ASIA PACIFIC DEVELOPMENT CENTRE WORKSHOP ON RISK MANAGEMENT IN COMMCERCIAL BANKS SHANGHAI, 20/21ST DECEMBER 2005

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ASIA PACIFIC DEVELOPMENT CENTREWORKSHOP ON RISK
MANAGEMENT IN COMMCERCIAL BANKSSHANGHAI, 20/21ST
DECEMBER 2005

• Presentation by Ken Waller
• Group Economic Advisor
• Commonwealth Bank of Australia
• Session II Basel II-based Risk Management
  Requirements and Challenges for Commercial Banks
• ????????II???????
• ???????????
• ???Ken Waller, ??????????

2
Agenda ??

• 1. Why risk management is critical to good
• banking ????????
• 2. Factors which impact on risk ????
• Basel II risk management supervision
• ?????II ????????
• Requirements on commercial banks
• ????????
• Challenges in implementing Basel II
• ???????II ??????
• 6. Conclusions ??

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1.Why risk management is critical to good banking
????????

• Obligation on banks to protect depositor savings
  fundamental - often required under law
• ????????????????
• Shareholders expect growth in earnings from sound
  bank management ????????????????
• Vital for confidence in banking system for sound
  economic performance and improving living
  standards of community ???????????,??????????????
  ????
• Ensures best use of capital in banks
• ???????????

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2. Factors which impact on risk ????

• International and domestic economic conditions
  ???????
• - Asian financial crisis of 1997/98 caused
• contagion across the region
• 97/98???????????????
• - global imbalances threaten stability
• ?????????????
• - energy price rises ??????
• - terrorism ????
• - avian flu ???

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2.2 Factors which impact on risk (continued)
???? (?)

• Quality of macroeconomic management of an economy
  ?????????
• - budgets balance over the cycle
• ??-?????????
• - monetary policy sustained low
  inflation
• ????-????????
• - exchange rates - flexible
• ??????
• - capital account liberalise
• ???????
• - taxation policies simple,
  transparent, equitable
• ???? ????????

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2.3 Factors which impact on risk(continued)
???? (?)

• Quality of prudential supervision of financial
  system
• ???????????
• - helps determine the credit culture
• ???????????
• - value of international regulatory
• standards and practices
• ????????????
• - quality of governance in regulatory
• agencies and in ministries
• ?????????
• - sound legal supervisory framework
• ?????????

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2.4 Factors which impact on risk(continued)
???? (?)

• Changing technology in finance often costly and
  complex to manage
• ??????????-???,???
• Product innovation new products complex
• ????-???-??
• Changing ownership structures
  mergers/acquisitions ???????-??/??
• Financial market integration challenge for
  supervisors/cross-border harmonisation
• ???????-?????/?????????????

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3. Basel II Risk management supervision
?????II-????????

• Supervision of risk management within framework
  three pillars ????????
• Pillar 1 minimum capital requirement
• ??1-???????
• - three choices for managing credit risk
• ???????????
• - standardised ???
• - foundation internal ratings (FIRB)
  ??????
• - advanced internal ratings (AIRB)
  ??????
• - market risk element is unchanged ??????????
• - operational risk new element to cover
  loss resulting from inadequate or failed
  processes, people and systems and external events
• ????-???-????????????????????????????????
  

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3.2 Basel II risk management supervision
(continued)?????II-????????(?)

• Pillar 2 Supervisory review of capital adequacy
  ??2 ??????????
• - based on a series of guiding principles
• banks required to assess their capital
• adequacy provisions relative to risk
• ????????????????????????
• - supervisors review banks processes -
• involves increased dialogue with banks
• ???????????-???????

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3.3 Basel II risk management supervision
(continued)?????II-????????

• Pillar 3 market discipline
• ??3 ????
• - more disclosure required of banks
• ????????
• - provides for greater understanding by
• market participants on a banks risk
• profile and capitalisation
• ????????????????????????? ??????
• Markets should be come more discerning about a
  banks quality impact on credit rating and
  cost of raising capital
• ??????????????-???????-???????

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3.4 Basel II risk management supervision
(continued)?????II-????????

• Aligns regulatory capital with banks assessment
  of economic capital
• ?????,????????????????????????
• Principles based approach to supervision rather
  than a rules-based approach
• ??????????????
• Role of bank boards enhanced and critical to
  process of risk management
• ??????????,?????????????

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4. Requirements on commercial banks ????????

• Major changes to banks governance arrangements
  ?????????
• - regular submissions to boards advising
• accreditation processes
• ????????????
• - implementation requires rigorous work on
  improving credit risk management and knowledge
  and management
• of operational risk
• ???????????????,????? ???

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4.2 Requirements on commercial banks ????????

• Dealing with credit and market risk
• ?????????
• - upgrade credit risk analytics and
• reporting ????????????
• - upgrade collateral management systems
• ????????
• - credit risk factors/risk model validation
• ??????/???????
• - improve analysis and focus on interest
• rate in the banking book ??????????

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4.3 Requirements on commercial banks ????????

• Operational risk ????
• - develop/review risk indicators and
• scenario analysis ??/???????????
• - refine capital modelling ??????
• - refine IT solutions ??IT????
• - business and strategic risk analysis
• provide for business continuity comply
• with use and experience test
• ????????????????? ????

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5. Challenges in implementing Basel II
???????II ??????

• Based on a minimum capital requirement
• which has to be met, including for
  operational risk
• ????????????????????
• Requires an integrated approach to risk
  management and concerted effort to implement by
  boards and management
• ??????????????,??????????
• ???
• May well require a major change in culture
• ????????????
• Processes require strong and effective governance
  processes in banks (and supervisory agencies)
• ????(?????)????????????

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5.2 Challenges in implementing Basel II
???????II ??????

• Use and experience test supervisors require
  banks to demonstrate they can estimate
  regulatory capital requirements and can manage
  risk
• ????-????????????????????????????
• For most banks, upgrade of data and management
  processes for credit and operational risk
  required
• ?????????,???????,?????????????????
• Stringent requirements on boards and management
  (requiring detailed education and training
  programs)
• ???????????(????????????)

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5.3 Challenges in implementing Basel II ???????II
??????

• Important for banks to determine whether they
  seek the standardised or IRB approach the
  latter can be costly in terms of capital and
  human resources for smaller banks
• ???????????????????? ???????????????????????
• Cross-border implementation issues for
  internationally active banks and for supervisors
  in home and host jurisdictions yet to be resolved
• ??????????????????????????????

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6. Conclusions ??

• Benefits through deeper appreciation of risk and
  its critical importance to banking
• ???????????????????
• Domestic and global economic factors highly
  relevant
• ????????????
• Basel II requires all banks to take an integrated
  approach to risk complex and for smaller banks
  this may be expensive
• ?????II ???????????????????-?????????????
• Important to decide on standardised or advanced
  approach
• ??????????????????
• Much deeper coordination with supervisors
  extremely valuable for financial stability.
• ???????????? ?????????