BANKS TO GET READY FOR BASEL II NOW
BNB Deputy Governor Emiliya Milanova infront of the participants in the spring meeting of the CBA in Plovdiv*The requirements of the currently prepared New Basel Capital Accord II will be probably enforced as of the beginning of 2007. Then they will automatically become obligatory for all member states of the European Union (EU) and the Basel-based Bank for International Settlements. The Bulgarian National Bank (BNB) has already started preparing a plan to apply the EU capital directives, CAT 1 and CAT 2, and to introduce the requirements of the New Basel Capital Accord II. What does this plan stipulate?In 2004, BNB's experts will translate and publish on the Bank's website the provisions of the new capital accord and the new directive for its implementation. For the purpose we expect commercial banks to set up working groups.The central bank is going to publish a glossary of the words mentioned in the accord so that their Bulgarian equivalents be established and these words be interpreted in an uniform way.BNB's experts will also prepare and coordinate with the commercial banks a report, proposing specific requirements to determine the credit risk and to treat the various types of collaterals.Along with experts from leading commercial banks, the central bank is going to prepare and publish a report on the applicability of internal credit ratings and the perspectives for their use in Bulgaria. The report will clarify the problems concerning the application of internal ratings prepared by the commercial banks and will make it clear whether the existing database allows the banks to estimate the solvency of their customers.Another report will be published on the methods for assessment of the operational risk. The report should contain an analysis of the problems referring to the revenues from various types of transactions effected by credit institutions. Attention will be also paid to the adequacy of the database, upon which the assessment will be made.Moreover, the BNB is going to adopt a new regulation on the capital-to-assets ratio, that will reflect the methods for reporting the market risk and will harmonize the capital requirements in Bulgaria with those effective in the EU.Moreover, in 2005 the BNB will publish aid materials on the internal models for assessment of the credit risk in banks. In the beginning of 2006 the central bank will propose to commercial banks new forms and instructions for supervision reporting of their capital-to-assets ratio and their risky assets, such as those bearing credit risk, market risk and operational risk. Together with the credit institutions the BNB will carry out tests to estimate the various kinds of risk and the amount of the banks' capital as per the requirements of the New Basel Capital Accord II. The aim will be to establish to what extent their implementation would influence the capital-to-assets ratio of financial institutions. If the results of the tests make that necessary, the banks' report forms will be changed. The manuals for bank supervision will be supplemented and the questionnaires and procedures for inspections in the banks will be updated. Along with that the BNB will prepare a supervision methodology for testing the internal bank models for specifying the credit rating of borrowers. Commercial banks will have to work out internal methodologies, rules and procedures for the implementation of the New Basel Capital Accord II. They should set themselves the parameters of their capital on the basis of their business plans and risk profile, and in accordance with the requirements for supervision review, set by the New Basel Capital Accord II.The BNB will approve a list of requirements to banks for releasing information. The aim is to strengthen market discipline by increasing transparency in the operation of credit institutions and of the risks they undertake when carrying out their activities. Banks, on their part, will have to work out their own plans for activities in that direction. It is necessary for them to begin preparations for the implementation of the New Basel Capital Accord II as early as now, and include in their annual plans the fulfilment of individual elements of the New Basel Capital Accord II. * We are publishing the final part of the report of BNB's Vice Governor Emiliya Milanova at the spring meeting of the Association of Commercial Banks (ACB), held in Plovdiv on April 17, 2004, with some abridgement and editing.