An Analysis and Critique of the BIS Proposal on Capital Adequacy and Ratings

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An analysis and critique

of the BIS proposal on Cap

ital Adequacy and Ratings

(#10)

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Outline

 名詞解釋名詞解釋  國際清算銀行_{國際清算銀行} (BIS)_(BIS)  巴塞爾組織_{巴塞爾組織}  資本適足率資本適足率  BASEL1BASEL1 的起源的起源

 New BASEL (BASEL II) New BASEL (BASEL II) 的改革背景的改革背景  BIS 3 stages proposals draftBIS 3 stages proposals draft

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名詞解釋

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₍₁₎

 國際清算銀行國際清算銀行 (BIS)(BIS)  根據１９３０年１月２０日簽訂的海牙國際協_{根據１９３０年１月２０日簽訂的海牙國際協} 定組成。定組成。  現在是西歐多邊清算制度的收付代理人，並接_{現在是西歐多邊清算制度的收付代理人，並接} 受各國中央銀行的存款，代為買賣黃金、外匯受各國中央銀行的存款，代為買賣黃金、外匯、發行債券，辦理國際性政府借款﹔促進中央、發行債券，辦理國際性政府借款﹔促進中央銀行之間的合作﹔為國際支付往來提供方便。銀行之間的合作﹔為國際支付往來提供方便。該行掌握著世界１４０家中央銀行部分國際儲該行掌握著世界１４０家中央銀行部分國際儲備。備。

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BIS

的歷史

_的歷史

 BIS_BIS 的建立_的建立

 The BIS was established in 1930, which dealt with the issue _{The BIS was established in 1930, which dealt with the issue}

of the reparation payments imposed on Germany by the Treaty

of Versailles following the First World War.

 The new bank was to take over the functions previously perfo_{The new bank was to take over the functions previously perfo}

rmed by the Agent General for Reparations in Berlin: collect

ion, administration and distribution of the annuities payabl

e as reparations.

 The BIS was also created to act as a trustee for the Dawes a_{The BIS was also created to act as a trustee for the Dawes a}

nd Young Loans (international loans issued to finance repara

tions) and to promote central bank cooperation in general.

tions) and to promote central bank cooperation in general.  The reparations issue quickly faded, focusing the Bank's act_{The reparations issue quickly faded, focusing the Bank's act}

ivities entirely on cooperation among central banks and, inc

reasingly, other agencies in pursuit of monetary and financi

reasingly, other agencies in pursuit of monetary and financi al stability.

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BIS

的角色扮演

_{的角色扮演}

 在財政領域內的角色在財政領域內的角色  財政領域之外的角色財政領域之外的角色  提供緊急財政支援提供緊急財政支援

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BIS

的角色扮演

_{的角色扮演}

 在財政領域內的角色_{在財政領域內的角色}

 In the immediate aftermath of the Second World War and _{In the immediate aftermath of the Second World War and} until the early 1970s ,cooperation at the BIS focused o

until the early 1970s ,cooperation at the BIS focused o

n implementing and defending the Bretton Woods system.

 In the 1970s and 1980s, the focus was on managing cros_{In the 1970s and 1980s, the focus was on managing cros} s-border capital flows following the oil crises and the

s-border capital flows following the oil crises and the

international debt crisis.

 The 1970s crisis also brought the issue of regulatory s_{The 1970s crisis also brought the issue of regulatory s} upervision of internationally active banks to the fore,

upervision of internationally active banks to the fore,

resulting in the 1988

resulting in the 1988 Basel Capital AccordBasel Capital Accord and its " and its " Basel II

Basel II" revision of 2001-06. " revision of 2001-06.

 More recently, the issue of financial stability in the _{More recently, the issue of financial stability in the} wake of economic integration and globalisation, as high

wake of economic integration and globalisation, as high

lighted by the 1997 Asian crisis, has received a lot of

attention.

