Basel Committee maintains calibration of Basel II Framework
24 May 2006
The Basel Committee on Banking Supervision has reviewed the calibration of its capital framework for banking organisations (International convergence of capital measurement and capital standards: a revised framework, better known as the Basel II Framework) and decided to maintain the current calibration (1.06 scaling factor for credit risk-weighted assets). The review was based on the results of the fifth Quantitative Impact Study (QIS 5), and also QIS 4 carried out in some jurisdictions.
At its meeting today, hosted by the Deutsche Bundesbank in Berlin, the Committee expressed appreciation for the substantial efforts that banks and national supervisors have devoted to this exercise, which represents a major milestone in the implementation of Basel II on a global basis.
The QIS results for the G10 countries show that minimum required capital under Pillar 1 of the Basel II Framework (including the scaling factor) would decrease relative to the current Accord. For Group 1 banks (internationally active and diversified institutions with Tier 1 capital of more than EUR 3 billion), minimum required capital would decrease on average by 6.8%, based on the results for the approach to credit and operational risk that participating banks are likely to adopt after implementation.
"The Committee expects that in the course of implementing the Basel II Framework, supervisors will ensure that banks maintain a solid capital base throughout the economic cycle," noted Mr Jaime Caruana, Chairman of the Basel Committee and Governor of the Bank of Spain. "Mechanisms are in place to achieve this goal."
QIS 5 results
Of the two internal ratings-based approaches, the advanced approach shows a greater reduction (-7.1%) in minimum required capital than the foundation approach (-1.3%). Minimum required capital under the standardised approach would increase by 1.7% for Group 1 banks. However, very few G10 Group 1 banks are expected to adopt this approach. Group 2 banks show a greater reduction in minimum required capital under all approaches, in particular due to their higher proportion of retail exposures. The results for banks in non-G10 countries that participated in the study show substantial dispersion both within and between countries, mostly due to the specialised business profile of certain banks and particularities in national implementation. To the extent that banks' risk profiles are similar, their QIS 5 results appear to be broadly in line with the results for the banks in G10 countries.
Although the Committee believes that the quality of QIS data submitted by banks has significantly improved since the previous exercise, the implementation of loss-given-default estimates reflecting economic downturn conditions1 and issues relating to the Committee's revised trading book rules2 need further improvement. The Committee also conducted an analysis of the cyclicality of the Framework. Macroeconomic conditions prevailing in most countries at the time of QIS 4 and 5 were more benign than during QIS 3. The Committee concluded that this influenced the results, but currently available information does not allow the impact to be quantified with precision.
Also taking into account the remaining uncertainties in the data, the Committee agreed that no adjustment of the scaling factor of 1.06 for credit risk-weighted assets under the internal ratings-based approaches would be warranted at this stage. Sound validation procedures are key to ensure that implementation of the Basel II Framework properly reflects banks' underlying risk. In the course of implementation, while banks are becoming familiar with the greater risk sensitivity of the Basel II Framework, they should exercise caution in the way that minimum required capital influences their decisions on actual capital levels.
The Committee intends to publish a detailed report on the outcome of QIS 5 in G10 and non-G10 countries in June 2006. National authorities will continue to monitor capital requirements during the period of implementation of the Basel II Framework. The Committee will monitor national experiences with the Framework.
1 Basel Committee on Banking Supervision, Guidance on the estimation of loss-given-default (paragraph 468 of the framework document), July 2005.
2 Basel Committee on Banking Supervision, The application of Basel II to trading activities and the treatment of double default effects, July 2005.