Enhancements to Basel II
Hassan NasserCompliance & Inspection DirectorDubai Multi Commodities Centre
Enhancements To Basel II
• Basel Committee is responding to the financial crisis by strengthening the Basel II framework
Enhancements to Pillar 1
• Strengthening the risk capture of Basel II framework
• CDOs of ABS – Re-securitization are highly correlated with systematic risk
• It warrants higher capital charge
Enhancements to Pillar 1
• Increasing the capital requirement for Liquidity lines extended to support ABCP by eliminating the distinction between short-term and long-term facilities
Enhancements to Pillar 1
• Banks must obtain comprehensive information about the underlying exposure characteristics of their externally-rated securitization positions
• Failure of which would result in higher capital requirements
Enhancements to Pillar 2
• Firm-wide governance and risk management
– Understanding the firm-wide risk profile
– Aggregate firm-wide exposure information in a timely manner using easy to understand and multiple metrics
– Considering long term performance over the cycle
Enhancements to Pillar 2
• Firm-wide governance and risk management (contd.)
– Set clear incentives in accordance with the stated risk appetite
Enhancements to Pillar 2
• Capturing the risk of off-balance exposures and securitization activities including:
– Contractual risk
– Non-contractual commitments
– Implicit support
– Reputational risk
Enhancements to Pillar 3
• Disclosures will include:
– Securitization exposures in the trading book
– Sponsorship of off-balance sheet vehicles
– IAA for securitization and other ABCP liquidity facilities
– Re-securitization exposures
Enhancements to Pillar 3
• Valuation with regards to securitization exposures
• Pipeline and warehousing risk with regard to securitization exposures