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СОВРЕМЕННАЯ БАНКОВСКАЯ СИСТЕМА
MODERN BANKING SYSTEM
UDC 336.71
E.E. Vasileva
BANKING CREDIT RISK ASSESSMENT: FROM GENERAL TO SPECIFIC
The article deals with a retrospective approach to the assessment of the credit risk of the Basel Committee on Banking Supervision - Basel I, Basel II and Basel III. Basel II gave banks the opportunity to self-assess the credit risk. Extended concept has remained unchanged innovations appeared "in the footsteps" of the world financial crisis, Basel III, which proves the full viability of this approach in the framework of the implementation of best practices in the developed world.
Keywords: credit risk, credit risk assessment, IRB-approach.
Introduction
The principle of banking risks regulation has been considered as a fundamental principle designed to ensure the stability of the financial system since the second half of the 20th century to the present time. From the point of view of identification of new trends it is interesting to consider the transformation of international approaches to risk management in the banking sector.
1.The history of banking risk management development
Basel Committee on Banking Supervision is the international institute for determining the banking rules of the leading world powers. It was established in 1974 as a consultative-advisory agency under the Bank for international settlements. A group of 10 countries (G-10), which included the USA, Japan and several European countries, was its initiator. Nowadays the Basel Committee is in fact an official body, forming the basic conditions for the functioning of the international banking system. The best modern practice of banking is generalized and standardized under the Basel agreements.
In 1988 the Basel Committee developed the first agreement on capital adequacy (Basel 1988 Capital Accord) [1] commonly known as Basel I.
The main idea of the Basel I is that the financial stability of the bank is determined by the adequacy of capital to cover credit risks. Pre-existing leverage ratio (the ratio of equity / assets) used to assess the sustainability of the Bank's has been replaced by an indicator that takes into account the riskiness of assets. The degree of sufficiency is determined with the so-called "Cook relation" and is set at 8%:
© Vasileva E.E., 2016.
DOI: 10.15350/2221-7347.2016.1
* Vasileva Ekaterina Eliseevna - senior Lecturer, Dept. of Economics and Finance, Perm National Research Polytechnic University, Russia.
r.Cap;lal . > 0,08 Credit risk
For determination the amount of credit risk it was offered to count the total amount of the assets according to their credit risk by multiplying (weighting) the value of the asset by the corresponding risk weights varied from 0% to 100%. That is, the "Cook relation" can be represented as follows:
„ . , , . Equity capital
Capital adequacy ratio = -. , ,—;-7-:-• ,., ,- > 0,08
r The total volume of assets weighted
by credit risk
Determining of weighting factors corresponding to the level of credit risk assets is secured as an exclusive competence of national regulators of the banking systems. Basel I has not stimulated commercial banks to solve the problem of adequate assessment of the credit risk taken by them independently.
So for the first time the normative constraint was imposed on the riskiness of the commercial structures activities.
2.IRB as a banking innovation.
The next stage which has changed revolutionary the approach to the participation of banks in the risk assessment of its activities was the adoption of the document called "Principals for the Management of Credit Risk" by the Basel Committee in 1999 [2]. Principles declared the possibility of using banks internal ratings to assess credit risks for the first time (Internal rating based approach -IRB).
The system of valuation on the basis of internal credit ratings itself was presented later in 2001 in the document called "The New Basel Capital Accord" [3], and after a lengthy approvals the system was enshrined in the standards of the "International Convergence of Capital Measurement and Capital Standards. A Revised Framework" in 2004 [4]. These standards have received customary abbreviation - Basel II.
Basel II comprises three pillars or components that determine the solvency and stability of the banking system (figure 1).
The first pillar contains bank's minimum capital requirements. The second pillar determines the necessity of supervisory review process held by banking regulatory authorities. The third pillar establishes the obligation of compliance the market discipline by banks through the disclosure of information about its activities. Maximum attention is paid to the first pillar, the provisions of the second and third ones are of declarative nature.
