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12 February 2002 12 February 2002
Basel and the Impact on Basel and the Impact on Securities Houses/Investment Securities Houses/Investment FirmsFirms
Securities Institute Risk ForumSecurities Institute Risk Forum
Basel and the Impact on Basel and the Impact on Securities Houses/Investment Securities Houses/Investment FirmsFirms
Securities Institute Risk ForumSecurities Institute Risk Forum
Steve TeatherMerrill Lynch Europe PLC
Steve TeatherMerrill Lynch Europe PLC
The New Basel AccordThe New Basel Accord
The Three Pillars
Pillar 1 Minimum Capital Requirements Pillar 2 Supervisory Review Pillar 3 Market Discipline
Timetable
Quantitative Impact Study (‘QIS) - March 2002 (Investment firms?) CP3 - Summer 2002 Implementation - 2006 (?)
The New Accord was not drafted with Investment firms in mind
Capital Adequacy Directive is the important one
The Three Pillars
Pillar 1 Minimum Capital Requirements Pillar 2 Supervisory Review Pillar 3 Market Discipline
Timetable
Quantitative Impact Study (‘QIS) - March 2002 (Investment firms?) CP3 - Summer 2002 Implementation - 2006 (?)
The New Accord was not drafted with Investment firms in mind
Capital Adequacy Directive is the important one
Why all the fuss?Why all the fuss?
Trying to develop a risk sensitive regime
In effect trying to bring regulatory capital closer to economic capital
No revision of market risk
Aims to maintain overall level of capital (in the Banking industry)
Significant proposals
Credit risk - external v internal ratings based approach
Operational risk - a new charge
Disclosure (Pillar 3) - extensive disclosure of potentially sensitive information
The impact on Investment firms 1The impact on Investment firms 1
Trading book v banking book
Proposals designed and calibrated based on the banking book
General assumption of carry-across confirmed by Basel
More clarity needed
Operational risk
Calibration of minimum charge based on a typical international bank
Investment firms have different business profiles to the typical bank
Result = significantly higher operational risk charge compared to banks
Compensating reduction in credit risk charge?
The impact on Investment firms 2The impact on Investment firms 2
Credit risk mitigation
Initially proposed the “w-factor” though this has been moved
Use of collateral haircuts
Significant impact on repos and securities lending
Concerns with documentation - collateral and credit derivatives
Large exposures
Increases in exposures could have significant large exposure implications
The impact on Investment firms 3The impact on Investment firms 3
Securitisation
Proposals treat securitised products as more risky than similar non-securitised products
Treatment of synthetic securitisation likely to be penal
Treatment of unrated tranches
Minimum capital
Will economic capital be greater than regulatory minimum for investment firms?
Pillar 2 will lead to an upwards review of capital only
Further food for thoughtFurther food for thought
Integrated Prudential Sourcebook
Counterparty risk
Material holdings
Liquidity
Outsourcing
Systems and controls
Financial Conglomerates Directive
Material holdings
Group structure
Investment Services Directive
Commodities
Prospectuses Directive, IAS 39 etc etc