

p!oale losses)

iii) +sset Re7al"atio# Rese!7es i7) S"o!'i#ate' Te! Det (5 $ea!s at"!it$)

7) I$!i' ('ete

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DEDUCTIONS FRO& THECAPITAL

#7este#ts i# "#co#soli'ate'

a#i#4 a#' A#a#cial s"si'ia!$copa#ies a#' i#7este#ts i# thecapital o othe! a#s J A#a#ciali#stit"tio#s

6oo'ill

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DEFINITION OF CAPITAL IN

BASEL-I"1#

TER 1

Pai'-"p sha!e capitalcoo# stoc

Disclose' !ese!7es (le4al !ese!7es,s"!pl"s a#'o! !etai#e' p!oits)

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DEFINITION OF CAPITAL IN

BASEL-I"/#

TIER /

#'isclose' !ese!7es (a# has a'e a p!oAt "t this

has #ot appea!e' i# #o!al !etai#e' p!oAts o! i#4e#e!al !ese!7es o the a#K)

+sset !e7al"atio# !ese!7es (he# a copa#$ has a#asset !e7al"e' a#' a# i#c!ease i# 7al"e is !o"4ht toacco"#t)

6e#e!al P!o7isio#s (c!eate' he# a copa#$ is aa!ethat a loss a$ ha7e occ"!!e' "t is #ot s"!e o the

e=act #at"!e o that loss) 6e#e!al loa#-loss !ese!7es I$!i' 'ete

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RISK WEIGHT CATEGORIESIN BASEL-I "1#

34 R,56 W*,78:

Cash,

Clais o# ce#t!al 4o7e!#e#ts a#' ce#t!ala#s 'e#oi#ate' i# #atio#al c"!!e#c$a#' "#'e' i# that c"!!e#c$

Othe! clais o# OECD co"#t!ies, ce#t!al

4o7e!#e#ts a#' ce#t!al a#s Clais collate!aliLe' $ cash o OECD

4o7e!#e#t sec"!ities o! 4"a!a#tee' $OECD 6o7e!#e#ts

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RISK WEIGHT CATEGORIESIN BASEL-I "/#

/34 R,56 W*,78

Clais o# "ltilate!al 'e7elope#t a#s a#'

clais 4"a!a#tee' o! collate!aliLe' $ sec"!itiesiss"e' $ s"ch a#s

Clais o#, o! 4"a!a#tee' $, a#s i#co!po!ate'i# the OECD

Clais o#, o! 4"a!a#tee' $, a#s i#co!po!ate'i# co"#t!ies o"tsi'e the OECD ith !esi'"alat"!it$ o "p to o#e $ea!

Clais o# #o#-'oestic OECD p"lic-secto!e#tities, e=cl"'i#4 ce#t!al 4o7e!#e#t, a#'clais o# 4"a!a#tee' sec"!ities iss"e' $ s"che#tities

Cash ites i# the p!ocess o collectio#

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RISK WEIGHT CATEGORIESIN BASEL-I "9#

3 4 R,56 W*,78

*oa#s "ll$ sec"!itiLe' $ o!t4a4e o#!esi'e#tial p!ope!t$ that is o! ill eocc"pie' $ the o!!oe! o! that is!e#te'K

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RISK WEIGHT CATEGORIESIN BASEL-I ";#

1334 R,56 W*,78

Clais o# the p!i7ate secto!

Clais o# a#s i#co!po!ate' o"tsi'e the OECD ith!esi'"al at"!it$ o o7e! o#e $ea!

Clais o# ce#t!al 4o7e!#e#ts o"tsi'e the OECD("#less 'e#oi#ate' a#' "#'e' i# #atio#al c"!!e#c$)

Clais o# coe!cial copa#ies o#e' $ the p"licsecto!

