Internal Adoption of Basel II in a Centralized Bank

Abstract: Background and Problem: Basel II is a regulatory framework introduced by the Basel Committee of Banking Supervision. Its aim is to improve international capital supervision. Banks have to apply this legislation in order to have a sufficient level of capital in case of unexpected defaults. There is, however, room for different local interpretations, given the nature of the new regulatory framework. Banks can, for example, make judgments of capital requirements internally if national authorities approve them. In times of financial crisis it is of great importance that banks handle risk correctly. Thus, in the current situation, it is especially interesting to study how the regulatory framework, aimed to create stability in the financial system, is applied internally in banks. Previous research has shown that the support of Basel II has been greater in centralized banks, and for that reason we wanted to take this further, by making a study of how the application is pursued in a centralized bank. Purpose: To describe how a centralized bank applies Basel II internally in the process of business credit decisions. Limitations: The focus of the thesis lies on Nordea, one of the four largest Swedish banks. The thesis does, however, not intend to describe the mathematical and technical details of Basel II, but primarily concerns credits given to businesses. Its primary target of study is the first pillar of Basel II. Method: We have chosen to make a qualitative study in which we interview people at different hierarchical levels within Nordea, in order to obtain a deeper understanding of the processes involved in giving credits to businesses together with applying Basel II. The regulatory framework of Basel II and previous research concerning management of banks will be used for analyzing the empirical data acquired through interviews and other data published by Nordea. Results and Conclusions: There is awareness at local- as well as at central level that Basel II is applied. The knowledge of how the framework is applied, however, deviates between the different functions of Nordea. Centrally in the organization the instructions for credit decisions are seen as well integrated with the internal system of economic capital and Basel II. At local levels the knowledge of Basel II is, however, deficient to a great extent, and credit decisions are based on clear guidelines for decision-making processes given by the central levels.