QIS3 results released by Basel Committee

A paper outlining the results of the third quantitative impact study (QIS3) was released by the Basel Committee on Banking Supervision yesterday.

The release of the QIS3 data will help explain some of the choices that the Basel Committee made in its third consultative paper (CP3), released last week.

The Basel Committee said the key changes it made to the CP3 as a result of QIS3 included a lower risk weight of 35% for residential mortgages, and a recognition that past-due loans with significant levels of provisioning warrant a lower risk weighting than 150% on the net amount remaining. The Committee also introduced another operational risk methodology, an alternative standardised approach (ASA), which allows banks to use ‘loans and advances’ for the retail and commercial banking businesses instead of gross income for calculating the capital charge.Elements of the internal ratings-based (IRB) approach have been modified – floors have been set for retail mortgage loss-given default levels (10%) and for all retail probability of default levels (3 basis points). Also, the risk weight curve for qualifying retail exposures has been modified and the implicit maturity for repos has been reduced to six months.

The results themselves show a wide dispersal of calculations for banks. Indeed, according to further analysis by US consultancy Mercer Oliver Wyman, the 30 largest US banks would see their total minimum capital requirement fall by 10% to 15% under the advanced IRB approach – a fact that is masked in the published QIS3 results by input from Japanese banks. Europe’s banks are likely to see capital fall by 3% to 7%. Other banks, especially those from certain emerging markets and those that specialise in businesses that are operational risk-sensitive, are likely to see their capital requirements increase substantially.

A total of 188 banks in 13 Group of 10 countries participated in the study, with a further 177 banks from another 30 countries. The results were originally anticipated to be released in late February, but were then postponed until the release of CP3, partly because of the unexpectedly strong response from banks outside G-10 countries. The Basel Committee also had to contend with trying to understand how the level of information that banks could provide influenced the QIS3 results – in many cases banks could not accurately fill in certain data fields, such as collateral for specific types of loans, because they did not have the information in an accessible format internally.