Transcript Document

IMPLICATIONS OF BASEL II FOR CENTRAL
BANK POLICIES
Erdem Başçı
Vice Governor
Central Bank of the Republic of Turkey
[email protected]
Conference on Financial Stability and Implications of Basel II
May 2005, İstanbul
CONTENTS
1) Central Banks and Financial Stability
2) Financial Stability and Basel II
3) Basel II and Turkey
4) Conclusion and Suggestions
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1) CENTRAL BANKS AND FINANCIAL
STABILITY
CENTRAL BANKS AND FINANCIAL STABILITY
Definition: Financial Stability
• Lack of financial crises
• Sustained success of financial contracts
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CENTRAL BANKS AND FINANCIAL STABILITY
Duties of Central Banks
• Price stability
• Employment and growth
• Payment systems
• Financial stability
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CENTRAL BANKS AND FINANCIAL STABILITY
Tensions
• Financial stability versus price stability
• Financial stability versus financial development
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CENTRAL BANKS AND FINANCIAL STABILITY
•Maintenance of financial stability is much more difficult
and complex compared to price stability
• There is no straightforward instrument that a central bank
can use for financial stability
• Financial stability reports are useful communication
tools
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2) FINANCIAL STABILITY AND BASEL II
FINANCIAL STABILITY AND BASEL II
Better risk management
Effective supervision
Financial
Stability
International standards
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FINANCIAL STABILITY AND BASEL II
BASEL II
I. Adequate Capital
II. Supervisory Review
III. Market Discipline
P
I
L
L
A
R
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1
P
I
L
L
A
R
*
2
P
I
L
L
A
R
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3
All three pillars of Basel II have direct implications
for financial stability.
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FINANCIAL STABILITY AND BASEL II
Pillar 1: Minimum Capital Requirements
• Capital allocation that is more sensitive to risks
• Alignment of regulatory and economic capital
• Encouragement of better risk management techniques
FINANCIAL STABILITY
Banks with adequate capital is the most important level of
defense for a central bank.
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FINANCIAL STABILITY AND BASEL II
Pillar 2: Supervisory Review Process
Urges banks to
• maintain adequate capital in relation to their risks
• monitor, measure and manage their risks by developing
better risk management techniques
• take into consideration risks that are not defined under
Pillar 1such as,
market risk (capital charges for price and FX risk,)
liquidity risk (no capital charge, additional arrangements)
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FINANCIAL STABILITY AND BASEL II
Pillar 3: Market Discipline
• Better information disclosure
• Enhanced efficiency of financial markets
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3) BASEL II AND TURKEY
BASEL II AND TURKEY
Basel II preparations
• Basel I, Capital Adequacy: 1988
(TR: 1989)
• Basel I, Market Risk:
1996
(TR: 2002)
• QIS 3:
2003
• QIS-TR:
2004
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BASEL II AND TURKEY
Reduced Fiscal Dominance
• Public debt to GDP ratio
• Deposit to GDP ratio
• Loans to GDP ratio
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BASEL II AND TURKEY
Reverse Currency Substitution
• Asset Side
Share of household FX deposits
Share of commercial FX deposits
• Liability Side
Share of household FX denominated loans is 0
Share of Treasury’s FX liabilities
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BASEL II AND TURKEY
Effects on Bank Balance Sheets
• TL denominated government securities may receive “0” lower
risk weight (national discretion).
• FX denominated government securities will receive 100
percent risk weight under the current BB- rating for Turkey.
FX denominated sovereign risk weights
AAA to
BBB+ to
AA- A+ to A- BBBSovereign
Rating
0
20
50
BB+ to B100
Under
BUnrated
150
100
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BASEL II AND TURKEY
Effects on Bank Balance Sheets (Standard Approach)
• Basel II assigns to
Risk Weight
 consumer loans
75 %
 small and medium sized enterprises
75 %
 mortgages (owner occupied)
35 %
• Additional capital requirement against operational risk
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4) CONCLUSION AND SUGGESTIONS
CONCLUSION AND SUGGESTIONS
• For implementing of Basel II Turkey needs to improve:
• risk culture and awareness
• supervisory capacity
• rating agencies
• disclosure practices
• use of international standards
• credit registry
• coordination between supervisors and banks
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CONCLUSION AND SUGGESTIONS
• Basel II is very good news for central banks as far as
financial stability objective is concerned
• Macro-prudential analysis that covers banks as well as
non-bank sectors is also essential.
• Financial Stability Report of the CBRT will focus mainly
on macro-prudential analysis.
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IMPLICATIONS OF BASEL II FOR CENTRAL
BANK POLICIES
Erdem Başçı
Vice Governor
Central Bank of the Republic of Turkey
[email protected]
Conference on Financial Stability and Implications of Basel II
May 2005, İstanbul