Basel II as seen by Israel s Banking System

Basel II as seen by Israel’s Banking System Rony Hizkiyahu, Supervisor of Banks, Bank of Israel 30 January 2007 The Interdisciplinary Center, Herzliya, Caesaria Center

Basel II –The Vision ü Strengthening the safety and soundness of the international banking system. ü Creating standardization and reliability in the banking system at an international level. ü Conversion to advanced methods accompanied by incentives. 2

Basel II - Challenges ü Improvement of risk management by the banking system (credit and market risks) including risks that were not addressed in the past (operational risk). ü Management of organizational culture change with respect to risk (corporate governance). ü Creation and maintenance of databases. ü Management of credit risk due to small businesses through pools. 3

Basel II - Implications ü Upgrading risk management and control systems. ü Development of internal and external rating. ü Effect on competition. ü Effect on credit management of (large) corporations in non-bank financial services industries. ü Upgrading small corporations’ management in order to meet the demands of the bank. ü Increased efficiency of market activities as a result of increased disclosure. ü Increased volatility of the business cycle => change in behavior patterns. ü Costs 4

Risk-Based Capital Ratio of the Large Banking Groups in Israel 5

Relative Surplus Capital Adequacy – International Comparison 6

Basel II – The Three Pillars Pillar 1: Minimum Capital Requirements 7 Pillar 2: Supervisory Review Process Pillar 3: Market Discipline

Basel II – Pillar 1 - Main Approaches to the Calculation of Minimum Capital Requirements Credit Risk • Standardised Approach (SA) • Internal Ratings-Based Approach (IRB) • Foundation Internal Ratings-Based Approach (F IRB) • Advanced Internal Ratings-Based Approach (A IRB) 8

Basel II – Pillar 1 – Main Approaches to the Calculation of Minimum Capital Requirements Operational Risk • Basic Indicator Approach (BIA) • Standardised Approach (SAOR) • Advanced Measurement Approaches (AMA) 9

Basel II – Implementation Prospects in 49 Countries 35 countries in which an implementation date has been set: Australia Bahrain Canada EU (19 countries) Hong Kong India Latvia Malaysia New Zealand Philippines Singapore South Africa South Korea Sri Lanka Switzerland Taiwan Thailand US 10 14 countries in which an implementation date has not been set: Source: "Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva. Albania Argentina Bermuda Bulgaria Chile China Croatia Israel Japan Mauritius Panama Romania Turkey Uruguay

Basel II Implementation Prospects in 35 Countries (according to publicized data) 11 Source: "Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

35 Countries in which an Implementation Date has been Set Implementation Date: Number of Countries Year 3 5 21 4 1 1 2006 2007 2008 2010 2009 Source: "Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva. 12

35 Countries in which an Implementation Date has been Set (Continued) Approaches adopted to calculate minimal capital requirements Number of Countries 1 3 24 2 3 2 Approach Advanced Only (US) All the Approaches Standard 2007 Advanced 2008 Standard with Parallel Calculation Only Standard No Specified Approach Source: "Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva. 13

Basel II – Implementation Prospects in 14 Countries (according to published data) 14 Source: "Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

Basel II – 14 Countries in which no Implementation Date has been Set Albania, Argentina, Bermuda, Bulgaria, Chile, China, Croatia Israel Japan Mauritius, Panama Romania, Turkey, Uruguay Source: "Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva. Note: Countries in red will implement the standard approach and the advanced approach 15

The Principles for Implementing Basel II in Israel 16

The Principles for Implementing Basel II in Israel 1. The Supervisor of the Banks will adopt Basel II in its latest version (June 2006), as a proper conduct of banking business directive. www. bis. org/publ/bcbs 128. htm 17

The Principles for Implementing Basel II in Israel (Continued) 2. 18 The Supervisor’s directive for the implementation of Basel II will be based on a full and exact translation of the original in English. The directive will include as additional paragraphs in order to clarify those areas which require specific instructions and/or transitional instructions for implementation in Israel.

The Principles for Implementing Basel II in Israel (Continued) 3. 19 The Supervisor will set 2009 as the implementation date. From that year on, every banking corporation will implement all three pillars of Basel II, in all their aspects. In 2008, the banks will provide the data they received during the implementation of Basel II to the Supervisor.

The Principles for Implementing Basel II in Israel (Continued) 4. A banking corporation that will be able to implement an advanced approach on the implementation date will receive all the necessary assistance from the Supervisor in order to fulfill the instructions of Basel II regarding this approach. 5. A banking corporation which will not be able to implement an advanced approach according to Basel II on the implementation date will have to implement an alternative approach. 20

The Principles for Implementing Basel II in Israel (Continued) 6. The Supervisor will hold discussions and consultations with “Basel”, regulatory authorities and other entities abroad and in Israel concerning main issues in the adoption of Basel II in Israel. 7. The Supervisor will hold discussions and consultations with the banking corporations on all aspects of the implementation of Basel II, including those which according to Basel II require a specific directive of the Supervisor. 21

The Principles for Implementing Basel II in Israel (Continued) 8. Up until the implementation date, the Supervisor will monitor and support each banking corporation’s preparations to implement Basel II. 9. The Supervisor will appoint a supreme steering committee for Basel II and will serve as its Chairman. 10. The Supervisor will initiate seminars and training activities on main issues related to the implementation of Basel II. 22

The Principles for Implementing Basel II in Israel (Continued) 11. The Supervisor will publish, in stages, the directives for the implementation of Basel II. At the end of the first quarter of 2007 (approximately), the Supervisor will publish an ANPR: A discussion draft regarding Pillar 3 of Basel II which addresses disclosure. A draft of a directive for the implementation of Basel II according to the standardised approach (credit risk, market risk and operational risk). A preliminary draft of a directive for the implementation of the complete Basel II directive, according to both the standardised approach and the advanced approaches. A Quantitative Impact Study (QIS) in order to organize the information on the plans and estimates of each banking corporation regarding the implementation of Basel II and its effects. ANPR-Advanced Notice of Proposed Rulemaking 23

The Principles for Implementing Basel II in Israel (Continued) w At the end of the third quarter of 2007 (approximately), the Supervisor will publish a full draft of the directive for the implementation of Basel II in all its aspects. 24

Thank you 25