EUROPEAN BANKING FEDERATION

ISDA INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION

Basel Action on Retail Portfolio Required Says Industry Report

The British Bankers' Association (BBA), the European Banking Federation (EBF) and the International 
Swaps and Derivatives Association (ISDA) today publish a joint report on industry practice in the 
measurement and management of credit risk in the retail banking book and the consequence for reform 
of the Basel Capital Accord. 

The report addresses a widespread industry concern that the debate to date on reform of the 1988 Basel 
Accord has focused almost exclusively upon the treatment of corporate and sovereign assets. The report 
addresses the need to bring the retail portfolio within the scope of the reform process and so reduce 
the serious discontinuity between economic and regulatory capital. 

The major conclusions are as follows:

1. The internal ratings based approach can and should be applied to the retail portfolio on a basis 
   which differentiates it from the treatment of corporate exposures.

2. This will include the development and application of a risk weighting matrix which reflects the 
   more stable loss profile and greater granularity of the retail portfolio.

3. Because of the data environment it is anticipated that more retail banks will have access to, and 
   operate, the advanced internal ratings based approach.

The report received a positive reception when presented last week in London to the Basel Models Task 
Force. 

The project is the first concrete achievement of an ongoing co-operative partnership between the EBF 
and ISDA. It is envisaged that further projects in this and other areas will follow.

Tim Sweeney, Director General of the BBA commented "This study demonstrates that the internal ratings 
based approach can and should be applied to the retail portfolio on a differentiated basis. Critically 
this includes the application of a risk weighting matrix which reflects the significantly lower risk 
inherent in the retail portfolio." 

Richard Grove, CEO of ISDA said "Portfolio loss distributions for retail assets are markedly less fat 
tailed than for corporate exposures. This report provides a measure of the difference and draws the 
necessary regulatory conclusions."

Nicholas Bömcke, Secretary General of the EBF said "We have been concerned that not enough attention 
has been given to reform of the regulatory capital treatment of the retail portfolio. We believe that
this report makes a real and positive contribution to that debate."
 
Notes for Editors

1. The EBF is the European Bankers Federation. ISDA is the International Swaps and Derivatives 
   Association. The BBA, British Bankers' Association, as a member of the EBF, led the development 
   of the project jointly with ISDA

2. The report built upon the response of both the EBF and ISDA to the June 2000 proposals for reform 
   of the Basel Accord. Each argued for a differentiated treatment of retail portfolio including a 
   revised risk weighing matrix. These responses are available from www.isda.org or www.fbe.be 
   respectively.

3. EBF and ISDA recently agreed to co-operate on an ongoing basis in the development of joint projects
   in the area of risk management and regulatory capital. The intention is to maximise the effectiveness 
   of the industry lobby and resources. The recently announced BBA/EBF/ISDA European Loss Given Default 
   Study (see Press Release xx/10/2000) is another example of this co-operation.

4.  The survey is based upon the response of 14 major financial institutions, from 6 countries, all with
    substantial retail portfolios. They are:


 

·	ABN Amro
·	Abbey National
·	Allied Irish Bank
·	Barclays Bank
·	Bank One 
·	Chase Manhattan
·	Citigroup



·	Credit Suisse
·	Deutsche Bank
·	Halifax plc
·	HSBC
·	Lloyds TSB Group
·	Royal Bank of Scotland Group
·	UBS 



4.	The full report is available from www.bba.org.uk, www.isda.org or www.fbe.be