Schönen Guten Tag

Presentation Topic:

Basic Understanding of Basel Agreements

Course:

Finandamentals of Financial Management WS 09/10

Course Instructer:

Prof. Dr. Gruner

Presenation By:

Mehar Muhammad AshfaqDate:

November 24, 2009

Coburg University of Applied Sciences-Germany

Basic Understanding of Basel Agreements

Thrust of PresentationHistorical Aspects

Basel I: Overview Short-Comings Achievements

Basel II: Overview Objectives of Basel II

Difference Between Basel I & Basel II.

Summary

Mehar Muhammad Ashfaq 4

What is Basel……….?

Mehar Muhammad Ashfaq 5

Overview on Basel

• Committee Founded in 1974• By Central Bank Governors of G10

(Belgium, Canada, France, Germany, Italy, Japan, Luxemburg, Netherlands, Spain, Sweden, Switzerland, UK, US)

• Focus: Banking Supervision• Objectives:• Adequate Supervision• No Internationally Active Bank Should Escape Supervision• Meets 4 Times a Year• Around 30 Working Groups / Task Forces• Location of Secretariat: Basel, Switzerland

Mehar Muhammad Ashfaq 6

Basel I – 1988 Agreement

Mehar Muhammad Ashfaq

Shortcomings of Basel I

• Capital Required did not Mirror a Bank’s True Risk Profile.

• Too Simple for Advanced Banks.

• Inflexible Against New Developments.

• Covers Only Credit and Market Risks.

• Only Quantitative in Nature.

• Limited Recognition of Collateral.

7

Mehar Muhammad Ashfaq 8

Basel I - Achievements

• Definition of Capital – First to be Internationally Accepted• Capital adequacy – First International Benchmark• Regulatory Capital Adequacy - Accepted• Soundness Indicator• Risk Management Orientation• Credit Risk: Simple Measure• Market Risk: Simple and Advanced Measures• Simple to Apply – Contributed to its Acceptance• Outcome: Basel I Adopted in over 100 Countries

Mehar Muhammad Ashfaq 9

Global Developments & Basel I

• Globalization

• Growth in Cross-Border Trade, Finance &

Investment.

• Technological Advances

• Computing Power and Storage

• Networks and Communications

• Financial Engineering (Development of Highly

Sophisticated/Complex Products)

• Above Causes are Reasons for Change…….

Mehar Muhammad Ashfaq

2006 …… Basel II Objectives of Basel II

• Greater Emphasis on Internal Assessment of Risk.

• Comprehensive Framework for Credit, Market and Operational Risk.

• Encourages Rigorous Bank Supervision.

• Ensures Market Transparency, Disclosures.

• More Risk sensitive; Better Align Regulatory Capital with Actual Risk Exposure.

10

Mehar Muhammad Ashfaq 11

Overview of Basel II

Mehar Muhammad Ashfaq 12

Difference: Basel I Vs Basel II

Mehar Muhammad Ashfaq 13

Conclusion

• Basel II as a law in EU.

• 1 January 2008 EU & US delayed January 2009.

• Lenders Sophistication in Risk Management.

• Tier 2 Capital: 8% of Risk-Weighted Assets.

• Tier 1 Capital: atleast 4% of Risk-Weighted Assets.

• Thinking Point……….Sub-prime Financial Crisis.

Mehar Muhammad Ashfaq 14

Thanks for Listening…….

For Feedback

Mehar Muhammad AshfaqMBA Financial Management

ashfaq8585@hotmail.com

Coburg University of Applied Sciences-Germany