Reality of market - Basel II effect on the credit market to SME

Date: 2015-10-07; view: 417.

Basel II is "International convergence of capital measurement and capital standards: a revised framework" which contains guidelines in the field of banking regulation. The main purpose of the agreement "Basel II" is to improve the quality of risk management in the banking industry, which in turn will strengthen the stability of the financial system as a whole.

Russia has adopted Basel Agreements according to its reality. We have our own Standards in these sphere, such as Letter № 192-T " Guideline for the implementation of the approach to the calculation of credit risk based on the internal ratings of banks "(January 2013) or "Core capital adequacy ratio" (N1.1 ≥ 5,6%).

"A report issued by the Bank of Russia Letter № 192-T "Guideline for the implementation of the approach to the calculation of credit risk based on the internal ratings of banks" describes the requirements for credit institutions are planning to submit their internal rating model for certification eligibility approaches based on internal ratings (IRBs) contained in Basel II. Most likely, the credit institutions will be able to use the IRB since 2015. Currently, the amount of capital needed to cover credit risk, calculated in accordance with instructions of the Bank of Russia № 139-I and other regulations."[22]

IRB is an alternative to the standardized approach to determining the amount of capital needed to cover credit risk. The standardized approach is the use of fixed ratios of credit risk for various groups of assets, which are determined by the regulator, while the IRB allows credit institutions to determine the risk factors on the basis of their own internal rating systems.

"To apply IRBs to calculate credit risk bank needs to use IRBs in the internal systems of evaluation and management of credit risk at least three years. The Bank should make a consistent plan of application which identifies to what extent and in what time frame it intends to use IRBs in respect of certain classes of assets and subsidiaries.

To calculate the value of the capital requirements based on IRBs bank must meet the minimum requirements (eg with regard to the separation of the balance sheet assets into seven categories established by the regulator) to define a default in accordance with its regulatory definition, have historical data for a minimum period for calculation of parameters PD, LGD and EAD and others."[23]

Despite the fact that most Russian banks haven't yet developed good scoring systems to evaluate credit risk, the most large of them started to use IRB models.

"After reducing of capital requirements banks used models to more clearly differentiate the risk of borrowers ( EDF or expected frequency of defaults), and the risk on the project (LGD, or loss given default). These models include the risks tied to market prices, and the creation of adequate reserves for potential credit losses"[24].

Defaults of many commercial organizations occur simultaneously under the influence of factors affecting the specific activity and / or type of security. For banks that have a larger share of the risk of potential losses relating to similar borrowers and the types of collateral (and this is low diversification and a high concentration), a flurry of defaults could have disastrous consequences for the stability of the capital. For a bank with a diversified set of borrowers and types of collateral such excitements are less felt and they are easier to resolve.

"Portfolio with a good level of diversification reduces risk-based capital requirements for the majority of its loan's components. As a result the capital that was associated with these loan can be relocated to the solvency test of the new client, which effectively allows the bank to increase its lending and revenue base without a concomitant increase in capital.

Reduced requirements for capital adequacy and improved ability to assess risks have a direct effect on loan pricing. In their calculations, banks take into account not only the cost of refinancing, operating expenses and profit margins, but also include in the calculation the risk premium in line with the expected loss and the cost of capital for each loan."[25] As a result, we can observe an increase in the difference between the interest rates for clients with low-risk and clients with a high level of risk. This is particularly noticeable in those banks that have adopted IRB-approach which allows a more careful selection of customers and allows to avoid adverse selection in the portfolio (ie underestimation of higher risks with simultaneous revaluation of the low risk).

In fact even today the majority of Russian banks failed to cope not only with standards of Basel II, but also with the international system financial statements. Only major Russian banks such as "Sberbank", "VTB", "Renaissance", "ROSBANK" or "Saint-Petersburg" fully met the requirements of Basel II. That's why it had an ambiguous influence on credit market.

"In recent years some of banks have consolidated and as a consequence their number decreased. It was made because new requirements are rather tough for some of Russian banks. "During year 2014 the number of credit institutions decreased by 9%. Some of these banks are in the process of readjustment, while the rest have lost license."[26] They were forced to increase business lending rates and in some situations refused to give loans. As a result, the pace of development of small and medium-sized businesses slowed down".[27] Moreover during the year 2014 there have been a lot of cases of revocation of licenses, even in large banks.