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UBS: QIS3 results in increased capital, is not "fair"

UBS, the Switzerland-based financial institution, says its overall capital will increase under the Basel Accord revisions, as currently outlined in the third quantitative impact study (QIS3). In addition, other institutions have had the same results, the bank says.

    • Ellen Leander
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UBS made these pronouncements in its response paper to QIS3, conducted by the Basel Committee for Banking Supervision in the fourth quarter of 2002. The response papers were posted recently on the Bank for International Settlements website.

Publication of the actual results from the QIS3 have been delayed by the Basel Committee from March to May, when they will be released alongside the third consultative paper. Speculation has been rampant in banking circles as to the content of the QIS3 results, and the reasons for the delay. Although Basel Committee members and banking regulators worldwide have, for the most part, been very positive about the QIS3 results, many in the industry have been privately grumbling about them. UBS’s comments are the first, formal public disclosure of QIS3 results in so frank a manner.

“UBS has severe doubts that the QIS forms a reliable basis for a ‘fair’ assessment of an institution’s capital requirements under the new Accord,” the bank says. The capital charge varies widely among institutions, the paper says, so that although the average works out to the target for the Basel Accord revisions, “the variances are unexpectedly large”. The paper goes on to charge that “the variations between banks are far too big to be a representative data sample for a “fair” calibration of the new Accord. Or – in other words – it confirms our earlier concerns that it is possible to have two banks with essentially the same risk profile (exposure, quality of obligors etc.) but very different capital requirements.”

The UBS paper postulated several reasons why the results among banks should have varied so widely – use of approximations and shortcuts because internal systems are not in place yet; data sets that are not ‘clean’; no common standard for the calibration of the probability of default of segments; distortions as a result of mapping in external benchmark information; and differing accounting, cultural and political considerations.

The paper goes on to say: “We realise that the question of calibration cannot be delayed for a long time for reasons of national legislation. Given the need for banks to upgrade their risk measurement systems and to collate the necessary data in order to have a more reliable basis for the statistical analysis, it would, however, be preferable first to lay down the rules for the IRB [internal ratings-based] approaches and to re-calibrate the risk weight functions and operational risk capital only once more information is available.”

UBS also provided brief remarks on its own QIS3 results, saying that all its results for the project led to an increase in capital. The firm says it reported a significant increase in capital held under the standardised approach, and a “noticeable decrease” under both of the IRB approaches. This was benchmarked against 88% of the Basel I credit risk capital levels for the bank, assuming that 12% will be set aside under Basel II for operational risk. In addition, the firm’s results for the foundation IRB and the advanced IRB were practically the same as each other. The bank believes this is due to the firm’s level of conservatism when estimating future losses.

Also, the operational risk charge is “very punitive” when calculated under the basic indicator or the standardised approaches for UBS, the paper says, because of the fact that gross income is used as the sole driver of the capital charge under those approaches.

The paper, which was dated from the beginning of February, was signed by Walter Stuerzinger, group chief risk officer; and Urs Blumli, managing director for credit and country risk controlling. It is posted online at:
www.bis.org/bcbs/qis/resp3ubsp3.pdf.BaselAlert.com

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