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BIS

的角色扮演

_{的角色扮演}

 財政領域之外的角色財政領域之外的角色

 The BIS has always performed "traditional" bankin_{The BIS has always performed "traditional" bankin}

g functions for the central bank community (eg gol

d and foreign exchange transactions), as well as t

rustee and agency functions.

 The BIS was the agent for the European Payments Un_{The BIS was the agent for the European Payments Un}

ion (EPU, 1950-58), helping the European currencie

s restore convertibility after the Second World Wa

r.

 The BIS has acted as the agent for various Europea_{The BIS has acted as the agent for various Europea}

n exchange rate arrangements, including the Europe

an Monetary System (EMS, 1979-94) which preceded t

he move to a single currency.

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BIS

的角色扮演

_{的角色扮演}

 提供緊急財政支援_{提供緊急財政支援}

 During the 1931-33 financial crisis, the BIS or_{During the 1931-33 financial crisis, the BIS or}

ganised support credits for both the Austrian a ganised support credits for both the Austrian a

nd German central banks. nd German central banks.

 In the 1960s, the BIS arranged special support _{In the 1960s, the BIS arranged special support}

credits for the Italian lira (1964) and the Fre credits for the Italian lira (1964) and the Fre nch franc (1968), and two so-called Group Arran nch franc (1968), and two so-called Group Arran

gements (1966 and 1968) to support sterling. gements (1966 and 1968) to support sterling.

 More recently, the BIS has provided finance in More recently, the BIS has provided finance in

the context of IMF-led stabilisation programmes the context of IMF-led stabilisation programmes

(eg for Mexico in 1982 and Brazil in 1998). (eg for Mexico in 1982 and Brazil in 1998).

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名詞解釋

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₍₂₎

 巴塞爾組織巴塞爾組織  國際清算銀行_{國際清算銀行} (BIS)_(BIS) 於_於 1974₁₉₇₄ 年結合_年結合 10₁₀ 大工業_大工業國共同設立巴塞爾銀行監理委員會。國共同設立巴塞爾銀行監理委員會。  目標：在『國外銀行業務無法避免監理』和_{目標：在『國外銀行業務無法避免監理』和} 『適當監理』兩項原則下，消弭世界各國監理『適當監理』兩項原則下，消弭世界各國監理範圍差異範圍差異  擁有近三十個技術工作團隊，執行每年鎖定的_{擁有近三十個技術工作團隊，執行每年鎖定的} 計畫及目標計畫及目標  委員會本身不具任何跨國監理的權力，因此其_{委員會本身不具任何跨國監理的權力，因此其} 決議沒有也未企圖擁有法律上的強制效力決議沒有也未企圖擁有法律上的強制效力

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名詞解釋

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₍₃₎

 資本適足率資本適足率  巴塞爾銀行監理委員會於_{巴塞爾銀行監理委員會於} 1988₁₉₈₈ 年_年 7₇ 月發布「銀_{月發布「銀} 行自有資本之計算與自有資本標準之國際通行自有資本之計算與自有資本標準之國際通例」，此一規範一般稱為巴塞爾資本協定，其例」，此一規範一般稱為巴塞爾資本協定，其奠定了現行銀行風險基準資本適足性的基礎。奠定了現行銀行風險基準資本適足性的基礎。自有資本淨額自有資本淨額信用風險性資產額信用風險性資產額＋＋市場風險市場風險應計提之資本應計提之資本 ×× 12.5 12.5  ８％

