1.      Establishing a mechanism of collaboration between the supervisory authorities and the banking industry

      In the efforts to help banks adopt the new rules of Basel II and help them boost their risk management capability, the Financial Supervisory Commission, together with the Bankers Association, set up a New Basel Capital Accord Joint Research Taskforce (the “Taskforce”) to study the rules under the new Accord and propose action plans for promoting compliance by the banking industry. It is hoped that in the process of promotion, banks will face less obstacles in implementing Basel II through experience sharing and a supervisor-bank collaboration mechanism is established.

2.      Specific accomplishments of the Taskforce

      The Taskforce is participated by 21 domestic banks and 2 organizations (Joint Credit Information Center and Taiwan Academy of Banking and Finance), and has made the following accomplishments by June 2004:

• The Taskforce has finished studying the second and third consultative papers (CP2 and CP3) on Basel II (results are posted on BOMA website) and held several workshops that have drawn the attention of banks to Basel II. Some banks have constructed the framework for IRB advanced approach for credit risk.
• The Taskforce has completed the preliminary trial calculation of the impact of Basel II on bank’s capital adequacy (BIS) ratio.
• The Taskforce is undertaking the task of comparing the new Basel Capital Accord issued by Basel Committee on Banking Supervision in June 2004 with prevailing rules and analyzing its impact. The task is scheduled for completion before the end of September 2004.

3.      Analysis of preliminary trial calculation

(1) Background information

• Targets: 10 banks participated in the Joint Taskforce.
• Trial basis: Standardized approach described in CP3.
• Trial base date: June 30, 2003.
• Trial items: Items having greater impact on bank’s capital adequacy ratio, including consumer loan, corporate lending, sovereign, past due loans, claims on banks/insurance companies/securities firms, guarantees (credit derivatives), provision of operational risk, collateral, retail business and repo-style transactions.

(2) Results

• 10 banks participated in the trial calculation saw their capital adequacy ratio drop 1.3393% on average, mainly because of the added capital charge for operational risk and past due loan as required under Basel II. 

4.      Pushing for the creation of a credit risk database platform

      Under the new Accord, at least five years of data are required for the estimation of PD and at least seven years of data for the estimation of LGD and EAD if the internal ratings-based (IRB) approach is adopted. To help the banks implement the IRB approach for risk assessment, we have commissioned JCIC to create an archive database. JCIC subsequently amended the reporting framework for bank’s monthly report of loan outstanding in April 2004, and banks have begun reporting in accordance with the new system. Based on its credit related database built up in the past, JCIC has constructed a comprehensive credit risk database platform and built the credit risk assessment models for banks.

      Currently one domestic bank has constructed the relevant framework for the IRB approach and is embarking on parallel trial calculations under the old and the new systems. Four more banks are planning on implementing the IRB system.

5.      Taiwan''s stance on implementing Basel II

      In step with other countries, Taiwan will implement Basel II at the end of 2006. The government adopts an encouraging and fully supportive, but non-mandatory attitude towards the use of IRB approach for risk assessment by banks. The new Accord gives a considerable number of issues to the discretion of national supervisors. In exercising our discretion, we will give primary considerations to: 1) the status of domestic financial environment; 2) the approaches taken by other country; and 3) helping banks establish pertinent risk management system.

      In conjunction with the implementation of Basel II, we will also push for the following banking supervision policies:

(1) Establishing accounting system and method for determining loan loss reserve in tune with international practice to render the provision of capital charge comparable and objective:

• Pushing for the application of Financial Accounting Standard No. 34, which prescribes the use of fair value in assessing financial instruments so as to reflect realistically the risk exposure.
• The newly amended Regulations Governing the Provision of Loss Reserve and Treatment of Past Due Loans and Bad Debt by Banks will be implemented in July 2005, which will enhance bank’s classification of credit assets and provisions of bad debt reserve and reserve for guarantees.

(2) Building risk-based supervisory system

• Through the implementation of the second pillar of Basel II - supervisory review process coupled with the CAMELS bank rating system currently in use, we will constantly evaluate the risk management system adopted by banks and the integrity of their internal control measures, and under differential management approach, banks that bear higher risks will be required to provide higher capital charge.
• The risk-based supervisory system will gradually take over the prevailing regulation-based administrative approach.

(3) Building a market-oriented supervisory system

      In reference to the third pillar of Basel II - market discipline and getting ready for the adoption of deposit insurance scheme as financial security mechanism, we will amend regulations governing information disclosure by banks. By establishing a system for banks to disclose instantly information on finance, business, corporate governance and risk management operation, market supervision will be in place and market participants (depositors, individual investors, parties to a trade and institutional investors) will be better informed when making trading decisions.

6.      Conclusion

      By implementing Basel II and putting into effect the supervisory review process and market discipline guidelines, we will establish a risk management-oriented banking supervision system that allows us to construct a more secure and healthier financial system.