A little national discretion
Australian banking supervisors are using national discretion to propose that banks and other deposit-taking firms hold more capital than suggested by the Basel II capital rules to guard against `other retail' exposures.
This emerged, as expected, with the issue by the Australian Prudential Regulation Authority (Apra) in April of a discussion paper on implementing the standardised approach to credit risk. The approach is the simplest of the ways of assessing the chances of borrowers defaulting under Basel II (see main feature) and hence calculating the capital a bank needs to absorb losses from bad loans. The standardised approach uses, where possible, external assessments of the creditworthiness of borrowers as provided by organisations such as the leading credit rating agencies.
The paper, which has a September 30 deadline for comment, is the first of eight expected in coming months on the implementation of the various and pillars of Basel II as Apra wants them to apply to Australian banks, building societies and credit unions.
The Basel II framework, which was designed by the global banking supervisors of the Basel Committee, permits a 75% risk weighting for other retail exposures - such loans to individuals or a small business - under the standardised approach. But Apra proposes that these exposures continue to be risk-weighted at 100%. Most deposit taking firms in Australia will adopt the standardised approach when Basel II comes into force on January 1, 2008; only a half dozen or so of the larger banks will adopt the more sophisticated internal ratings-based approaches.
Apra says Australian ADIs (authorised deposit-taking institutions) that are likely to use the standardised approach do not have a high degree of diversification, whereas the Basel framework's 75% relates to large, diversified loan portfolios.
Furthermore, quantitative assessments of the Basel proposals suggest that for Australian ADIs a 75% risk weight offers an inadequate buffer for other risks that will be captured under the more sophisticated approaches but which are not captured in the same way by the standardised approach.
