Fewer banks planning for higher risk measure
NEW YORK - There are some early signs that fewer banks around the world will adopt the most sophisticated approaches to measuring their regulatory risk capital under the new Basel capital accord than originally seemed likely.
According to a survey of banks on four continents, some 49% of banks and other financial institutions either use, or plan to use, the advanced internal ratings based approach (A-IRB) for credit risk measurement. This compares with roughly 55% when this particular survey was last undertaken two years ago.
Conversely, the number of respondents whose banks either use or are planning to implement the foundation internal ratings based approach (F-IRB) - the intermediate of the three approaches designated under the new accord - has more than doubled, to 50%, from 22%.
The bi-annual Global Risk Management survey, published in December, and carried out during the second half of last year by the capital markets division of Deloitte & Touche, the professional services firm, is based on 162 responses from across North and South America, Europe and Asia-Pacific.
A key section of the survey provides insights into the current intentions of banks choosing from the designated options for risk capital calculation under the new accord - Basel II - which is aimed at underpinning the world's banking system. As well as banks choosing the A-IRB and the F-IRB, an even larger group (around 60% of respondents), is using, or planning to use, the standardised credit risk measurement approach, the simplest of the three methods.
Although, taken together, the sum of the answers from respondents is much greater than 100% for the planned use of the three measurement options, Deloitte's think this can readily be explained. In some cases, the figures may relate to bank holding companies planning to use different measurement options in different jurisdictions. In addition, many banks are planning to graduate from the simpler approach to the F-IRB or A-IRB over time. For many banks, the F-IRB is seen as a half-way house to ultimate use of the most sophisticated measure, and so will have indicated the planned intention to use both.
One reason for the modest decline over the last two years in the number of banks planning to implement the A-IRB may be the decision of the US regulatory agencies to restrict the number of banks permitted to apply Basel II in America, reckons Deloitte. Mergers may also have reduced the number of large banks implementing the A-IRB. But, it may also be possible, say the survey's editors, that "a number of banking institutions have a better appreciation now of the complexities and investment required to implement the A-IRB."
Equally surprising, a majority of respondents (54%) still say that they are planning to implement the advanced measurement approaches (AMA) for operational risk capital calculations - the most sophisticated of the three designated options. However, only a small minority (6%), think they are currently in a position to comply with AMA requirements, which might indicate that plans are excessively ambitious, in many cases. Only 18% think they are in a position currently to comply with the standardised (the intermediate) approach, although around 60% are planning to use this option. This is rather more than say they plan to implement the basic indicator (the simplest) approach.
In the case of both credit and op risk, it is the largest firms that are opting for the more sophisticated approaches, and the smaller banks that are choosing the simpler ones.
On a geographical basis, Asia-Pacific banks show a strong interest in implementing the F-IRB for their credit risk calculations. Nearly 75% indicated that they had no plans to adopt the A-IRB. At the other end of the spectrum are the European banks, 70% of which are planning to implement the A-IRB, compared with under half that are planning to use the F-IRB.
The geographic picture is similar for op risk measurement, where over 60% of banks in the Asia-Pacific region are planning to use the basic indicator approach, higher than for any other geographic category. Almost three-quarters of European banks are planning to implement the AMA.
