WORLD TRADE  
ORGANIZATION  WT/WGTDF/W/42 
2 December 2008  
 
 (08-5880) 
Working Group on Trade, Debt and Finance 
 Original:   English 
 
 
PRESENTATION BY THE SECRETARIAT OF THE BASEL  
COMMITTEE ON BANK ING SUPERVISION1 
 
  The following is a summary of the presentation made by the representative of the Secretariat 
of the Basel Committee on Banking Supervision (BIS)  at the meeting of the Working Group on Trade, 
Debt and Finance of 26 November 2008.  
_______________ 
 
 
BASEL II AND TRADE FINANCE 
 
 
I. BASEL COMMITTEE 
A. A
N OVERVIEW  
• Established at the end of 1974 by Ce ntral Banks Governors of the G10. 
• Reports to G10 Governors/Heads of Supervision. 
• Members are senior bank supervisors from G-10, Luxembourg and Spain. 
• Chairman: Nout Wellink, President of the Dutch Central Bank. 
• Meets four times a year (mainly) at the BIS which also hosts its Secretariat. 
 
B. COMMITTEE 'S OUTREACH TO OTHER COUNTRIES  
• Committee has developed over time close links with non-members. 
• Committee tries to address issues relevant  for all jurisdictions worldwide: 
o International Liaison Group (includes 16 jurisdictions, IMF, World Bank, 
Islamic. Financial Services Board); 
o Sixteen Regional groups of banking supervisors; 
o International Conferences of Banking Supervisors (ICBS); 
o Participation in work of the Secretariat and in most groups. 
 
II. INTRODUCTION TO BASEL II 
A. WHAT IS BASEL II? 
• Basel II is not a compliance exercise but a new philosophy for capital regulation. 
• Back to basics – Basel II is needed because: 
o Simple Basel I risk measures are no longer meaningful; 
o Complexity of banking and rapid innovation in financial markets has increased. 
• Basel II provides a stronger link between risk, risk management and capital. 
                                                      
1 This summary is being circulated with the perm ission of the Secretariat of the Basel Committee on 
Banking Supervision for the information of delegations.   WT/WGTDF/W/42 
Page 2  
 
B. B
ASEL II – A FEW FACTS  
• Finalized in June 2004 with a few areas of on-going work. 
• Implementation in practice: starting 1 January 2008 in most jurisdictions: 
o Therefore, it was not yet there when crisis started. 
• Expected to be implemented by  large number of jurisdictions. 
• Committee recently announced areas of  work in response to crisis. 
 C. B
ASEL II – A GLOBAL FRAMEWORK  
• Committee involved non-member countries to a great extent. 
• It is likely that Basel II will become th e new yardstick for assessing banks financial 
soundness (as Basel I): 
o Expected to be implemented by other countries; 
o Around 100 jurisdictions intend to implement Basel II. 
 
D. WHAT ARE THE BASIC AIMS OF BASEL II? 
• To provide the right incentives for sound risk management. 
• To deliver a prudent amount of capital in relation to the risk that is run. 
• To maintain a reasonable level playi ng-field for all banks to operate in. 
• Basel II is not intended to be neutra l between banks/different exposures. 
• However, there was a desire not to change the overall amount of capital in the system. 
 
E. MAIN ELEMENTS OF BASEL II? 
• Based on three pillars: 
o Minimum capital requirements; 
o supervisory review process; 
o Disclosure requirements. 
• Pillar I : Minimum ratio of 8% maintained. 
• No changes to definition of capital (but currently under review). 
• Revised capital requirements for credit risk , new ones for operational risk, and hardly 
changed ones for markets risks (which, however, are currently under review). 
• Menu of approaches for the measurement of risks: 
o For credit risk, standardised approach, foundation and advances internal ratings 
based approaches. 
• More recognition of drivers of credit risk: 
o Probability of default; 
o Loss given default; 
o Exposure at default; 
o Maturity; 
o Correlations. 
• Pillar 2 : Supervisory review process. 
• The three pillars together are intended to ach ieve a level of capital commensurate with a 
banks overall risk profile. 
• Pillar 2 is based on four key principles: 
o Banks' own assessment of capital adequacy; 
o Supervisors' review of bank'  capital adequacy assessment ; 
o Supervisory response (capital above  regulatory minima; supervisory 
intervention). 
• Pillar 2 has drawn, over time, more and more attention.  WT/WGTDF/W/42 
 Page 3 
 
 
• Pillar 3 : Market Discipline. 
• Another level to strengthen the safety and soundness of the system: 
o Complements regulatory capital require ments and the supervisory review 
process; 
o Reliable and timely information allo wing well-founded counterparty risk 
assessments; 
o Strong incentive for banks to conduct bu siness in a safe, sound and efficient 
manner. 
 
III. TREATMENT OF TRADE FINANCE 
A. LARGELY UNCHANGED FROM BASEL I TO BASEL II? 
• Text in Basel I:  " Short-term self-liqui dating trade-related contingencies (such as 
documentary credits collateralised by the underlying shipment)" >20% credit conversion 
factor (CCF). 
• Text in Basel II (paragraph 85 – standardised approach): "For short-term self-liquidating 
letters of credit arising from the moveme nt of goods (e.g., documentary credits 
collateralised by the underlying shipment), a 20% CCF will be applied to both issuing and 
confirming banks". 
o Paragraph 311 under IRB appro ach refers to paragraph 85. 
 
B. CREDIT CONVERSION FACTOR - EXAMPLE ? 
• Standardised approach: 
o Loan to corporate (unrated) $ 1,000,000; 
o 100% risk weight; 
o Capital requirement (8%): $ 80,000; 
o CCF 20%: capital requirement: 20% of $ 80,000 = $ 16,000. 
 
C. OTHER REQUIREMENTS PARTICULARLY RELEVANT FOR EMERGING MARKETS  
• Inter-bank claims denominated and funded in local currency can be risk weighted at 20% 
when the original maturity is 3 months or less. 
• Risk weighting of certain MDBs has been  reduced from 20% under the 1988 Accord to 
0% under Basel II. 
• Preferential treatment of B-loans (Footnote 37 to paragraph 102). 
 
IV. CYCLICALITY 
A. IS BASEL II CYCLICAL ? 
• Banks' business models are inherently cyclical  (their risk appetite varies with changing 
economic conditions. 
• Also, a risk-based approach to capital is cyclical. 
• But is it pro-cyclical. 
• Issue already addressed under Basel II, e.g.: 
o Flatter risk weighting curves; 
o Results of stress tests should be reflected; 
o Buffers above the minimum are encouraged. 
• Pro-cyclicality again the centre of attention. 
• Financial Stability Forum is examining issue focusing on four areas: 
o Capital regime; WT/WGTDF/W/42 
Page 4  
 
o Sound loan loss provisioning; 
o Compensation arrangements; 
o Valuation and leverage. 
• Committee's current and future work streams also addressing issue: 
o Current enhancements to Basel II; 
o Strengthen buffers in good tim es and enhance banks' ability to dip into buffers 
during adverse conditions. 
• Several other areas of work addressing the crisis. 
 
__________