Results of Quantitative Impact Study 2.5

July 2002

In November 2001, the Basel Committee on Banking Supervision conducted a limited quantitative impact study to assess the effect of a variety of potential modifications on the amount of regulatory capital that banks would have to hold under the Committee's proposed foundation IRB approach. This focused study (QIS 2.5) followed a more comprehensive study (QIS 2), which also was conducted in 2001. Given the results of QIS 2, and in light of the Basel Committee's objective to ensure that the foundation IRB approach provides a modest capital incentive relative to current capital requirements, the modifications considered were:

• Adjusted risk-weight functions for various portfolios under the IRB approach;
• A revised treatment of specific provisions under the IRB approach whereby specific provisions could be used to offset the EL portion of capital requirements of loans falling into the defaulted loan category.
• A revised treatment of general provisions, in which general provisions (in excess of the amount included as Tier 2 capital) could be offset against EL charges.
• Possible elimination of the granularity adjustment under the IRB approach;
• The removal of the w-factor when treating credit risk mitigation techniques (under Pillar 1).
• Greater recognition of collateral (i.e. receivables and physical collateral).

Except for these possible modifications, banks were asked to follow the approaches set out in the second consultation paper (CP2) and evaluated under QIS 2. The modifications were being tested to give an indication of the overall effect they would have on capital requirements as an input into further consideration of the most appropriate ways to amend the CP2 proposals.

Overall, the QIS 2.5 results indicate that, on average across the banks sampled, the credit risk capital requirements for the core portfolios (i.e. corporate, sovereign, interbank and retail) would decline relative to the Current Accord, when the potential modifications are made to the proposals in the second consultation paper. These results are detailed in the Results of Quantitative Impact Study 2.5 (PDF, 6 pages, 44 kb)

The Committee will be conducting another Quantitative Impact Study (QIS 3) later this year. QIS 3 will be a comprehensive exercise, which will allow the Committee to assess the impact of various proposals, before a third consultation paper is published next year. The survey will involve banks in the G10 and non-G10; including both large, internationally active, diversified institutions as well as smaller more specialised banks. It will encompass results on all three new approaches proposed by the Committee - Standardised, foundation IRB and advanced IRB - and will analyse the effects of the new proposals on all portfolios.