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Charles Littrell Executive General Manager Australian Prudential Regulation Authority

Charles Littrell Executive General Manager Australian Prudential Regulation Authority 17 October 2003. BASEL II In the Australian Context. What is Basel II?. International Accord on minimum Bank Capital Established 1988 but becoming obsolete Still works for simple ADIs

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Charles Littrell Executive General Manager Australian Prudential Regulation Authority

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  1. Charles Littrell Executive General Manager Australian Prudential Regulation Authority 17 October 2003 BASEL II In the Australian Context

  2. What is Basel II? • International Accord on minimum Bank Capital • Established 1988 but becoming obsolete • Still works for simple ADIs • Economic equity models superior for large ADIs • Basel II – planned update • Final rules and timing uncertain

  3. Australia’s ADIs – a Snapshot

  4. APRA Objectives for ADI Capital (in order) • Ensure sufficiency • Core issue in avoiding failures • International requirement • Increase risk sensitivity • Basel I too blunt • Basel II an improvement • Avoid excess • Efficiency issue • Complacency risk • Minimise transition costs • Dollars • Distraction

  5. Basel II for Sophisticated Banks • Disaggregates credit, operational, “other” risks • Relies on internal risk models • Scope for supervisory discretion • More disclosure • Likely outcomes • Lower average capital • Higher marginal capital • Best of both worlds? • Justifies effort and expense

  6. Basel II for Small Banks & CUBS • Update on Basel I • Simplistic but workable • Increased disclosure applies • APRA attempting to minimise transition costs • Likely outcome • Slightly lower capital • More operational risk focus

  7. Why is Basel II Good? • Flexible, Dynamic Risk Based • Linked to personal incentives • Discourages silly risks • Reduces failure probability and Capital Requirements • Both safety and efficiency

  8. Why Isn’t Basel II Good? • Model Risk • Data and assumptions • Response time • Model myopia • Mathematics • Unspecified Risks • Cyclicality • Strategic/Business • Interest Rate Mismatch • Supervisory Complexity • Cost and Distraction

  9. Competitive Effects • Australia v rest of world • Relative improvement • Large banks v other ADIs • Both do better • Continues long term trends

  10. Outstanding Issues • Conversion uncertainty • Schedule • Rules • Applicability • Australian Rules • We need to be tougher • But not too tough

  11. Summary • APRA supports Basel II • Safety and efficiency benefits • We are prepared for implementation • Not cheap, easy, or risk free… • But will be good for Australia

  12. Charles Littrell Executive General Manager Australian Prudential Regulation Authority 17 October 2003 BASEL II In the Australian Context

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