1. The Basel Committee’s Approach
cEng
The Basel Committee’s Approach
Measures taken by International Organisations and Central Banks to establish a sound banking system
Damascus 2 July 2005
Karl F. Cordewener
Deputy Secretary General

2. cEng Basel Committee – an overview
Established at the end of 1974 by Central Bank Governors of G10
Committee started as forum for discussion and information-sharing among banking supervisors
Over time, it has become standard setter
Most noticeable when 1988 Capital Accord was published

3. cEng Basel Committee – its main goals
Improve the quality of banking supervision worldwide
Promote more effective corporate governance
Close gaps in international supervisory coverage
Level the playing field among international banks
Establish a safer and sounder banking system as a precondition for sustainable growth of an economy

4. cEng Committee‘s worldwide focus
Committee tries to address issues relevant for all jurisdictions worldwide
Committee has developed over time close cooperation with non-members
Core Principles Liaison Group (16 jurisdictions, IMF, WB)
Sixteen Regional Groups of Banking Supervisors
International Conferences of Banking Supervisors (ICBS)

5. cEng Principal policies developed by the Committee
Core Principles for Effective Banking Supervision
Capital Adequacy Framework
Principles for sharing supervisory responsibility for banks’ foreign establishments
Many other policy papers, e.g. risk management guidelines, on the Committee’s website (

6. cEng
Core Principles
Committee released in 1997 a set of Core Principles for Effective Banking Supervision
Developed in close cooperation with supervisors from non-member countries
Comprehensive set of supervisory guidelines
Methodology issued in 1999
IMF and World Bank monitor implementation

7. cEng
Capital Adequacy
1988 Capital Accord established minimum capital requirements for banks
In 1998, Committee started revising the 1988 Accord, in order to make
It more risk sensitive and
More consistent with current best practice in banks’ risk management
Capital
Risk weighted assets
Minimum ratio:
 8 %

8. cEng What are the basic aims of Basel II?
To provide the right incentives for sound risk management
To deliver a prudent amount of capital in relation to the risk that is run
To maintain a reasonable level playing-field for all banks to operate in

9. cEng Main elements of Basel II Based on three pillars
Specific minimum capital requirements
Supervisors‘ evaluation of banks‘ own assessment of risks
Disclosure requirements to foster market discipline
Revised capital requirements for credit risk, new ones for operational risk, and hardly changed ones for market risks
Menu of approaches for the measurement of risks
Introduction of increasingly reliable estimates of the drivers of credit risk
More emphasis on operational risk

10. Pillar 2 – Supervisory review process
cEng
Pillar 2 – Supervisory review process
Pillar 2 is based on four key principles:
Banks‘ own assessment of capital adequacy
Supervisors‘ review of banks‘ capital adequacy assessment
Supervisory response
Capital above regulatory minima
Supervisory intervention

11. Pillar 3 – Market discipline
cEng
Pillar 3 – Market discipline
Another lever to strengthen the safety and soundness of the system
Complements regulatory capital requirements and the supervisory review process
Reliable and timely information allowing well founded counterparty risk assessments
Strong incentive for banks to conduct business in a safe, sound and efficient manner

12. cEng Implementation - the current process Implementation means
transforming the framework into enforceable rules and
adjust it to national circumstances
Time schedule for implementation
End 2006
End 2007 ?
Committee member implementation of simpler approaches
Committee member implementation of advanced approaches
Extended transition period for other countries

13. cEng Time schedule for implementation
When should Basel II be implemented?
Only national authorities can answer this question
Timing should be determined by a country‘s own circumstances
Basel II may be a lesser priority compared to other efforts
For a successful implementation, greater cooperation among supervisors across jurisdictions is necessary