Transcript Slide 1

How the FSA is implementing Basel II
Michael Ainley
Head of Wholesale Banks and
Investment Firms Department
UK Financial Services Authority
17/07/2015
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Outline
• Basel II, Capital Requirements Directive
and the FSA Handbook
• Pillar 1
• Pillar 2 and Pillar 3
• Other important elements
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Basel II
• What is the Basel II agreement?
– Closer alignment of regulatory capital and economic
risks;
– Incentives to improve risk management;
– Maintenance of overall level of capital in the system.
• What does it consist of?
– Pillar 1: minimum capital standards
– Pillar 2: supervisory review process
– Pillar 3: market discipline
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Basel II
• Basel agreements and related publications do
not have the force of law; and
• They are of limited application:
– Scope: G:10
– Legal Basis: None
– Coverage: Internationally active banks
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CRD
• Across the EU the Basel II agreement is given legal “life”
by the Capital Requirements Directive:
– Scope: 27 EU Member States;
– Legal Basis: EC Directive
– Coverage: Credit institutions and investment firms i.e.
potentially very broad e.g. banks, mutually-owned
deposit takers, investment banks, asset managers…
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CRD
• The Capital Requirements Directive is already in force:
– The EC legislative process ran broadly in tandem with
the Basel Committee’s deliberations over Basel II;
– Came into force at 1 January 2007 (though some
elements subject to transitional arrangements until 1
January 2008);
– Basel II has therefore already been adopted across the
EU.
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CRD to FSA Handbook
•
Member States should take steps to implement CRD:
– “National discretions” allow tailoring of policy to suit local
circumstances; and
– CRD establishes only minimum capital standards;
– Our overall policy-making approach was no “superequivalence”, instead, “copying-out” the CRD text into our
handbook with minimal extra guidance;
– Handbook changes came into effect at 1 January 2007. Except
where transitional provisions apply, firms must now comply
with the new prudential module of our handbook.
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Pillar 1: Waiver application process
•
Firms must apply for a formal “waiver” of our rules to allow use of
the advanced approaches, such as the internal ratings based
approach to credit risk (IRB);
•
The application should be detailed enough to allow us, in
conjunction with on-site review work, to form a complete view on
a firm’s compliance with our standards;
•
A strict timetable governs the process, telling firms when they
should apply; and, when we will reach a decision;
•
Key deadline: we will process any application for a CRD advanced
approach received by 31/12/2006 in time for first-use at 1/1/2008;
•
For firms that apply during 2007 we offer no such service
standard.
•
At end-2006 we had received around 30 applications, we expect
several further applications for IRB in the coming weeks.
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Pillar 1: Waiver application process
•
Our internal process gives supervisors a key role throughout:
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•
On-site review work, assisted by risk specialists;
Liaising with other regulators;
Scrutinising firms’ application packs;
Presenting to the decision making body.
There are 4 possible outcomes for firms:
– Accept unconditionally
– Accept with conditions
– “Minded to grant” – reasonable compliance but uncertainty
over ability close gaps
– Reject
•
Most decisions are likely to be conditional acceptance or minded
to grant.
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Risk-based approach
• FSA has conducted “risk-based” supervision for many
years via ARROW but Basel II poses even greater
challenges to supervisors;
• This is particularly so for the supervision of
internationally diversified groups:
– FSA is Home regulator to a number of UK-parent firms
with complex overseas operations e.g. HSBC, Standard
Chartered; and
– FSA is Host regulator to many subsidiaries of complex
foreign-parent groups e.g. Citigroup, Goldman Sachs.
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Risk-based approach
• We have responded to this challenge in a
number of ways, for example:
– Not publishing rules that unnecessarily differ
from the minimum standards of the CRD;
– Conducting proportionate reviews of
applications for advanced approaches, for
example, limiting our on-site review work
where we can rely on the work of a foreign
subsidiary’s parent company supervisor.
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Pillar 2: process
•
Pillar 2 operates on a separate, though related, timescale to
Pillar 1;
– A firm must have its individual capital adequacy assessment
(ICAAP) in place at the time it begins to use any of the Pillar 1
approaches, and no later than 1/1/2008;
– We will review the ICAAP, and issue Individual Capital
Guidance, as soon as possible once it is ready;
– Some firms have chosen to submit a draft ICAAP at the same
time as their application for a Pillar 1 advanced approach.
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Pillar 2: risk-based approach
•
For Pillar 2 we have:
– Discussed with industry what we should expect to see at
different types of firms;
– Developed a policy for supervisory review that has 3 levels of
intensity, broadly corresponding to the nature and scale of
firms’ business; and
– Embedded the supervisory review fully in our ARROW riskbased methodology.
•
In the future, Pillar 2 reviews will be fully part of our ARROW
framework.
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Other: transparency and governance
•
Emphasising senior management responsibility is a
fundamental axiom of FSA’s approach to supervision:
– E.g. the requirement for the Board and Senior Management to
have, respectively, general and good understanding of AMA
and IRB models.
•
Governance is a key area of focus in CRD model review work
and more generally for standardised approach firms;
•
Pillar 3 disclosures help to enhance transparency and promote
market discipline. FSA approach in line with CRD – details for
firms to decide.
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Other: organising supervisors for delivery
• Training – technical and practical training
rolled out to supervisors and DMC members;
• Central Project Team – established to
coordinate implementation;
• Basel Implementation Project Teams –
established in all supervisory divisions to
coordinate implementation;
• Risk Review Specialist teams to lead on-site
review work for advanced approaches.
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Other: CRD for smaller banks
•
Our approach to smaller banks is embedded within our Pillar 1
approvals process and ARROW, which give us the flexibility to
be proportionate;
•
Most smaller banks in the UK are adopting the standardised
approaches to risks under CRD;
•
But we are not compelling smaller banks to adopt a particular
approach - some intend to progress to IRB soon.
•
Special circumstances apply to EU-parent banks - the CRD
assumes that all EU supervisors are equivalent:
– For subsidiaries adopting the Pillar 1 advanced approaches
there is only one application, to the EU-parent Member State.
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Conclusion
• Basel II is complex and demanding for supervisors as
well as firms, particularly in the context of internationally
active groups;
• FSA response:
– “Copy out” our rules from the CRD text;
– Be clear and consistent about how we handle Pillar 1
advanced approach applications;
– Embed Pillar 2 in our ARROW risk based approach to
supervision;
– Equip our supervisory staff with the necessary
resources for delivery.
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