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BASEL 1

的起源

_的起源

 歷史背景歷史背景  1974₁₉₇₄ 年_年 5.6_5.6 月西德的賀斯塔特銀行及美國第_{月西德的賀斯塔特銀行及美國第} 20₂₀ 大的富蘭克林銀行倒閉。大的富蘭克林銀行倒閉。  在這次事件衝擊下，外匯市場收縮，國際資金_{在這次事件衝擊下，外匯市場收縮，國際資金} 緊張。使得銀行業本身的脆弱浮上檯面。譬如緊張。使得銀行業本身的脆弱浮上檯面。譬如自有資金比重下降，放款對存款比例增大，存自有資金比重下降，放款對存款比例增大，存款準備金不足等。款準備金不足等。  從從 1960~19741960~1974 ，美國全部商業銀行資本占資產，美國全部商業銀行資本占資產比重從比重從 8.1%8.1% 降到降到 6.9%6.9% ，放款佔存款比例從，放款佔存款比例從 5656 .2% .2% 升至升至 82%82% ，存款準備金結構也失衡。，存款準備金結構也失衡。

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BASEL 1

的起源

_的起源

 協定的設立協定的設立  1975₁₉₇₅ 年_年 9₉ 月，第一個《巴塞爾協定》提出。_{月，第一個《巴塞爾協定》提出。}  核心內容是針對國際性銀行監管主體缺位的核心內容是針對國際性銀行監管主體缺位的現實，提出了兩個基本之監管思想：現實，提出了兩個基本之監管思想： 1. 1. 任何銀行的國外機構全都不能逃避監管。任何銀行的國外機構全都不能逃避監管。 2. 2. 母國和地主國應共同承擔相應職責。母國和地主國應共同承擔相應職責。  19881988 年年 77 月，巴塞爾委員會對協定進行了首月，巴塞爾委員會對協定進行了首次實質性完善，並通過了《關於統一國際銀次實質性完善，並通過了《關於統一國際銀行的資本計算和資本標準的報告》（簡稱行的資本計算和資本標準的報告》（簡稱《巴塞爾報告》）。《巴塞爾報告》）。

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New BASEL

的改革背景

_{的改革背景}

 It give an equal weighting to all copIt give an equal weighting to all cop

orates credits whether of high or low orates credits whether of high or low

credit quality. credit quality.

 It fails to incorporate potential capIt fails to incorporate potential cap

ital savings from credit (loan) portf ital savings from credit (loan) portf

olio diversification. olio diversification.

 It has led to extensive regulatory caIt has led to extensive regulatory ca

pital arbitrage which adds to the ris pital arbitrage which adds to the ris

kness of bank asset portfolios. kness of bank asset portfolios.

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BIS 3 stages proposals draf

t

 19991999 年年 66 月國際清算銀行巴塞爾銀行監理月國際清算銀行巴塞爾銀行監理委員會公布一個更具風險敏感性的新資本委員會公布一個更具風險敏感性的新資本適足性架構，或稱修正草案諮詢文件第一適足性架構，或稱修正草案諮詢文件第一版

版 (Consultative Paper,CP1)(Consultative Paper,CP1) ，將以取代，將以取代 1988

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BIS 3 stages proposals

draft

 修正草案內容修正草案內容

1)

1) the 8% risk based ratio would be replaced the 8% risk based ratio would be replaced

by weighting based on the external credit

agency rating of the borrower .

2)

2) some sophisticated banks have developed thsome sophisticated banks have developed th

eir own internal rating systems for loans

.

3)

3) given appropriate model and database develgiven appropriate model and database devel

opment and testing some banks may be able

to use their own internal credit risk mode

ls to calculate capital requirements .

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The BIS Stage 1 Proposal

 1988 BIS: All corporate loans have the 1988 BIS: All corporate loans have the

same 100% risk-weight implying the same 100% risk-weight implying the

same minimum capital requirement same minimum capital requirement

8%. 8%.

 1999 BIS: The 8% risk based ratio 1999 BIS: The 8% risk based ratio

should be replaced by weightings should be replaced by weightings

based on the external credit agency based on the external credit agency

rating of the borrower. rating of the borrower.

