IMPLICATIONS OF BASEL II FOR CENTRAL BANK POLICIES

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IMPLICATIONS OF BASEL II FOR CENTRAL BANK POLICIES
Erdem Basçi Vice Governor Central Bank of the
Republic of Turkey Erdem.Basci_at_tcmb.gov.tr
Conference on Financial Stability and
Implications of Basel II May 2005, Istanbul
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CONTENTS

1. Central Banks and Financial Stability
2. Financial Stability and Basel II
3. Basel II and Turkey
4. Conclusion and Suggestions

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1) CENTRAL BANKS AND FINANCIAL STABILITY
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CENTRAL BANKS AND FINANCIAL STABILITY

• Definition Financial Stability
• Lack of financial crises
• Sustained success of financial contracts

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CENTRAL BANKS AND FINANCIAL STABILITY

• Duties of Central Banks
• Price stability
• Employment and growth
• Payment systems
• Financial stability

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CENTRAL BANKS AND FINANCIAL STABILITY

• Tensions
• Financial stability versus price stability
• Financial stability versus financial development

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CENTRAL BANKS AND FINANCIAL STABILITY

• Maintenance of financial stability is much more
  difficult and complex compared to price stability
• There is no straightforward instrument that a
  central bank can use for financial stability
• Financial stability reports are useful
  communication tools

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2) FINANCIAL STABILITY AND BASEL II
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FINANCIAL STABILITY AND BASEL II
Better risk management
Financial Stability
Effective supervision
International standards
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FINANCIAL STABILITY AND BASEL II
I. Adequate Capital II. Supervisory Review III.
Market Discipline
All three pillars of Basel II have direct
implications for financial stability.
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FINANCIAL STABILITY AND BASEL II
Pillar 1 Minimum Capital Requirements

• Capital allocation that is more sensitive to
  risks
• Alignment of regulatory and economic capital
• Encouragement of better risk management
  techniques

FINANCIAL STABILITY
Banks with adequate capital is the most important
level of defense for a central bank.
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FINANCIAL STABILITY AND BASEL II

• Pillar 2 Supervisory Review Process
• Urges banks to
• maintain adequate capital in relation to their
  risks
• monitor, measure and manage their risks by
  developing better risk management techniques
• take into consideration risks that are not
  defined under Pillar 1 such as,
• market risk (capital charges for price and
  FX risk,)
• liquidity risk (no capital charge, additional
  arrangements)

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FINANCIAL STABILITY AND BASEL II

• Pillar 3 Market Discipline
• Better information disclosure
• Enhanced efficiency of financial markets

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3) BASEL II AND TURKEY
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BASEL II AND TURKEY

• Basel II preparations
• Basel I, Capital Adequacy 1988 (TR 1989)
• Basel I, Market Risk 1996 (TR
  2002)
• QIS 3 2003
• QIS-TR 2004

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BASEL II AND TURKEY

• Reduced Fiscal Dominance
• Public debt to GDP ratio
• Deposit to GDP ratio
• Loans to GDP ratio

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BASEL II AND TURKEY

• Reverse Currency Substitution
• Asset Side
• Share of household FX deposits
• Share of commercial FX deposits
• Liability Side
• Share of household FX denominated loans is 0
• Share of Treasurys FX liabilities

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BASEL II AND TURKEY

• Effects on Bank Balance Sheets
• TL denominated government securities may receive
  0 lower risk weight (national discretion).
• FX denominated government securities will
  receive 100 percent risk weight under the current
  BB- rating for Turkey.

FX denominated sovereign risk weights
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BASEL II AND TURKEY

• Effects on Bank Balance Sheets (Standard
  Approach)
• Basel II assigns to
  Risk Weight
• consumer loans
  75
• small and medium sized enterprises
  75
• mortgages (owner occupied)
  35
• Additional capital requirement against
  operational risk

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4) CONCLUSION AND SUGGESTIONS
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CONCLUSION AND SUGGESTIONS

• For implementing of Basel II Turkey needs to
  improve
• risk culture and awareness
• supervisory capacity
• rating agencies
• disclosure practices
• use of international standards
• credit registry
• coordination between supervisors and banks

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CONCLUSION AND SUGGESTIONS

• Basel II is very good news for central banks as
  far as financial stability objective is concerned
  
• Macro-prudential analysis that covers banks as
  well as non-bank sectors is also essential.
• Financial Stability Report of the CBRT will
  focus mainly on macro-prudential analysis.

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IMPLICATIONS OF BASEL II FOR CENTRAL BANK POLICIES
Erdem Basçi Vice Governor Central Bank of the
Republic of Turkey Erdem.Basci_at_tcmb.gov.tr
Conference on Financial Stability and
Implications of Basel II May 2005, Istanbul