In accordance with the provisions of the first pillar the procedure for calculating the minimum adequate capital of the Bank was extended taking into account the three types of risk: credit, operational and market ones. In this case the Cook relation takes the following form:
_Capital_
Credit risk + Market risk + Operation risk
0,08
For determination of the credit risk the Bank can choose one of the following approaches:
1) standardized approach - SA
2) internal ratings based approach (IRB)
a. Foundation IRB — FIRB
b. Advanced IRB — AIRB
The standardized approach of Basel II is not fundamentally different from the approach recommended by the Basel I. It only involves the use of ratings of external agencies of the Bank to assess the borrower's credit risk. The bank's assets are divided into 13 groups depending on the risk rate:
1) States and their Central banks' liabilities,
2) public nongovernmental institutions' liabilities,
3) liabilities of multilateral development banks,
4) bank liabilities,
5) liabilities of the companies operating in securities,
6) liabilities of corporations,
7) liabilities of the companies engaged in retail operations,
8) company liabilities secured by residential property,
9) company liabilities secured by commercial real estate,
10) overdue liabilities,
11) assets of high risk categories,
12) other assets,
13) off-balance sheet assets.
Fig. 1. Key pillars of Basel II
A fixed risk ratio or a scale on which these factors correlate with the ratings of major rating agencies (Standard&Poor's, Moody's, Fitch, Export Credit Agency) is provided for each group. The less the rating is, the higher established risk factors are.
The standardized approach does not require bank's independent risk analysis of its assets, it is simple and convenient for use in cases where liabilities and assets have ratings of external rating agencies.
The essence of the IRB-approach is an independent calculation of the magnitude of credit risk by the bank with the approval of the regulator by means of certain transformations in the value of assets weighted by risk level with the following characteristics of the credit risk:
•PD (Probability of default);
•LGD (Loss given default);
•EAD (Exposure at default);
•M (Maturity).
The resulting value of the assets based on the risk evaluation is included in the denominator of the formula for calculating the bank's capital adequacy.
Depending on the approach used: the base one (FIRB) or advanced one (AIRB), the degree of participation of the bank in determining the values of the parameters of credit risk may be different (table 1).
Table 1
Rules for determination of PD, LGD, EAD, M in accordance with Basel II [5]
Index FIRB | AIRB
PD, Probability of default Is set by bank on the base of own estimates. The minimum value for corporations and banks is 0,03% (i.285 FP)
LGD, Loss given default Is set by Basel committee: 45% for main assets and 75% for secondary assets (i.287-296 FP) Is set by bank on the base of own estimates (i.297-303, 331 FP)
EAD, Exposure at default Установлен Базельским комитетом (i.311-315 FP) Is set by bank on the base of own estimates (i.316, 317, 334-338, 368-371 FP)
M, Maturity Установлен Базельским комитетом (М=2,5) или определяется банком (i. 318 FP) Is set by bank on the base of own estimates, the maximum period is 5 years (i.319-321 FP)
The basic approach (FIRB) is based on the fact that the bank uses internal models solely to determine the probability of default (PD) of a counterparty, and other credit risk parameters (PD, LGD, EAD, M) are guided by the recommendations of the regulator.
The advanced approach (AIRB) requires an independent determination of all four components of credit risk by the banks, subject to all minimum requirements and conditions stipulated by Basel II.
In any case, the bank should regularly evaluate the performance of the model, including monitoring results, the stability and tracking of the relationships between models, testing against real data and a number of other restrictions designed to increase the stability and reliability of the evaluation system.
The ability of banks to use the IRB approach in credit risk evaluation was a significant innovation in banking. Basel II offers banks the freedom to choose between the two main methodologies for the calculation of credit risk: the use of external ratings, or based on their own internal rating systems. For the first time, credit institutions have the possibility to determine the value of credit risk assets. This fact can be evaluated as the expression of a considerable degree of trust of the regulators capabilities and professionalism of the banking system.
In the current environment a world banking community in the face of the Basel Committee is inclined to think that the IRB is an innovation designed to tackle the negative aspects of external ratings, to eliminate the "commonality", to strengthen the role of banks in the assessment of their risks and, ultimately, to increase the stability of the financial system.
3.The modern stage in the regulation of banking risks
However, despite the attention paid to the problem of risk management by the Basel Committee, the global financial crisis in 2008-2009 demonstrated the failure of the global banking system to ensure its stability. The obvious need to refine the standards led to the creation of a new version of the agreement in 2010 called the "International regulatory framework for banks" [6] or Basel III.