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The BIS Stage 1 Proposal

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The BIS Stage 1 Proposal

 Examine the three-bucket approach for Examine the three-bucket approach for

corporate borrowers with two questions:

1. Does this approach lead to bank capital

reserves rising prior to recessions? (i.e.

before the realization of loan losses occurs)

→

→ A well-designed regulatory system should A well-designed regulatory system should see capital reserves rising during periods of

see capital reserves rising during periods of

high profitability and earnings for banks and

falling during recessions as “unexpected

losses” are written off against capital.

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The BIS Stage 1 Proposal

2. Does the bucketing system make economic se

nse? That is, how homogeneous in terms of r

isk are the different buckets.

→

→ Bucket 2 encompasses both investment gBucket 2 encompasses both investment g rade debt (A and BBB) as well as below inve

rade debt (A and BBB) as well as below inve

stment grade debt (BB and B).

Moreover, if they are not homogenous, Moreover, if they are not homogenous, what relative risk-weighting scheme would t

what relative risk-weighting scheme would t

hese data suggest?

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Empirical Result

1.

1. The lead-lag relationship of capital The lead-lag relationship of capital

reserves: reserves:

 Rating agencies move slowly and theiRating agencies move slowly and thei

r ratings are often inflexible. r ratings are often inflexible.

 A capital adequacy system builts aroA capital adequacy system builts aro

und traditional agency ratings might und traditional agency ratings might

even follow, rather than lead, the b even follow, rather than lead, the b

usiness cycle. usiness cycle.

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Empirical Result

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Empirical Result

 Rather than leading the recession, miRather than leading the recession, mi

nimum capital requirements would have nimum capital requirements would have

been lagging it and also the rising w been lagging it and also the rising w

ave of loan defaults. ave of loan defaults. →

→ Some banks would have had to buiSome banks would have had to bui ld up their minimum reserve requireme ld up their minimum reserve requireme nts during the recession with a peak nts during the recession with a peak minimum capital ratio being achieved minimum capital ratio being achieved

at or near the recession’s end. at or near the recession’s end.

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Empirical Result

2.

2. Bucket risk homogeneity:Bucket risk homogeneity:

 We examined data on bond issues We examined data on bond issues

(and issuers) over the 1981-1999 (and issuers) over the 1981-1999

period. period.

 Our focus of attention was the Our focus of attention was the

degree of homogeneity degree of homogeneity

(heterogeneity) of unexpected loss (heterogeneity) of unexpected loss

rates over the sample period. rates over the sample period.

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1.

1. We use the data of bond to represenWe use the data of bond to represen

t loan of each company. t loan of each company. 2.

2. Collecting the price and coupon of Collecting the price and coupon of

the bonds one year prior to default the bonds one year prior to default and the price of the bonds just aft and the price of the bonds just aft er defaults, then we obtained the l er defaults, then we obtained the l oss rate of each bond default.(From oss rate of each bond default.(From 1981~1999)

1981~1999) 3.

3. Using Mean value (loss rate) to repUsing Mean value (loss rate) to rep

resent the “Expected Loss Rate.” resent the “Expected Loss Rate.” 4.

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Statistics

　　 AA BBBBBB BBBB BB CCC&LowerCCC&Lower Total Total _12,122_12,122 _7,576_7,576 _5,375_5,375 _5,372_5,372 ₄₉₃₄₉₃ Default Default 7 7 47 47 64 64 375 375 199 199 Non-Defa Defa ult ult 12,115 12,115 7,529 7,529 5,311 5,311 4,997 4,997 294 294 Mean(Los Mean(Los s rat s rat e) e) 0.012 0.012 0.067 0.067 0.298 0.298 1.734 1.734 14.079 14.079 S.D.(Los S.D.(Los s rat s rat e) e) 0.628 0.628 1.027 1.027 3.181 3.181 8.066 8.066 28.890 28.890

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Empirical Result

Fitting the data (loss rate) into two Fitting the data (loss rate) into two probability models to do the

probability models to do the empirical researches.

empirical researches.

