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Basel I I

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Does anyone know which banks are going ahead with the Internal Ratings Based approach? I'm interested in the idea that some may have abandoned it due to the increased requirements for disclosure of Basel II.

Sorry, I know this will have been discussed before, but can't find it.

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Does anyone know which banks are going ahead with the Internal Ratings Based approach? I'm interested in the idea that some may have abandoned it due to the increased requirements for disclosure of Basel II.

Sorry, I know this will have been discussed before, but can't find it.

I didnt think there were many banks that operated Basel 2?

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I didnt think there were many banks that operated Basel 2?

I am pretty sure they all had to ?

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I am pretty sure they all had to ?

They are only recommendations which are then taken up by the various jurisdictions.

Would take time to implement too I imagine. Basel II is fairly new ?

Edited by Alan B'Stard MP

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Read this and have a good laugh. All banks had to comply by 2004. The reason is stated below.

"The New Basel Capital Accord, more commonly known as Basel II, is fundamentally about improving risk and asset management to avoid financial disasters. Compliance requires all banking institutions to have sufficient assets to offset any risks they may face, represented as an eligible capital to risk aggregate ratio of 8%. Part of this compliance dictates that data capture must be fully operational by 2004, and financial institutions must have three years of data on file by 2007, which of course means that work on this aspect of compliance needs to start now, if it hasn't already started."

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They are only recommendations which are then taken up by the various jurisdictions.

Would take time to implement too I imagine. Basel II is fairly new ?

Yes - but there has been a lot of mandatory work undertaken by UK Banks recently re. Basel II.

I don't think they would have done it if they didn't have to.

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Read this and have a good laugh. All banks had to comply by 2004. The reason is stated below.

"The New Basel Capital Accord, more commonly known as Basel II, is fundamentally about improving risk and asset management to avoid financial disasters. Compliance requires all banking institutions to have sufficient assets to offset any risks they may face, represented as an eligible capital to risk aggregate ratio of 8%. Part of this compliance dictates that data capture must be fully operational by 2004, and financial institutions must have three years of data on file by 2007, which of course means that work on this aspect of compliance needs to start now, if it hasn't already started."

Worked a treat :lol:

This is how I see it:

The new rules were far more complicated than the previous ones IIRC. They allowed asset classes to be weighted differently. So it didn't come down to simple % rules anymore. Certain assets were classed as more secure and therefore could be weighted more in regards to ratios and requirements. And vice versa. I get a funny feeling they got it all wrong.....

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Yes - but there has been a lot of mandatory work undertaken by UK Banks recently re. Basel II.

I don't think they would have done it if they didn't have to.

Oh Im sure it might be mandatory but that depends on the BoE et al (who of course are surrender monkeys). I didn't think many UK banks were currently operating under it and fully compliant.

Edited by Alan B'Stard MP

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Oh Im sure it might be mandatory but that depends on the BoE et al (who of course are surrender monkeys). I didn't think many UK banks were currently operating under it and fully compliant.

I think they all operate under it. As for compliant I imagine that is a different story. Or maybe they are and the rules are just pish.

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Hi guys - I thought this thread had died without drawing breath, so it's good to see a few people here now. The situation (as I understand it: this is gleaned mainly from memory and 5 minutes with Wiki and Fitch) is:

Basil II is a bit like the original Basil accord, but with knobs on. These are described as pillars, and the first pillar specifies the amount of capital a bank must hold against assets, which are rated by how risky they are (this is very like the 1988 accord). Where it gets interesting is that banks have the choice of rating their assets using the "standardised approach", which is very similar to Basle I*, or use an "internal ratings based" approach (IRB). Once their assets have been discounted for risk, they then have to hold 8% capital against these weighted assets.

The second pillar is basically the nuts and bolts of how the thing works.

This might sound like a bank could just hold a whole load of shit and dress it up in a sharp suit, claiming it is all low risk (not easy, but tempting). But this is to ignore the third pillar, which is Disclosure. This allows the market somewhat better sight of what is actually going on inside a bank.

So, back to the thread. Not everyone has adopted this system yet. The US is going ahead, but without the option of the Standardised Approach. The EU has effectively adopted the system through the EU Capital Requirements Directives**. What I'm interested in is how many UK institutions are using the seemingly complex IRB approach, and if any have (been able to?) abandon it for the Standardised Approach.

*but with a new ultra risky class of assets where borrowers have impaired credit (hmm, what to call them?)

** I now realise this is what I should really be looking at. This thread may be redundant after all. Will report back.

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I know for a fact that one very large almost busted Jock bank definitely uses the bells and whistle risk weighted assets method.

They have lots of apps and servers & people dedicated purely to this area.

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Basel II, weird how the credit crunch started as the second pillar it was being implemented? :P IMHO basel II, and the locking down of capital adequacy ratios caused the crunch. If you have years of plenty, you cant tighten the banks and expect the world to continue as normal...

Edited by moosetea

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The US hadn't adopted it. The uk and many other countries had.

It didn't work because it only had a good look at the on balance sheet risks.

Unfortunately the banks were making their capital 'more efficient' by use of spv's etc. in order to get round the need for capital as set out in the accord. The risks hadn't disappeared though.

And where we are now is that Basel has the effect of increasing capital requirements as thngs worsen because asesets have become riskier in hindsight. This exacerbates the effect of the economic cycle just when they should be using that capital. And people never seem to want to put aside extra capital.

