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Basel II: Country-specific risk weightage model

The first Basle accord of 1988 had to be revised as it took into account only globally active banks in G10 nations and it focussed “narrowly” on minimum capital requirements. The new Accord currently under development is commonly called the Second Basel Accord (Basel II). While the implementation of the Accord is not likely to happen before 2006, systems and process changes needs to be made much sooner.

The initial Basel Capital Accord only took financial risks into account. Basel II will ensure that banks evaluate and measure other forms of risk, including operational risk. Banks will have to make capital provision to effectively act as a contingency fund, to cover the direct and indirect losses that emergent operational risks could cause.

Bank for International Settlements (BIS) had asked RBI for vital inputs, including the quantitative impact study (QIS) to help in calibrating proposals to arrive at a country-specific risk weightage in the revised Basle accord on capital adequacy for banks, slated to be in place by ‘06.

QIS would help in crunching the numbers and provide an opportunity for dialogue between regulators and banks in the respective countries, he said. The country-specific risk weightage model would depend on inputs from the respective countries including India, as risk perceptions varied among countries and region.

The treatment of credit risk determinants in standardised approach, in which “third parties” judge the risk, comprises probability of default, loss given default, maturity, exposure at default and concentration. On the financial collateral, standardised approaches cash on deposit with the lending banks, government securities rated BB- and above (includes public sector enterprises treated as sovereigns by national supervisor), bonds rated BB- and above, equities in a main index and certain mutual funds and gold.

The Reserve Bank of India (RBI) will soon finalise the policy approach for the proposed new Basle capital accord based on the detailed study of the data, after receiving information from banks.

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