1. Normal distribution1. Normal distribution

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Normal distribution

　　 A_A BBBBBB BBBB BB CCC&LowerCCC&Lower 99.97 99.97 % % 2.142 2.142 3.458 3.458 10.619 10.619 25.947 25.947 88.501 88.501 99.00 99.00 % % 1.448 1.448 2.323 2.323 7.102 7.102 17.030 17.030 55.455 55.455 95.00 95.00 % % 1.021 1.021 1.623 1.623 2.051 2.051 11.533 11.533 35.085 35.085 Mean Mean 0.012 0.012 0.067 0.067 0.298 0.298 1.734 1.734 14.079 14.079 S.D. S.D. (%) (%) 0.628 0.628 1.027 1.027 3.181 3.181 8.066 8.066 28.890 28.890

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Actual distribution

　　 A_A BBBBBB BBBB BB CCC&LowerCCC&Lower Total Total _,122_,122 1212 _,576_,576 77 _,375_,375 55 _,372_,372 55 ₄₉₃₄₉₃ Default Default ₇₇ ₄₇₄₇ ₆₄₆₄ ₃₇₅₃₇₅ ₁₉₉₁₉₉ Non-Defa Defa ult ult 1212 ,115 ,115 ,529 ,529 77 ,311 ,311 55 ,997 ,997 44 294 294 0.03% 0.03% _3.64_3.64 _2.27_2.27 _1.61_1.61 _1.61_1.61 _0.15_0.15 1.00% 1.00% _1.22_1.22 1212 _5.76_5.76 77 _3.75_3.75 55 _3.72_3.72 55 _4.93_4.93

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　　 A_A BBBBBB BBBB BB CCC&LowerCCC&Lower 99.97 99.97 % % 14.988 14.988 24.933 24.933 54.702 54.702 83.266 83.266 85.921 85.921 99.00 99.00 % % 0*0* 0*0* 4.702 4.702 43.266 43.266 70.921 70.921 95.00 95.00 % % 0*0* 0*0* 0*0* 13.266 13.266 50.921 50.921 Mean Mean 0.012 0.012 0.067 0.067 0.298 0.298 1.734 1.734 14.079 14.079 S.D. S.D.

Actual

distribution

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Empirical Result

 Nomatter what model we use,the four degree Nomatter what model we use,the four degree

of credit qualities in bucket 2 should not

be equally risk weighted.

 Comparing with bucket 2 and bucket 3,we fi_{Comparing with bucket 2 and bucket 3,we fi}

nd that 100% risk-weighting for bucket 2 a

nd 150% for bucket 3 is not appropriate.

The reason is “the degree of homogeneitThe reason is “the degree of homogeneit y.”

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Revised method

 Confounding “loan losses” with “boConfounding “loan losses” with “bo

nd losses.” nd losses.”

 For non-defaulter,we have used the nuFor non-defaulter,we have used the nu

mber of “issuers.” mber of “issuers.”

 For defaulter,we have used the number For defaulter,we have used the number

of “issues.” of “issues.”

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Revised method

 Way: Only using the most “senior” bond or nWay: Only using the most “senior” bond or n ote of each defaulting issuer.

ote of each defaulting issuer.

 What is “senior” ? _{What is “senior” ?}

The one with highest price one year prior to The one with highest price one year prior to default.

default.

 Benefit: Since most bank loans have collatera_{Benefit: Since most bank loans have collatera} l backing and have higher prices.These “seni

l backing and have higher prices.These “seni

or” bonds are more like loan than others.

