Estimating Changes to Minimum Regulatory Capital under Base

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Estimating Changes to Minimum Regulatory Capital
under Basel IIs Standardized Approach

• FDIC / JFSR Conference
• September 13, 2006
• Katherine Wyatt
• New York State Banking Department

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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

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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

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Average Changes in Required Capital, 27 NY Banks,
12/31/01
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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.
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International Survey Results for Standardized
Approach
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Average Contributions to Change in Required
Capital
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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

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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.
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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

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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 banks gross income
• Limited risk sensitivity
• Competitive balance with Advanced Approach banks

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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