The adoption of Basel III does not constitute a waiver of Basel II and it is not in the new version of the earlier document. These agreements exist in parallel to regulate different sides of banking. The main idea of Basel III is to ensure the ability of banks to withstand a variety of financial and economic
shocks. The main provisions of the Basel III relate to measures on toughening of requirements to the capital of banks and their liquidity:
1) strengthen of limits for capital of the first level and the introduction of the concept of "root capital of the first level";
2) creation of a "conservation buffer" and "countercyclical buffer" - the formation of capital reserves in good times for use during the crisis;
3) additional requirements to minimum total capital of the bank taking into account the buffer of capital to 10.5% of assets, weighted by risk, the minimum requirement for the total capital remains the same - 8%;
4) establishment of minimum levels of liquidity with short-term and long-term requirements designed to ensure the implementation of adequate funding in crisis situations.
5) introduction of additional risk-free basis for the calculation of minimum capital requirements - leverage ratio as the ratio of capital to borrowed funds.
Basel III also pays attention to data management within the banking structure, especially for large banks with extensive branch network. Under Basel III banks are required to appropriately collect information about exposure to risks, liabilities, counterparties and the market in the centralized risk database. In addition, banks should be given access to national regulators to all portfolio cash flows and be able to conduct stress testing of data flows and analysis of any gaps in liquidity under different scenarios.
Thus, the concept of ownership of banks in assessing credit risk put forward by the Basel II is not affected by the innovations of the "anti-crisis" Basel III. It proves the full viability of the IRB within the framework of the excellence of its introduction in the developed countries.
Conclusion
In summary it should be noted that since the creation of the leading economic powers of the Basel Committee on banking supervision, one of the principal innovations in the history of approaches to the calculation of the adequacy of bank capital has been providing the banks with the possibility of using their own methodologies of risk assessment - IRB. In fact, it is recognition of the fact that in the rapidly changing environment of banking, neither oversight, nor market discipline can ensure the efficiency and stability of the banking system if the banks themselves are excluded from the process of risk assessment and management.
References
[1] Basel Committee on Banking Supervision. «International convergence of capital measurement and capital standards». Consultative document, Basel: Bank for International Settlements, 1988. - URL: http://www.bis.org/publ/bcbs04a.htm.
[2] Basel Committee on Banking Supervision. «Principals for the Management of Credit Risk». Consultative document, Basel: Bank for International Settlements, 1999. - URL: http://www.bis.org/publ/bcbs75.htm.
[3] Basel Committee on Banking Supervision «The New Basel Capital Accord». Consultative document, Basel: Bank for International Settlements, 2001. - URL: http://www.bis.org/bcbs/bcbscp3.htm.
[4] Basel Committee on Banking Supervision «International Convergence of Capital Measurement and Capital Standards. A Revised Framework». Consultative document, Basel: Bank for International Settlements, 2004. - URL: http://www.bis.org/publ/bcbs128.htm.
[5] Chetyrkin E.M. Financial risks: scientific-practical. allowance. - Moscow: Publishing House "Delo" ANE 2008. - 176.
[6] Basel Committee on Banking Supervision «International regulatory framework for banks», Consultative document, Basel: Bank for International Settlements, 2010. - URL: http://www.bis.org/bcbs/basel3.htm?m=3%7C14%7C572.
УДК 336.71
Е.Е. Васильева
БАНКОВСКАЯ ОЦЕНКА КРЕДИТНОГО РИСКА: ОТ ОБЩЕГО К ЧАСТНОМУ
В статье рассматривается ретроспектива подходов к оценке кредитного риска в документах Базельского комитета по банковскому надзору - Базель I, Базель II и Базель III. Базель II дал банкам возможность самостоятельно определять величину кредитного риска. Выдвинутая концепция IRB осталась неизмененной нововведениями появившегося «по следам» мирового финансового кризиса Базеля III, что доказывает полную жизнеспособность данного подхода в рамках передового опыта внедрения в развитых странах мира.
Ключевые слова: кредитный риск, оценка кредитного риска, IRB-подход.
