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

Basel II as seen by Israel’s Basel II as seen by Israel’s Banking SystemBanking System

Rony Hizkiyahu, Supervisor of Banks, Bank of Israel

30 January 2007 The Interdisciplinary Center, Herzliya, Caesaria Center

2

Basel II –The Vision

Strengthening the safety and soundness of the

international banking system.

Creating standardization and reliability in the banking

system at an international level.

Conversion to advanced methods accompanied by

incentives.

3

Basel II - Challenges

Improvement of risk management by the banking

system (credit and market risks) including risks that

were not addressed in the past (operational risk).

Management of organizational culture change with

respect to risk (corporate governance).

Creation and maintenance of databases.

Management of credit risk due to small businesses

through pools.

4

Basel II - Implications Upgrading risk management and control systems.

Development of internal and external rating.

Effect on competition.

Effect on credit management of (large) corporations in non-bank financial

services industries.

Upgrading small corporations’ management in order to meet the demands

of the bank.

Increased efficiency of market activities as a result of increased disclosure.

Increased volatility of the business cycle => change in behavior patterns.

Costs

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

0

2

4

6

8

10

12

14

Total HaBeinleumi Mizrahi Discount Hapoalim Leumi

Precentage

1999 2000 2001 2002 2003 2004 2005

(10.7%)

(9.8%)

(11.7%)

(10.6%)

(9.4%)

(11.6%)

The minimum required capital ratio since March

1999 (9%).

1999-2005

Source: Financial Statements

9

6

Relative Surplus Capital Adequacy –International Comparison

Relative Surplus Capital Adequacy 1

in Selected2 Banking Systems – International Comparison

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Switzer

land

Holland

Greec

e

Austri

a

Finlan

d

South

Afri

ca5

Germ

any

Canada

Portu

gal

Belgium

Spain

Med

ian

Avera

ge

US 50

Sweden

Irelan

d

Britain

Norway

Israel

Denmar

k

New Zea

land

Austra

lia

Franc

eIta

ly

Precentage

1. Relativ e Surplus Capital Adequacy is calculated as a percentage of the total minimal required capital in each country when the minimal required capital ratio in all

the countries is 8%. In Israel, where the minimum required capital ratio is 9%, and in Canada and South Af rica, where the minimum required capital ratio is 10%,

Surplus Capital Adequacy was calculated f or ov er 8%.

2. In each country , the 10 largest banking groups were included except f or: the US whose data includes the 50 largest banking groups; Israel, Finland and South

Af rica, whose data includes the 5 largest banking groups; and New Zealand whose data includes the 4 largest banking groups.

Source: Calculations of the Research Unit of Superv ision of the Banks on the basis of data f rom BankScope.

49%

34%

50

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Basel II – The Three PillarsPillar 1:

Minimum Capital

Requirements

Pillar 3:

Market Discipline

Pillar 2:

Supervisory Review

Process

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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)

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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)

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Basel II – Implementation Prospects in 49 Countries

Source:"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

According to the publication there is no

implementation date14 countries

According to the publication there

is an implementation

date 35 countries

35 countries in which an implementation date has been set:AustraliaBahrainCanadaEU (19 countries)Hong KongIndiaLatvia Malaysia New Zealand PhilippinesSingaporeSouth Africa South KoreaSri LankaSwitzerlandTaiwan ThailandUS

14 countries in which an implementation date has not been set: AlbaniaArgentina Bermuda BulgariaChileChinaCroatiaIsraelJapan MauritiusPanamaRomania Turkey Uruguay

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Basel II Implementation Prospects in 35 Countries (according to publicized data)

Source:"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

12

Number of Countries

3 5 21 4 1 1

Year 2006 2007 2007

2008

2008 20082010

2009

35 Countries in which an Implementation Date has been Set

Implementation Date:

Source:

"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

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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

35 Countries in which an Implementation Date has been Set

(Continued)Approaches adopted to calculate minimal capital requirements

Source:

"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

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Basel II – Implementation Prospects in 14 Countries (according to published data)

Source:"Basel 2 at mid-2006: prospects for implementation and other recent development”, Cornford Andrew, Financial Markets Center, Geneva.

15

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

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The Principles for Implementing Basel

IIin Israel

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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/bcbs128.htm

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The Principles for Implementing Basel II in Israel (Continued)

2. 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.

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The Principles for Implementing Basel II in Israel (Continued)

3. 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.

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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.

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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.

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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.

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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

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The Principles for Implementing Basel II in Israel (Continued)

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.

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Thank youThank you