Basel II by the Numbers: Q1 2006
July 24, 2006
Institutional Risk Analytics has released its latest report, Basel II By the Numbers, for Q1 2006. This report presents public data Basel II credit benchmarks derived from the IRA Bank Monitor for more than 360 US bank holding companies ("BHC"). The IRA Bank Monitor provides 18 years of historical, portfolio-level performance and Basel II benchmarks for all federally insured depository institutions and includes BHCs which operated in the US market as of March 31, 2006.
Copies of the report, as well as individual profiles for all federally insured depository institutions featured in Basel II by the Numbers, are available for purchase on the IRA web site. The report delivered in Adobe Acrobat is $250.
The metrics presented in the Basel II By the Numbers report are based on "as filed" data from the Research Information Service ("RIS") of the Federal Deposit Insurance Corp and aggregate financial results for the subsidiary banks of the BHC, rolled-up into a "bank only" profile. The results of the Basel II and performance benchmarks in this report are grouped into four subsets based upon the BHC's asset size:
Large Holding Companies Over $10 Billion Assets
Mid-Size Holding Companies $1B to $10B Assets
Small Holding Companies $500M to $1B Assets
Micro Holding Companies Under $500M Assets
Of note, thrifts are not listed in this edition of the Basel II by the Numbers series. The Office of Thrift Supervision's policy controlling the FDIC research feed prevents transmission of portfolio and aggregate maturity data for thrifts in electronic form - even though the data is public. This makes it impossible to calculate a key Basel metric - weighted average maturity or WAM. We are addressing our observations to the OTS and look forward including this class of institutions in future editions of Basel II by the Numbers.
As with IRA's previous report, we are again using a test methodology that sets a very high hurdle in terms of capital adequacy by measuring the amount of Economic Capital ("EC") a firm needs and comparing this result with the bank's regulatory capital requirement. Under Basel II, EC is broadly considered to be the amount of capital a financial services firm's own internal risk assessment determines it should hold. Our benchmarking efforts continue to focus on a perspective that is an apparent opposite of that selected in the Quantitative Impact Survey 4 conducted by US regulators during 2005.
Specifically, this Basel II simulation
poses the key question: How much Economic Capital does a given banking
organization need in order to sustain severe losses on its risk bearing trading
book and yet keep its external credit ratings stable? By focusing on the
stressed scenario rather than the "best case" scenario highlighted in QIS 4,
issue, we hope to shed light on the assumptions in the current debate over Basel
** Whereas surveys conducted by US bank regulators suggest that under the Basel II proposal some of the largest US banks would need less EC than current regulatory minimum capital levels, the "fully stressed" simulation presented in this report suggests that some of the largest US banks would require significantly more EC than current minimum levels of Tier One Risk Based Capital ("RBC"), particularly during an economic downturn.
** For example, JP Morgan Chase (NYSE:JPM) would require EC equal to 5.4x current Tier One RBC in order to maintain its credit rating during a period of extreme stress -- which is defined as the institution sustaining significant, high double-digit percentage losses to the risk bearing portion of the trading and investment books. Under this same scenario, Citigroup (NYSE:C) would require 3.4x Tier One RBC, Bank of America 1.6x Tier One RBC and Wachovia Corp (NYSE:WB) 2.1x Tier One RBC.
The table below shows the results for the ratio of EC to Tier One RBC for the top ten largest BHCs in the US market as of March 31, 2006. The average ratio of EC to Tier One RBC for this group is 1.94, the median is 1.26 and the STDEV is 1.66.
EC to Tier One
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