institute seminar on the impact of basel ii a european perspective on basel ii implementation...

Institute Seminar on the Impact of Basel II

A European Perspective on Basel II implementation

Institute of International BankersNew-York

Danièle Nouy | 11 December 2007

New York, 11 December 2007 | Danièle Nouy 2

Outline

1. Moving from Basel 1 to Basel 2

2. Key challenges raised by the implementation of Basel II in Europe

3. CEBS responses:

-Phase I: Guidelines,

-Phase II: Shift to implementation.

Objective : Create a virtuous circle for a smooth, efficient and consistent implementation of Basel II


CEBS’ role

Main tasks:

• Advice the Commission on banking policy issues,

• Promote consistent implementation of the EU legislation and convergence of supervisory practices,

• Exchange information and enhance supervisory cooperation.

Objectives:

Promote cross-border supervisory cooperation and safety and soundness of the EU financial system through:

• Effective regulation,

• Efficient and cost-effective approaches to supervision of cross-border groups,

• Good supervisory practices,

• Level playing field and proportionality.


1- Moving from Basel I to Basel II - What’s new?

• Three pillars with checks and balances;

• Complex in detail but clear purpose and architecture;

• Based on the best practices of the industry => It is an efficient regulation from an economic perspective;

• Flexible framework for both small and big banks: “Proportionality” is the magic word.

3 pillars

Minimum Capital

Requirements

Regulatory view

Supervisory review and evaluation

(SREP)+

Banks’ internal view (ICAAP)

Market discipline

Market view

Credit riskMarket riskOperational

risk

Supervisory judgment

Disclosure requirements


2- Key challenges in the implementation of Basel II 1) Potential divergence in national implementation

• Options and national discretions;

• Additional layers of national rules (“goldplating”);

• Different interpretations.

2) Complex and fragmented supervisory process

• Misalignment between legal and operational structures in banking groups challenge to supervisory process;

• Validation and Art. 129 of the CRD;

• Supervisory review process for Pillar 2.

3) Administrative costs for compliance


3- Efforts to address implementation issues

Phase I: Guidelines

• Supervisory disclosure, for enhanced transparency of the process and outcome;

• validation of advanced approaches for credit and operational risk (high level principles not enough to achieve convergence);

• Common (but not fully harmonised) reporting frameworks (COREP and FINREP);

• Structured use of supervisory judgment: Supervisory Review Process (Pillar 2).

Joint effort from CEBS and Commission to ensure consistent interpretation of Basel 2 in Europe.



A CRD Transposition Group

• Joint effort of CEBS and European Commission to ensure a consistent interpretation and implementation of the CRD provisions and to enhance transparency.

• Answers are published on the websites of CEBS and the European Commission.

Statistics

Questions received so far: 287

Responses published as of mid October: 261



Example: Guidelines on validation

• Need for common approaches allowing both institutions and their supervisors to make appropriate preparations and pave the ground for final decision;

• Extensive involvement of supervisors from all Member States.

A common understanding on how supervisory authorities can deal with IRB or AMA applications.



Example: Guidelines on Pillar 2

•Set of guidelines covering:

• The application of the Supervisory Review Process -SREP- under Pillar 2,

• Concentration risk, interest rate risk in the banking book and stress testing.

•… And work in progress on some specific points including:

• The practical aspects of home-host cooperation in SREP,

• The methodologies for assessing claimed diversification benefits and Capital allocation…



Phase II: The shift to implementation

• Enhanced coordination and cooperation obtained by:

– Operational networking: e.g. networks of supervisors,

– Developing new tools, in particular delegation of tasks, joint EU examinations, mediation, common training, staff exchanges … to promote a common EU supervisory culture.

• Market pressure:

– Supervisory disclosure, as a tool for market pressure,

– Peer review.



Operational networking: What do we mean?The implementation of the CRD into day-to-day practices and supervisory decision give rise to a number of issues:

• Technical issues,

• Consistency issues.

Operational networking is about creating a stable connection between national supervisors to address practical issues:

• Colleges of supervisors, supported by:

• A line function: connection between colleges of supervisors,

• A support function: network of experts on specific topics (e.g. reporting, validation etc).

Industry proposal for the “Lead supervisor model”.


Operational networking

Line function: SON

The target is to establish an operational network of line supervisors in charge of day-to-day supervision of cross-border groups

• Objective: identifying and addressing Basel 2 implementation issues in a bottom-up fashion,

• First areas of attention: working of colleges, identification and prioritisation of IRBA and AMA validation issues, Pillar 2 cross border issues,…

• Deliverables:

– A best practices paper on the functioning of colleges of supervisors,– Templates for written arrangements for banking groups, – Analyses on the practical implementation of article 129 of the CRD,– As well as collection of Pillar 2 cross-border processes and issues.

Dialogue with the Industry “Operational Network Platform”.


Operational networking

Support function: NOVI – Validation and reporting networks

• For example : validation experts, two strands:

• credit risk, and • operational risk.

• Tasks: follow-up work resulting from the guidelines on validation:

• Exchange information on technical validation issues,• Suggest areas where further input from CEBS is deemed

necessary,• And, where necessary, conduct surveys of good practices on

validation issues.

• Similar approach in the area of reporting (FINREP and COREP networks).


New tools - Supervisory disclosure

Links to national websitesfor more detailed information


New tools - Peer pressure: a new mechanism …

• Benchmarking based on objective assessment criteria,

• A comply or explain approach,

• Transparency.


… To create a virtuous circle

2-Practicalapplication in

Member States

3-Monitoring and

updating

1-CEBSGuidelines

Consistent implementation


Strengthening the EU dimension

• Debate under way on the “review of the so-called Lamfalussy

process”

• CEBS issuing proposals for strengthening the Lamfalussy

approach by improving:

– Regulatory convergence (for example “sunset clauses for

national options and discretions),

– Supervisory convergence, as well as

– The role and working procedures of EU committees.



Supervisory convergence

• Ex ante definition of convergence targets:

-”Soft convergence”: converge on principles, with some flexibility,

- “Vertical convergence”: group specific convergence, for cross-border groups,

-”Hard convergence”: country-neutral approach, complete uniformity.

• … And assessment of the outcome vis à vis the selected convergence target.



The role and working procedures of EU committees

• Reviewing the mandates: EU and national,

• Possibility of majority voting, coupled with peer review and the “comply or explain principle”,

• No EU-wide legally binding tool at supervisory level, but guidelines, standards and recommendations linked to different convergence targets.

• Learning from the US model: the Federal Financial Institutions Examination Council - FFIEC.

A decentralised, but integrated system.


Conclusion

• A lot of efforts to create the tools,

• Feedback from market participants rather positive but room for

improvement,

• Need to translate the convergence efforts into the day-to-day

practices,

• Global perspective, beyond EU,

• Increased need for effective and regular dialogue with market

participants who should stay fully involved in the process.

institute seminar on the impact of basel ii a european perspective on basel ii implementation...

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