P!eises, pla#t a#' e

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RISK WEIGHT CATEGORIESIN BASEL-I "#

A Na,(na D,5

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CRITIQUE OF BASEL-I

asel- acco!' as c!iticiLe'

i) o! tai#4 a too siplisticapp!oach to setti#4 c!e'it !isei4hts

a#'ii) o! i4#o!i#4 othe! t$pes o !is

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THE PROBLE& WITH THE

RISK WEIGHTS

Ris ei4hts e!e ase' o# hat the

pa!ties to the +cco!' #e4otiate' !athe!tha# o# the act"al !is o each asset

Ris ei4hts 'i' #ot Mo !o a#$pa!tic"la! i#sol7e#c$ p!oailit$

sta#'a!', a#' e!e o! the ost pa!t,a!it!a!$K

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OPERATIONAL AND OTHERRISKS

The !e

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19 PROPOSAL:STANDARD &ODEL

Total RisB C!e'it Ris ?a!et Ris

?a!et RisB 6e#e!al ?a!et RisSpeciAc Ris

6e#e!al ?a!et RisB #te!est RateRis C"!!e#c$ Ris E

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1> &ODIFICATION:INTERNAL &ODEL

#te!#al ?o'el Nal"e at Ris

?etho'olo4$

Tie! Capital (O#l$ o! ?a!et Ris)

i) *o#4 Te! s"o!'i#ate' 'et ii) Optio# #ot to pa$ i i#i"

!e

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BANKS@ OWN CAPITALALLOCATION &ODELS

+'7a#ces i# tech#olo4$ a#' A#a#cealloe' a#s to 'e7elop thei! o# capitalallocatio# (i#te!#al) o'els i# the 1990s

This !es"lte' i# o!e acc"!ate calc"latio#so a# capital tha# possile "#'e! asel-

These o'els alloe' a#s to ali4# the

ao"#t o !is the$ "#'e!too o# a loa#ith the o7e!all 4oals o the a#

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INTERNAL &ODELS ANDBASEL I

Internal modelsallo a#s to o!e

A#el$ 'ife!e#tiate !iss o i#'i7i'"alloa#s tha# is possile "#'e! asel-

Ris ca# e 'ife!e#tiate' ithi# loa#cate4o!ies a#' etee# loa# cate4o!ies

+llos the applicatio# o a capitalcha!4e; to each loa#, !athe! tha# eachcate4o!$ o loa#

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VARIATION IN RISK QUALITY

a#s 'isco7e!e' a i'e 7a!iatio# i# c!e'it capital cate4o!$

#te!#al o'els calc"latio#s ca# lea' to

capital allocatio#s o# coe!cial loa#sthat 7a!$ !o 1 to 30, 'epe#'i#4o# the loa#Gs estiate' !is

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CAPITAL ARBITRAGE

a loa# is calc"late' to ha7e a#

internalcapital cha!4e that is locopa!e' to the > sta#'a!', thea# has a st!o#4 i#ce#ti7e to"#'e!tae !e4"lato!$ capital a!it!a4e

Sec"!itiLatio# is the ai# ea#s "se'especiall$ $ KSK a#s to e#4a4e i#!e4"lato!$ capital a!it!a4e

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EA&PLES OF CAPITALARBITRAGE

+ss"e a a# has a po!tolio o coe!cial loa#s iththe olloi#4 !ati#4s a#' i#te!#all$ 4e#e!ate' capital!e

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NEW APPRACH TO RISK-BASED CAPITAL

$ the late 1990s, 4!oth i# the "se o!e4"lato!$ capital a!it!a4e le' the aselCoittee to e4i# o! o# a #e capital!e4ie (asel-)

Efo!t oc"se' o# "si#4 a#sG i#te!#al!ati#4 o'els a#' i#te!#al !is o'els

"#e 1999: Coittee iss"e' a p!oposalo! a #e capital a'e

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BASEL-II

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BASEL-II

asel- co#sists o th!ee pilla!s:

?i#i" capital !e

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I&PLE&ENTATION OF THEBASEL II ACCORD

plee#tatio# o the asel !aeo!co#ti#"es to o7e o!a!' a!o"#' the 4loeK +si4#iAca#t #"e! o co"#t!ies a#' a#s al!ea'$iplee#te' the sta#'a!'iLe' a#' o"#'atio#app!oaches as o the e4i##i#4 o 200K