That is an interesting point. Looks like they put capital aside at the wrong time.

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That is an interesting point. Looks like they put capital aside at the wrong time.

My Personal View

In the past lots was off balance sheet. Basil II is all about having capital and disclosing information, so my assumption in 2006/7 there was a mad rush for capital to make up short falls and meet the requirements. This capital didn't exist and we had the credit crunch, and eventually the money was printed to start to meet the requirements...

It is a bit like the MIRAS fiasco, if you tell somone the taps will be closing, they will do anything to make as much money as possible before the taps close, but you get a disaster when the taps are closed/closing.

Edited by moosetea

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My Personal View In the past lots was off balance sheet. Basil II is all about having capital and disclosing information, so my assumption in 2006/7 there was a mad rush for capital to make up short falls and meet the requirements. This capital didn't exist and we had the credit crunch, and eventually the money was printed to start to meet the requirements...

That's what I've been wondering.

Do you have any background support for this, or is it just joining the dots?

edit: you've answered that question with your edit!

Edited by Timm

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That's what I've been wondering.

Do you have any background support for this, or is it just joining the dots?

Just Joining the dots from what I read, I joined the dots in 07, there is a thread from 07 on the subject. To me it seems obvious, the timings of the two are very similar, how can they not be interconnected? IMHO MIRAS is to the first UK property/economy crash, as BASEL II is to the world economic crash.

These kind of big economic changes to they way things work should be done in troughs not peaks (unless the intention is to crash the global market)

Edited by moosetea

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Just Joining the dots from what I read, I joined the dots in 07, there is a thread from 07 on the subject. To me it seems obvious, the timings of the two are very similar, how can they not be interconnected? IMHO MIRAS is to the first UK property/economy crash, as BASEL II is to the world economic crash.

These kind of big economic changes to they way things work should be done in troughs not peaks (unless the intention is to crash the global market)

Depends how far Basel II made its inroads into america. After all this is where this is where it started ;) via its proxy agents in the City.

Personally, I think it's just down to simple cash flow - ultimately caused by exporting production overseas and decimating income of the indigenous folk.

The rise of China seems a far bigger coincedence.

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These kind of big economic changes to they way things work should be done in troughs not peaks (unless the intention is to crash the global market)

A moderate hijack, maybe, though I've little of value to add to the discussion of Basel II - over and above what's already been said. I'm aware that there has been (maybe still is) a lot of activity with respect to 'credit risk' - which I presume is about trying to establish the risk weightings for Basel II in a way that is satisfactory for banks.

Something that interests me is the notion of 'intending to crash the global market'. My mental model precludes such a concept from being meaningful. I think of money as the medium of exchange for goods, services and assets - and the flexible money supply regulates debt against credit - while other market participants establish prices. Where net lending increases, this advantages asset owners; where net lending contracts, this advantages savers; those supplying goods and services are advantaged over those consuming by the same expansion - and vice-versa. While measuring this money supply in a meaningful way is preposterously hard (since there is no hard-and-fast notion of what constitutes money - but rather that every contract, most of which are not even registered... let alone regulated.... behaves to some extent as money.) Leaving this problem with quantification aside for a moment, though recognising that it's a big problem, it is obvious that cash and account balances at banks behave like money - so, restricting bank loans (and hence the growth of bank account balances) will definitely have a downwards effect on the money supply - even if it were drowned-out by other factors that defy measurement. With this in mind, I wonder whose authority is assumed when the moral imperative to tilt advantage towards productive asset-owners over (equally) productive savers. "Crash the economy" be damned, if debasement of currency has lead to immoral and counter-productive motivation - why should its preservation (in current form) be a revered taboo subject? In my opinion, it is ridiculous to measure the good functioning of "the economy" by summing transactions - a more preposterous measure it is hard to dream up... I'm worried by an economy that deceives an ignorant public, and consider that to be a failing/failed economy, which is exactly what we saw during the boom - though hardly anyone complained.

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Basel II, weird how the credit crunch started as the second pillar it was being implemented? :P IMHO basel II, and the locking down of capital adequacy ratios caused the crunch. If you have years of plenty, you cant tighten the banks and expect the world to continue as normal...

You should get over to the Gilts thread, sharpish!

;), again.

But seriously, this would raise a lot of questions about how many people would have known exactly what was coming, and if anyone had a grand plan, rather than just opportunistic profiteering.

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http://property.timesonline.co.uk/tol/life...icle6812286.ece

“Basel II"... an international finance directive introduced in January last year, is the main reason that buyers with small deposits are being turned down for home loans. “It looks to everyone like the credit crunch is to blame for the lack of deals for first-time buyers. While this has obviously had some impact, Basel II is also very relevant,†says Ray Boulger, of John Charcol, the mortgage broker. The rule requires banks to set aside more capital to offset the higher lending risks associated with offering higher loan-to-value deals. Loans to first-time buyers tend to fall into this category because they have smaller deposits. Since the downturn began, banks’ capital reserves have been severely depleted, with the result that they have pared down any lending that would mean having to shore up even more funds. The bad news is that the clampdown is set to get worse. At the moment the best mortgage deals are available to borrowers who have a 40 per cent deposit. A proposed further change to what are collectively called “capital adequacy requirements†could mean that only borrowers with a 60 per cent deposit will be entitled to the cheapest rates.

I'm sure this has been posted elsewhere already, but I thought it was relevent to this thread.

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