Basel’s Third Quantitative Impact Study:  The Results

May, 2003

Purpose & Process of QIS-3
        - Understand effect of/recalibrate proposal
        - Compare current capital standard with each of three potential approaches, showing details for each portfolio
        - Covered full proposal--all of credit risk, plus market and operational risk
        - 22 U.S. BHCs, >350 worldwide
        - Most addressed only standardized approach

          -   Recalibrate in terms of Committee goal to keep aggregate regulatory capital standards largely unchanged, worldwide, and to provide a slight/reasonable (my words) incentive to move to more advanced methods.
          -   Worldwide, participation was about evenly split between banks in G-10 and non-G-10 countries.  G-10:  Major European countries, plus U.S., Canada, and Japan.  Non G-10 included participation of banks from some 30 countries--Australia, India, Korea, China, Saudi Arabia, South Africa, and of course many others.  Relatively few, though, (confirm) from Latin America.
          -   As you might expect, great majority of banks from non-G-10 countries expect to adopt the standardized approach, and only __ respondents from the non-G-10 countries provided IRB data.  For that matter, could say the same about institutions from G-10 countries, and only __ of their respondents provided information re: IRB.  Consequently, the U.S. accounted for [1/3] of the IRB observations from the G-10, which was the focus of QIS (better data.)
          -   Unprecedented effort of data collection.  Printed out, survey spreadsheets covered nearly 100 pages of internal data that banks considered highly proprietary and highly sensitive.  

In some respects, might also add “highly questionable”, but overall, we believe at least U.S. contribution represented substantial effort and certainly the best data of this kind on which to make judgments about the effects of any proposed standard.  

Process (continued)
        - Substantial preparation, domestically and abroad
        - Data/spreadsheet clean-up, corrections, and changes
        - Findings used to “tweak” recent CP-3

	Modification				% Change
        - LGD floor for mortgages			1%
        - Revised risk wt curve for credit cards    0%
        - Revised Std approach for Op Risk	3%

A Challenge to All
        - Participants generally satisfied with their efforts and results
        - Questions remain about data
        - Not surprising at this stage

G10 Results:  Effect on Total RWA 1/Portfolio contribution to total credit risk change, percentage points

U.S. Results:  Effect on Total RWA (AIRB)

Key Issue/Question--DispersionContributing factors include:
        - Different assessment horizons or PD estimation methods
        - Sensitivity of PDs to different rating grades
        - Selection of stress/non-stress LGDs
        - Interplay of LGD/EAD
        - Interpretation/application of draft proposal
        - Data availability, strength/consistency of each company’s internal process
        - Actual differences in risk

Conclusion/Issues
        - All need to gain greater understanding and comfort with the range of results
        - QIS-3 data on best efforts basis & not subject to supervisory review
        - Important implications
        - QIS 3 results for individual banks may have substantial margins for error
        - Committee’s calibration process should be ongoing--QIS 4?
        - The transition to Basel II must be managed with care
        - Potential competitive implications?
        - Large banks vs small
        - Product lines (e.g., mortgages)