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Statistics

　　 A_A BBBBBB BBBB BB CCC&LowerCCC&Lower Total Total _,117_,117 1212 _,541_,541 77 _,330_,330 55 _,205_,205 55 ₃₈₇₃₈₇ Default Default ₂₂ ₁₂₁₂ ₁₉₁₉ ₂₀₈₂₀₈ ₉₃₉₃ Non-Defa Defa ult ult 1212 ,115 ,115 ,529 ,529 77 ,311 ,311 55 ,997 ,997 44 294 294 Mean Mean 0.002 0.002 0.091 0.091 0.205 0.205 2.126 2.126 12.078 12.078 S.D.(%) S.D.(%) 0.193 0.193 2.454 2.454 3.658 3.658 11.529 11.529 24.521 24.521

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Normal distribution

　　 A_A BBBBBB BBBB BB CCC&LowerCCC&Lower 99.97% 99.97% 0.659 0.659 8.332 8.332 12.351 12.351 37.440 37.440 72.077 72.077 99.00% 99.00% 0.446 0.446 5.619 5.619 8.306 8.306 24.694 24.694 44.967 44.967 95.00% 95.00% 0.314 0.314 3.946 3.946 5.813 5.813 16.837 16.837 28.256 28.256 Mean Mean 0.002 0.002 0.091 0.091 0.205 0.205 2.126 2.126 12.078 12.078 S.D.(%) S.D.(%) 0.193 0.193 2.454 2.454 3.658 3.658 11.529 11.529 24.521 24.521

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Actual distribution

　　 A_A BBBBBB BBBB BB CCC&LowerCCC&Lower Total Total _,117_,117 1212 _,541_,541 77 _,330_,330 55 _,205_,205 55 ₃₈₇₃₈₇ Default Default ₂₂ ₁₂₁₂ ₁₉₁₉ ₂₀₈₂₀₈ ₉₃₉₃ Non-Defa Defa ult ult 1212 ,115 ,115 ,529 ,529 77 ,311 ,311 55 ,997 ,997 44 294 294 0.03% 0.03% _3.64_3.64 _2.26_2.26 _1.60_1.60 _1.56_1.56 _0.12_0.12 1.00% 1.00% _1.17_1.17 1212 _5.41_5.41 77 _3.30_3.30 55 _2.05_2.05 55 _3.87_3.87 0.50% 0.50% _0.59_0.59 66 _7.71_7.71 33 _66.5_66.5 22 _60.3_60.3 22 _1.94_1.94

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Actual distribution

　　 A_A BBBBBB BBBB BB CCC&LowerCCC&Lower 99.97% 99.97% 0*0* 74.909 74.909 91.795 91.795 89.974 89.974 83.922 83.922 99.00% 99.00% 0*0* 0*0* 0*0* 72.874 72.874 72.922 72.922 95.00% 95.00% 0*0* 0*0* 0*0* 0*0* 62.922 62.922 Mean Mean 0.002 0.002 0.091 0.091 0.205 0.205 2.126 2.126 12.078 12.078 S.D.(%) S.D.(%) 0.193 0.193 2.454 2.454 3.658 3.658 11.529 11.529 24.521 24.521

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Empirical Result

 We got the same result.We got the same result.

 The problem of heterogeneity dose The problem of heterogeneity dose

exist. exist.

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Summary & Proposal

 This paper has examined two aspects of This paper has examined two aspects of

stage 1 of the BIS’s proposed reforms

:

1.

1. Relying on traditional agency ratings Relying on traditional agency ratings

could produce cyclically lagging capit

al requirements, resulting in an enhan

ced degree of instability in the bank

ing and financial system.

2.

2. The current bucketing proposal lacks a The current bucketing proposal lacks a

sufficient degree of granularity.

(39)

Summary & Proposal

 A revised bucket proposalA revised bucket proposal

(40)

Summary & Proposal

 A revised bucket proposalA revised bucket proposal

1.

1. The choice of 10% for bucket 1 is arbitrary. The choice of 10% for bucket 1 is arbitrary. Although the results clearly show that no

Although the results clearly show that no

defaults have actually taken place, Altman

thought it’s weird to let the weighting be

zero.

zero. 2.

2. Use a ratio of about 3.33 to 1 when Use a ratio of about 3.33 to 1 when

comparing the BB/B bucket with the A/BBB

bucket. This is about the midpoint between

the normal distribution and actual