July 16, 2007
Pillar 3 Disclosure - Prudential Std APS 330 Consultation paper from APRA
As the Basel II saga continues, in some developed countries the implementation is slowly inching past the Pillar 2 Supervisory review & model validation phase towards the Pillar 3 disclosures. In Australia, APRA has released APS 330 - a draft prudential standard for Market disclosure.
Summary: Last month in June, APRA released the market draft prudential standard APS 330 Capital Adequacy: Market Disclosure (APS 330). This sets min. prudential disclosure requirements for locally incorporated ADI’s (Authorized Deposit taking Institutions) and a limited set of (quantitative only) disclosures for foreign owned subsidiaries.
During my Risk modeling days, I was lucky to have the opportunity to interact closely with the Supervision deptt. of a few Central banks that were refining their Risk Assessment and Outlier methodology in preparation for Basel II.
Since then, I have always been a keen follower of the consultation papers released regularly by Supervisors. I find the papers and the the industry responses, very insightful & useful to feel the local pulse, benchmark the Basel II progress & understand the local industry concerns. APS 330 is one such recent paper from the proactive APRA (Australian Prudential Regulation Authority) on Pillar 3.
In summary, the APS 330 std proposes that all ADI's make at least some basic level of disclosure of their capital adequacy and mandates Pillar 3 disclosure for all locally incorporated ADI's in Australia, with minimum requirements.For a locally incorporated and owned ADI’s that have adopted advanced Basel II approaches, the requirements involve full and detailed disclosure broadly consistent with the Pillar 3. For all other ADIs, including foreign-owned subsidiaries, a limited set of (quantitative only) disclosure requirements relating to capital structure, capital adequacy and credit risk exposure is proposed.
The proposed guidance strives for a balance between a pragmatic approach to the Pillar 3 disclosure requirements with due consideration to the market disclosure needs as well as to minimise the reporting burden on the smaller ADIs.
The APS 330 proposal for Prudential disclosure also includes the following specifics on the how to:
- Specific order/layout of disclosures to allow comparison across institutions
- Websites as one of the readily accessible medium/location of the disclosures
- In specific instances, provision for an ADI not to disclosure proprietary and confidential information
I also wonder if the Market Disclosure needs will also eventually trigger the industry adoption of 2 items from my list of 10 items in my blog on Risk mgmt frontier.
1.Standardization of commonly used Risk reporting termswhat I refer to as Risk Mgmt taxonomy.
2.Risk Visualization - Adoption of reports that are visually easy to read and interpret.
The other recent Basel II papers being:(my next blogs)
- APRA revised Basel II advanced approaches, June 13
- APRA revised Basel II securitisation standard July 11
Source: APRA APS 330 Capital Adequacy: Market Disclosure, June 2007
http://www.apra.gov.au/Media-Releases/2007-Media-Releases-Home.cfm
Posted by spachava at 12:47 PM
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July 04, 2007
Basel II journey in US - Notice of Proposed Rulemaking (NPR)
As a keen follower of the Basel II initiatives around the world, it is fascinating to study the local flavors of Basel II approach variations. As many developed economies approach the final Basel II implementation milestones in their respective jurisdictions, the US banks Basel II & Basel IA initiatives are entering final stages of comment and review.
A key consultation being around the Basel II NPR guidance with the formula for LGD computation. My recent relocation to the West Coast, reignited the curiosity about the USA Basel II journey. This blog entry serves as much as a summary note to myself to understand the complexities involved as it serves as a quick summary for others wanting to know where US Basel II is headed.
The US Basel II roadmap proposes the advanced approaches for computing risk-based regulatory capital for the largest US banks numbering around 20, and permits the smaller and mid size domestic banks numbering around 9000 to continue to conform to flavour of Basel I. The Basel II NPR proposal includes a formula to relate LGD and the expected LGD (ELGD), in the Basel II Supervisory review of Capital Adequacy in Pillar II. Some believe that this is overly conservative limiting the capital reduction benefit for the US banks.
Some of the specific concerns on NPR being:
- Poposed safegaurds in NPR that go beyond the BIS Basel II text,including the effect on risk sensitivity that may result from the proposed limit on declines in aggregate capital
- Proposed definition of default and treatment of downturn LGDs
- Retention of the existing leverage ratio
Also in 2006 a group of large US banks jointly requested the US regulators to allow “alternative appropriate methodologies” including standardized approach for Credit Risk and operational risk, as a possible fallback plan.
Early this year in February, the US regulatory Agencies collectively released three interagency supervisory guidance proposals as companion guides to NPR detailing how the Agencies intend to implement the Basel II NPR and sets their expectations for the credit risk and operational risk approaches under the proposed Basel II framework. These 3 proposed guidance were focused on: IRB-A for Credit Risk, AMA for Op risk and the new Pillar II Internal Capital adequacy assessment process (ICAAP). ICAAP should identify and measure material risks, set capital goals related to risks, and provide governane and controls to ensure that internal capital assessments are subject to proper oversight.
The May 29 deadline for the comments on these guidance documents has gone past and the Congress appointed Govt. Accountability Office(GAO) has also given the “Go ahead but with extreme caution” signal for planning the Basel II transition.
Albeit the final journey is yet to start, these developments set the stage for the US Basel II guidance and transition to enter the critical final phase.
Sources: Basel II NPR & Proposed Supervisory Guidance documents from US Agencies:Board (Fed Reserve System), OCC, FDIC, OTS, Treasury.
Posted by spachava at 07:20 AM
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