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Estimating Changes to Minimum Regulatory Capital under Basel II’s Standardized Approach

Estimating Changes to Minimum Regulatory Capital under Basel II’s Standardized Approach. FDIC / JFSR Conference September 13, 2006 Katherine Wyatt New York State Banking Department. Outline. Survey of New York banks 2001 – 2002 Update: preliminary results

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Estimating Changes to Minimum Regulatory Capital under Basel II’s Standardized Approach

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  1. Estimating Changes to Minimum Regulatory Capital under Basel II’s Standardized Approach FDIC / JFSR Conference September 13, 2006 Katherine Wyatt New York State Banking Department

  2. Outline • Survey of New York banks 2001 – 2002 • Update: preliminary results • Comparison with Quantitative Impact Studies conducted by Basel Committee and in Germany (2004) • Potential Issues in implementing Standardized Approach

  3. Standardized Approach Study at 27 New York Banks • Banking Department used Call Reports as of 6/30/01 and 12/31/01 • Banks in study ranged in asset size from over $100 million to under $40 billion, and included both commercial and savings banks. • Banks represented different business plans, with variation in portfolio composition • Items on the RC-R that could receive different risk-weighting under the Standardized Approach were identified, and banks were consulted to determine the new risk weight • For example, banks were asked about exposures to rated counterparties, which claims were backed by guarantees or collateral, and about maturity of unused commitments and whether unused commitments were unconditionally cancelable by the bank

  4. Average Changes in Required Capital, 27 NY Banks, 12/31/01

  5. Weighted Average Op Risk Contribution to Change in Required Capital = 12.3% increase, but variation for individual banks. Banks ranked by asset size, in decreasing order.

  6. International Survey Results for Standardized Approach

  7. Average Contributions to Change in Required Capital

  8. New York Survey: Update 6/30/06 • 2001 survey population has changed mainly due to consolidation – updated survey covers 17 of the original 27 New York banks • Requested information from banks based on June 30 Call Report; not all information in yet • Too early to report on effect of recognition of external ratings, treatment of unused commitments, or credit risk mitigation • However, we can make preliminary estimates of changes in risk-weighting for retail portfolio, loans past due 90 days or more, and the operational risk charge • Basic Indicator op risk charge calculated as average of 12/31/03, 12/31/04, and 12/31/05 gross income minus insurance income

  9. Preliminary Estimated Change in Risk Weighted Assets for Retail Portfolio, Loans Past Due 90+ Days, and Operational Risk Weighted average change in items for 17 banks; assumption that immaterial amount of small business and other retail loans backed by eligible collateral or guarantees.

  10. Changes in Required Capital for Off-Balance Sheet Items • Under Standardized Approach unused commitments that are not unconditionally cancelable by the bank will receive a credit conversion factor (CCF): 20% CCF for those under one year in maturity, and 50% CCF for those over one year in maturity. • Exposure after credit conversion for letters of credit, commitments, or derivatives will be risk weighted according to public rating. The 50% limit on the risk weight for derivative exposures is lifted. • The survey banks in 2001 had few derivatives exposures, and few rated counterparties for letters of credit or commitments. • Required capital for unused commitments under one year contributed almost 3% to change in capital requirements in 2001

  11. Potential Issues • Treatment of home equity loans • Treatment of credit risk mitigation under the Simple Approach • Varying capital requirements for operational risk if based on bank’s gross income • Limited risk sensitivity • Competitive balance with Advanced Approach banks

  12. Conclusion • Research suggests that it is likely that adoption of Standardized Approach would not lead to large drops in required capital • Estimates of changes in capital from Standardized Approach can be obtained from analysis of Call Report submissions and minimal consultation with banks • Issues remain that could require U.S. adaptations if Standardized Approach adopted

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