To understand why Basel III
has been structured the way it has, we need to take a look at what necessitated
such an approach in the first place. The standard for lending teams the world
over before the global financial crisis was Basel II. Lenders across the globe
were both excited and daunted by this accreditation standard. On retail
lending lines alone, there was phenomenal regulatory capital release moving
portfolios off Basel
I into Basel II Risk Weighted Asset (RWA) processes.
amount spent on improving credit risk modelling programs was massive across the
banking sector. Some medium-sized national banks in the western world were
spending more than $80–$90 m to bring their credit risk systems into Basel II Internal
Ratings Based (IRB) approach. This was a small sum to pay when regulatory
capital release on the entire retail banking book could be $2 billion or
$3billion to switch to Basel II; that is a huge payback.
also had a good argument to move to Basel II as the realised losses that Basel I was pricing into
capital had not materialised, and it seemed that the time for moving to a risk-sensitive
approach for modelling credit internally had arrived.
Nearly all the counties
embraced this new standard, with Europe the first to do so and Japan and Australia
following closely behind. When a standard is imposed and banks are
institutionally motivated, industry response is usually broad and deep. Across Asia a flurry of Basel II analysts, risk
software companies and consultants engaging institution after
institution. Some great work was done.
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