# a#$ othe! F"!is'ictio#s, the #ecessa!$i#!ast!"ct"!e (le4islatio#, !e4"latio#, s"pe!7iso!$4"i'a#ce, etc) to iplee#t the !aeo! iseithe! i# place o! i# p!ocess, hich ill allo a4!oi#4 #"e! o co"#t!ies to p!ocee' ith

iplee#tatio# o asel Gs a'7a#ce' app!oachesi# 200> a#' 2009K

This p!o4!ess is tai#4 place i# oth aselCoittee ee! a#' #o#-ee! co"#t!iesK

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BASEL-II "1#

?i#i" Capital Re

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BASEL-II "/#

PILLAR I:?i#i" Capital Re

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BASEL-II "9#

Pilla! is t!$i#4 to achie7e

the a#Gs o# i#te!#al calc"latio#ssho that the$ ha7e e=t!eel$ !is$,loss-p!o#e loa#s that 4e#e!ate hi4hi#te!#al capital cha!4es, thei! o!al!is-ase' capital cha!4es sho"l' also e

hi4h

*ieise, loe! !is loa#s sho"l' ca!!$loe! !is-ase' capital cha!4es

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BASEL-II ";#

C!e'it Ris ?eas"!ee#t

1) Sta#'a!' ?etho': si#4 e=te!#al !ati#4 o!

'ete!i#i#4 !is ei4hts

2) #te!#al Rati#4s ?etho' (R)

a) asic R: a# cop"tes o#l$ thep!oailit$ o

'ea"lt ) +'7a#ce' R: a# cop"tes all !is

copo#e#ts

(e=cept efecti7e at"!it$)

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BASEL-II "#

Ope!atio#al Ris ?eas"!ee#t

1) asic #'icato! +pp!oach

2) Sta#'a!' +pp!oach

3) #te!#al ?eas"!ee#t +pp!oach

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BASEL-II ">#

Pilla! also a''s a #e capitalcopo#e#t o! operational risk

Ope!atio#al !is co7e!s the !is oloss '"e to s$ste !ea'o#s,eplo$ee !a"' o! isco#'"ct, e!!o!si# o'els o! #at"!al o! a#-a'e

catast!ophes, ao#4 othe!s

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BASEL-II "#

PILLAR /:S"pe!7iso!$ Re7ie P!ocess

1) a#s a!e a'7ise' to 'e7elop a# internalcapital assessment processa#' set ta!4etso! capital to coe#s"!ate ith thea#Gs !is p!oAle

2) S"pe!7iso!$ a"tho!it$ is !espo#sile o!e7al"ati#4 ho ell a#s a!e assessi#4thei! capital a'e

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BASEL-II "!#

PILLAR 9:?a!et Discipli#e

+is to !ei#o!ce a!et 'iscipli#e

th!o"4h e#ha#ce' 'isclos"!e $ a#sKt is a# i#'i!ect app!oach, that ass"es

s"ficie#t copetitio# ithi# thea#i#4 secto!K

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ASSESSING BASEL-II

To 'ete!i#e i the p!opose' !"les

a!e liel$ to $iel' !easo#ale !is-ase' capital !e

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RESULTS OF

QUANTITATIVE I&PACTSTUDIES "QIS#

Res"lts o the S st"'ies ha7e

ee# t!o"li#4 .i'e si#4s i# !is-ase' capital

!e

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I&PLICATIONS OF BASEL-

II "1#

The p!actices i# asel !ep!ese#tse7e!al ipo!ta#t 'epa!t"!es !o the

t!a'itio#al calc"latio# o a# capital

The 7e!$ la!4est a#s ill ope!ate"#'e! a s$ste that is 'ife!e#t tha#that "se' $ othe! a#s

The iplicatio#s o this o! lo#4-te!copetitio# etee# these a#s is"#ce!tai#, "t e!its "!the! atte#tio#

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I&PLICATIONS OF BASEL-II

"/#

asel Gs p!oposals !el$ o# a#sG o#i#te!#al !is estiates to set capital

!e

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I&PLICATIONS OF BASEL-II

"9#

Despite asel Gs

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PRO-CYCLICALITY OF THE

CAPITAL ADEQUACYREQUIRE&ENT

# a 'o#t"!#, he# a a#Gs capital ase isliel$ ei#4 e!o'e' $ loa# losses, its e=isti#4

(#o#-'ea"lte') o!!oe!s ill e'o#4!a'e' $ the !ele7a#t c!e'it-!iso'els, o!ci#4 the a# to hol' more capitala4ai#st its c"!!e#t loa# po!tolioK To thee=te#t that it is 'ific"lt o! costl$ o! the a#to !aise !esh e=te!#al capital i# a' ties, it

ill e o!ce' to c"t ac o# its le#'i#4acti7it$, the!e$ co#t!i"ti#4 to a o!se#i#4o the i#itial 'o#t"!#K;