Tag: Basel

By: Staci Baker On September 12, 2010, the new Basel III rules were passed in Basel, Switzerland. These new rules aim to increase the liquidity of banks over the next decade, thereby mitigating the risk of bank failures and mergers that transpired during the recent financial crisis. Currently, banks must maintain capital reserves of 4% on their balance sheet to account for enterprise risk. Starting January 1, 2013, banks will be required to progressively increase their capital reserves, known as tier 1 capital, to 4.5%. By the end of 2019, this reserve will need to be 6%.  Banks will also be required to keep an emergency reserve, or “conservation buffer,” of 2.5%. What does this mean for banks? And, what are some tools that banks can use in assessing credit risk? By increasing capital reserves, banks will be more stable in times of economic hardship. The conservation buffer is meant to help absorb losses during times of economic stress, which means banks will be in a better position to maintain economic progress in the most challenging economic circumstances. The capital reserve designated by the Group of Governors and Heads of Supervision is the minimum requirement each bank will be held to. Each bank will need to assess their current risk levels, and run stress tests to ensure they are in a good financial position, and are able to sustain strong financial health during a failing economy. Stress tests should be run for different time intervals, which will allow lenders to assess future losses and to plan capital satisfactoriness accordingly. This type of credit risk analysis is possible through applications such as Moody’s CreditCycle Plus, powered by Experian, that allow for stress testing, and profit and loss forecasting.  These applications will measure future performance of consumer credit portfolios under various economic scenarios, measured against industry benchmarks. ______________ Bank for International Settlements, 9/12/10, http://bis.org/press/p100912.htm

By: Kari Michel What is Basel II?  Basel II is the international convergence of Capital Measurement and Capital Standards. It is a revised framework and is the second iteration of an international standard of laws. The purpose of Basel II is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operations risk banks face.  Basel II ultimately implements standards to assist in maintaining a healthy financial system. The business challenge The framework for Basel II compels the supervisors to ensure that banks implement credit rating techniques that represent their particular risk profile.  Besides the risk inputs (Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD)) calculation, the final Basel accord includes the “use test” requirement which is the requirement for a firm to use an advanced approach more widely in its business and met merely for calculation of regulatory capital. Therefore many financial institutions are required to make considerable changes in their approach to risk management (i.e. infrastructure, systems, processes, data requirements).  Experian is a leading provider of risk management solutions -- products and services for the new Basel Capital Accord (Basel II).  Experian’s approach includes consultancy, software, and analytics tailored to meet the lender’s Basel II requirements.