Top six HK banks may adopt IRB
As many as six Hong Kong banks may implement the internal ratings-based approach (IRB) to Basel II by the end of 2006, potentially accounting for as much as 50% of Hong Kong's banking assets, says Simon Topping, executive director of banking policy at the Hong Kong Monetary Authority (HKMA).
The HKMA has already announced it will not force any of the territory’s financial institutions to adopt any particular approach to Basel II, leaving even the largest banks to decide which of the three approaches to credit and operational risk they will take. However, Topping cautioned small and medium-sized banks against trying to implement the IRB approaches. “IRB is only intended for big internationally active banks. For a small bank to implement IRB is a complete and utter waste of time,” he says.
Nonetheless, every bank in Hong Kong will be required to implement aspects of the IRB approach, regardless of size. For instance, all banks will have to expand the number of categories in their credit ratings systems, make more use of quantitative models, and begin stress testing. “It makes sense for all banks to think about how their business would be affected by events like economic downturn, increases in interest rates and regional shocks, and just try and think about whether their book is actually positioned the way they’d ideally like it to be,” says Topping. “I would expect all banks irrespective of size to have some form of stress-testing programme.”
All banks will also have to start managing a wider array of risks. In fact, those banks with adequate credit risk systems in place should prioritise the setting up of systems for market risk, interest rate risk, business cycle risk, forex risk and liquidity risk, potentially leaving further improvements in credit risk systems until after 2006. “It doesn’t mean you have to have the very latest techniques to monitor forex risk, liquidity risk and interest rate risk, but you do need to have systems commensurate with the risks the banks are running,” says Topping.
Those banks implementing the standardised approach will probably see their capital adequacy ratios fall by an average of 87 basis points, based on results of the third quantitative impact study published in May last year. However, those banks with riskier portfolios may see capital adequacy ratios depleted by as much as 2–3%, says Topping. “Overall, there will be little change in the aggregate figure, but for some banks, even using the standardised approach and adding on the operational risk charge will act as an incentive to manage their book.”
There are no estimates on the capital charges for IRB banks in Hong Kong, but Topping adds that implementing the more advanced approaches may not necessarily result in lower charges for all banks. “You can’t assume that IRB is necessarily going to lead to lower capital requirements. It will in economies where you’ve got very low bad debts, but in Asia, where we seem to have got used to a much higher level of underlying bad debt, IRB may end up costing more capital.”
Asia Risk
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Risk management
Independent audits drive compliance in FRTB data solutions
The EU and the Basel Committee have introduced strict audit standards for data vendors to uphold the FRTB rules. With deadlines approaching, audited solutions are critical for banks to ensure compliance, minimise NMRFs and reduce capital requirements
New CME guidance to drive tighter margin call management
Clearing house rule clarified to limit the use of grace periods to cases of admin/operational errors only
Too ’Berg to fail? What October’s Instant Bloomberg outage means for the industry
The ubiquitous communications platform is vital for traders around the globe, especially in fixed income and exotic derivatives. When it fails, the disruption can be great
SEC leadership change puts Treasuries mandate under scrutiny
FICC clearing models approved, but critics think delay could revive prospects of done-away trading
Markets Technology Awards 2025: Untangling the knots
Vendors jockeying for position in this year’s MTAs, as banks and regulators take aim at counterparty blind spots
Risk Awards 2025: The winners
UBS claims top derivatives prize, lifetime award for Don Wilson, JP Morgan wins rates and credit
An AI-first approach to model risk management
Firms must define their AI risk appetite before trying to manage or model it, says Christophe Rougeaux
BofA sets its sights on US synthetic risk transfer market
New trading initiative has already notched at least three transactions