Hazem Hassan

Public Accountants & Consultants

FINANCIAL SERVICES

Contacts
KPMG Hazem Hassan
Pyramids Heights Office Park
Km 22 Cairo / Alexandria Desert Road
12556 Al Ahram
P.O.Box 48 Al Ahram
Giza - Cairo Egypt
Aziz Maher
Partner Financial Services
Tel: (202) 35 36 2200/11 Ext.1519
Fax: (202)35 36 2305/03
E-mail: azizmaher@kpmg.com
Dr. Lionel Khalil
Director Financial Risk Management
Tel: (202) 35 36 2200/11 Ext.3714
Fax: (202)35 36 2305/03
E-mail: lkhalil@kpmg.com

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that such information is accurate as of the date it is received or that it will
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particular situation.

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member firm of KPMG International, a Swiss
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Design Services

Basel II Disclosures
Requirements
ADVISORY

Content
- Pillar 3 Disclosures

- Basel II Disclosure Requirements

- Benefit from a well-defined Basel II evolution program

Benefit from a well-defined

Basel II evolution program
Basel II compliance

KPMG Differentiators

KPMGs FRM Services provide Basel II

regulatory and compliance advisory
services to assist various types of
financial institutions in meeting their
regulatory obligations effectively and
efficiently and keep up with Basel II
issues:

KPMG's Basel II Methodology is a

structured approach to help clients
assess:

Effectively improve and monitor

systems and data
Ultimately obtain competitive
advantage through cost-effective
compliance.

Their actual status concerning the

Basel II Accord readiness
Existing gaps and shortcomings
Activities to be undertaken to fill
gaps and reach desired end state.

structure and organization of the

relevant risk management functions;

Provide practical guidance based

on Basel II leading practices.

extent and content of risk reporting

and/or measurement systems;

Provide risk management guidance.

risk management/risk mitigation

strategies and;

processes for monitoring the

efficiency of risk mitigation strategies

Phase 3
USE TEST
AND
APPROVAL

DESIGN AND IMPLEMENT

Phase 4
MONITOR
AND
CONTROL

Market and Other Risks

Capital Planning
Disclosure
(including linkage to IFRS)

Monitor and Control

Operational Risk

Use Test and Approval

Credit Risk

Basel II Roll-Out Plan

Basel II implementation
Master Plan

Basel II Implementation
Approach

Impact Analysis

Gap Analysis

A bank should decide which

disclosures are relevant for it based on
the materiality concept. Information
would be regarded as material if its
omission or misstatement could
change or influence the assessment or
decision of a user relying on that
information for the purpose of making
economic decisions.

BASEL II PROJECT MANAGEMENT

Basel II - Disclosures Requirements

Basel II, pillar 3 enforces the market

discipline with disclosures of objectives
and policies of risk management for each
risk type (credit risk, market risk,
operational risk, interest rate risk in the
banking book, equities), including :
strategies and processes;

Supervisory Review Process

SYSTEMS

Materiality

Corporate Governance/
Risk Management

PROCESSES

Disclosures under Basel II

Define a standard, modular

approach to performing Basel II
programs in 4 Phases.

Phase 2

ORGANISATION

According to the Basel committee the purpose of Pillar 3

market discipline is to complement the minimum capital
requirements (Pillar 1) and the supervisory review process
(Pillar 2).

The objectives of KPMG's Basel II

Methodology are to:

Mitigate regulatory impact on

processes and methods

ASSESS AND PLAN

DATA

z
z

Proactively setup an organization

ready to comply with regulatory
requirements

Phase 1

METHODS

Pillar 3 Disclosures

Disclosures encourage market discipline

by developing a set of disclosure
requirements which will allow market
participants to assess key pieces of
information on the scope of application,
capital, risk exposures, risk assessment
processes, and hence the capital
adequacy of the institution.

Interaction between Accounting

disclosures and Basel II
disclosures.
Pillar 3 disclosure framework does not
conflict with requirements under new
Standard. The risk disclosures are made
under accounting requirements.
Banks should explain reconciliation and
material differences between the
accounting disclosures and Basel II risk
disclosures.

Frequency
The disclosures set out in Pillar 3
should be made on a semi-annual
basis, subject to the following
exceptions. Qualitative disclosures
that provide a general summary of a
banks risk management objectives
and policies, reporting system and
definitions may be published on an
annual basis; and quantitative on
volatile information on a quarterly basis.

