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Basel Committee 1988 Accord

• Focus mainly on credit risk
• Later amended to include market risk
• Set minimum capital ratios

New Basel Capital Accord

• A more risk-sensitive approach to regulatory capital measurement
• Focus on overall risk management
• Broadened scope to include operational risk
• New asset class included in the calculation - advised line
• New categories - Specialized lending, securitizations, equity investments and investments in related entities, retail and SME
• New Analysis - Repo-style transactions

Objectives of New Capital Accord

• Produce a flexible structure and provide incentives for banks to improve risk management
• Refine the regulatory capital charge to include a more granular measure of risk
• Framework compatible with economic capital
• Eliminate arbitrage opportunities (e.g. 364-day revolvers)

Benefits to the Industry

• A more risk sensitive approach to regulatory capital estimation that minimizes existing regulatory capital arbitrage
• Encourages better risk management practices through the three mutually reinforcing pillars
• Provides incentives to invest in credit risk management infrastructure

US Regulatory Status

• U.S. regulatory agencies announced a delay of at least one year in implementation of the Basel II framework.
• The Notice for Proposal Rulemaking expected first quarter 2006
• Capital floors in place for at least three years instead of two

Basel II Basic Structure: Three “Pillars”

•  Pillar I: Capital Adequacy. Prescribes Regulatory Capital based on Economic Modeling
• Pillar II: Regulatory Oversight. Evaluates each bank and adjusts general requirements as necessary
• Pillar III: Market Discipline. Prescribes “uniform” public disclosure of each bank’s risk profile