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Basel’s Third Quantitative Impact Study: The Results

This document summarizes the results of Basel's Third Quantitative Impact Study (QIS-3) conducted in May 2003, which aimed to assess the effects of proposed capital standards on banks. It compares current capital standards with three potential approaches, covering credit, market, and operational risks. The study included 22 U.S. bank holding companies and over 350 banks worldwide. Key findings reveal significant concerns regarding data consistency and risk evaluation. The conclusion emphasizes the need for ongoing calibration and careful management of the transition to Basel II to mitigate competitive disparities between large and small banks.

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Basel’s Third Quantitative Impact Study: The Results

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  1. Basel’s Third Quantitative Impact Study: The Results May, 2003

  2. Purpose & Process of QIS-3 • Understand effect of/recalibrate proposal • Compare current capital standard with each of three potential approaches, showing details for each portfolio • Covered full proposal--all of credit risk, plus market and operational risk • 22 U.S. BHCs, >350 worldwide • Most addressed only standardized approach

  3. Process (continued) • Substantial preparation, domestically and abroad • Data/spreadsheet clean-up, corrections, and changes • Findings used to “tweak” recent CP-3 Modification % Change • LGD floor for mortgages 1% • Revised risk wt curve for credit cards 0% • Revised Std approach for Op Risk 3%

  4. A Challenge to All • Participants generally satisfied with their efforts and results • Questions remain about data • Not surprising at this stage

  5. G10 Results: Effect on Total RWA 1/Portfolio contribution to total credit risk change, percentage points

  6. U.S. Results: Effect on Total RWA (AIRB)

  7. Key Issue/Question--DispersionContributing factors include: • Different assessment horizons or PD estimation methods • Sensitivity of PDs to different rating grades • Selection of stress/non-stress LGDs • Interplay of LGD/EAD • Interpretation/application of draft proposal • Data availability, strength/consistency of each company’s internal process • Actual differences in risk

  8. Conclusion/Issues • All need to gain greater understanding and comfort with the range of results • QIS-3 data on best efforts basis & not subject to supervisory review • Important implications • QIS 3 results for individual banks may have substantial margins for error • Committee’s calibration process should be ongoing--QIS 4? • The transition to Basel II must be managed with care • Potential competitive implications? • Large banks vs small • Product lines (e.g., mortgages)

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