Proprietary and confidential

information
Disclosures should respect the
following constraints :
Proprietary information
encompasses information that if
shared with competitors would
render a banks investment in these
products/systems less valuable, and
hence would undermine its
competitive position;
Information about customers is often
confidential, in that it is provided
under the terms of a legal
agreement or counterparty
relationship.

Basel II - Disclosures Requirements

Basel II - Disclosure Requirements

Credit risk: General requirements

Qualitative information
z

Scope

Definition of overdue, impaired and defaulted loans, general and specific allowances and statistical
methods for their estimation.

Quantitative information

Qualitative information

Break-down of credit volume according to counterparties (rating classes), regions, industries, risk
concentration, maturity and collaterals; non-performing loans.

Difference between accounting-relevant and regulatory consolidation as well as overview of the group companies and their
inclusion in the group of consolidated companies (full consolidation, pro-rata consolidation, deduction).

Charges of specific allowances and charge-offs during the period.

Restrictions for (regulatory) capital transfer within the group.

Break-down of specific allowances according to sectors and regions.

Quantitative information
z

Details of surplus capital of insurance and capital shortage of all subsidiaries.

Effects of capital deduction of insurance participations on tier I capital and tier II capital, if actually 100% risk weighted.

Credit risk: Standardised approach

Qualitative information

Capital structure and adequacy

Qualitative information

Details via external rating agencies.

Details specifying positions for which external ratings are used.

Mapping of external ratings to risk classes.

Description of individual capital elements, core capital, capital strategy and approach for assessing capital adequacy.

Quantitative information

Details of innovative, complex or hybrid financing instruments.

Quantitative information
z

Capital requirements in the individual risk areas and capital parameters on a consolidated basis.

Individual components of core capital, items which deduct capital, tier II capital, tier III capital and other eligible capital.

Risk positions and assessment

General information
z

Information considering core risks of the institutions (credit risk, market risk, interest rate risk in the banking book,
operational risk).

Comparison between the current risk profile (ex-ante risk assessment) and the risks which actually occurred (ex-post
assessment) for assessing the reliability and effectiveness of the procedures chosen for risk management.

Consistent information structure is recommended.

Market risk: Standardised approach
Qualitative information

Market risk

Operational
Risk

Details of portfolios which are using the standardised approach, and their measuring methods.

Quantitative information
Corresponding capital requirements for the interest rate risk, equity position risk, foreign
exchange risk and commodity risk.

Operational risk
Qualitative information
z

Details for which approach the bank qualifies.

Interest rate risk in the banking book

Interest rate
risk in the
banking book

Qualitative information
z

Credit risk: Equity holdings in the banking book

Qualitative information

Credit
risk

Differentiation between equities held with the aim of generating a profit and strategic holding.

Discussion of key valuation and accounting principles for the equities in the banking book.

Quantitative information
z

Details of the (net) book value and current value of the equity, comparison with market value if
listed; type and nature, realized and unrealized profits and losses.

Capital requirements for equities for which supervisory transition or grandfathering provisions are
applicable.

Credit risk: Risk reduction techniques

Qualitative information
z

Increase or decline in earnings or economic value in the case of upward or downward rates
shocks

Basel II - Disclosures Requirements

Qualitative disclosure requirements for application of credit risk mitigation techniques (collateral
valuation and management, description of guarantees and credit derivatives, risk concentrations).

Quantitative information
z

For every portfolio: the total exposure which is covered by recognized financial collaterals;

For every portfolio: the total exposure which is covered by guarantees or credit derivatives.

Credit risk: Securitization of loans

Qualitative information
z

Qualitative disclosure requirements for securitization of loans (in particular: the role played by the
bank in the securitization process).

Summary of accounting policies for securitisation activities.

Name of rating agencies which are used and the type of securitization.

Quantitative information
z

Type and total amount of securitized loans, amount of non-performing loans and realized losses,
securitizations which are retained or bought back (broken down according to type and risk weighting
bands).

Total outstanding of securitized revolving exposures, segregated by investors interest and

originators interest.

Quantitative information
z

Description of the risk and control procedure (assumptions regarding customer behaviour,
interest shock, backing).

Break-down of exposures over the individual risk classes.

Basel II - Disclosures Requirements