Basel II - Convergence of Capital Measurement and Standards von Edu Pristine

Dozent des Vortrages Basel II - Convergence of Capital Measurement and Standards

Edu Pristine

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... objective: Broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements ...

... regulators as the risk of a 'contagion -effect' would be very large and no government can afford it Leads to inter-bank market players take a lax stance at risk- profile of large banks TARP (USA) – Troubled Asset ...

... Capital Refined Credit and new Operational Risk capital requirements Internal view Pillar II Supervisory Review Supervisor's assessment of ...

... Definition of Capital Credit Risk Market Risk Operational Risk Core Capital Supplementary Capital Standardized Approach Internal Rating Based ...

... of the financial system. Enhance competitive equality. Create capital adequacy assessments. Focus on internationally active banks while following the principles ...

... banking group at every tier of the group structure (consolidated at a holding company level)? Significant minority investments where control does not exist will be excluded from banking group ...

... At least 50% of bank's capital to comprise of core elements of Tier 1 Tier II: Hybrid Capital Instruments? Unsecured, subordinated and fully subscribed; not redeemable at the holder's initiative or without consent of the supervisory authorities; can be used to cover losses without the need to liquidate the bank; ...

... some amount of own parameter estimation Most since it requires all risk parameters to be estimated based on internally validated and applied risk models Corporate, Sovereign and Bank exposures Prescriptive Risk Weights based on credit rating and asset class Foundation IRB: Risk Parameter based: Bank's Own estimates of PD, ...

... Weight substitution approach Comprehensive approach: Adjustment of exposure value of collateral. –Using haircuts banks are required to adjust both the amount of the ...

... estimates based on fulfillment of certain criteria? Haircuts are based on Type of instrument, Type of transaction and frequency of marking to market and re -margining. ...

... shortfall would occur would be as rare as 1 in 1000 years. Average losses of any year are required to be met by Provisions (General or Specific) considered as cost of doing business ...

... quantification. And the ASRF class of models alone ("ordinary" credit portfolio models) could do it. ASRF models all systematic risk is modeled using a single systematic risk factor? Risk weight function requires value of Conditional PD (i.e. PD ...

... PDs and increase with firm size Corporate correlation is between the range 0.24 (for lowest PD 0%) and 0.12 (for highest PD i.e. 100%) Retail correlations are ...

... years prior to this qualification? IRB rating system must have two separate and distinct dimensions: Risk of borrower default summed in PD Transaction specific factors reflected in collateral, seniority of ...

... cannot be less than the long -run default -weighted average loss rate given default calculated based on the average economic loss of all observed defaults within the data source for that type of ...

... over from originating banks In this case a bank sheds the assets off its balance sheet and achieves bankruptcy remote transfer ?Synthetic securitization is in context of a structure where a bank retains the assets but sheds the risk on it to different classes of ...

... ABCP Internal Assessment Approach: Where rating is not available and cannot be inferred and the exposure is to an ABCP 18 Long- Te r m AAA to AA- A+ to A - BBB+ to BBB- BB+ to B - below B- Unrated RW 20% 50% ...

... to estimating securitization exposures treats assets rated Baa3 or better similar to other credit risks. ...

... as granular and risk weight under senior positions can be applied. If there are less than 6, risk weights change irrespective of the seniority of positions. This approach does not allow internal estimates of ...

... II Market Risk Treatment There are two methods ...

... capital charge for each market risk is computed as 8% of its market risky assets.? The bank's total risk charges can then ...

... the following: Requirements for IMA are as follows:- Internal oversight Backtesting of Output Stress Testing Setting Exposure Limits? Following are the important quantitative standards: VaR must be computed on a daily basis ...

... Zone approach using agreed boundaries for each: Green Zone Yellow Zone Red Zone? In the 1st zone (green), the test results are consistent with an model max to the extent of 4 exceptions - Good? The Yellow Zone begins with 5 exceptions ...

... pricing of instruments at a minimum should form a part of risk factors for estimating market risk Capture non-linearities, correlation risk and basis risk Yield curve should be modeled with ...

... losses Mainly these losses are attributed to risk of default, migration of rating causing illiquidity, loss of value and counterparty default Also, stress tests failed to capture losses, implies ...

... Factor for the above to be based on results of backtesting and 'plus' between 0 and 1 to be added to the min value of 3 ?Stressed VaR(weekly calculated): The higher of (1) ...

... increase correlations in times of stress (clustering of default and migration events). Diversification benefits between IRC and other risk types in Trading Book not be considered Concentration: IRC increases with a more concentrated portfolio Risk mitigation and diversification: Exposure amounts may be Netted only when long and short ...

... the regulation given by the maximum of –Average of the IRC measures over 12 weeks –The most recent IRC measure ?Alternative approach proposed under IRC: Applying banking book treatment to positions in trading book Objective is to remove a regulatory arbitrage between banking and trading book Copying ...

... definition includes Legal risk, but excludes business risk and reputational risk ?The measurement methodologies proposed under Base II in a continuum of ...

... the average over the previous three years (n=3) of a fixed percentage (denoted alpha and is 15%) of positive annual Gross Income (GI) Standardized Approach ?The capital charge for each business line is calculated by multiplying gross income ...

... Use of the AMA is subject to supervisory approval 32 Business Line Beta Factors Corporate Finance 18% Trading and Sales 18% Retail Banking ...

... due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/ discrimination events, which involves at least one internal party External Fraud Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party Employment Practices and Workplace ...

... Internal Models? Common approaches in this regard are: Loss Distribution Approach: Frequency distribution (Choices: Poisson, Negative Binomial or Binomial), Severity distribution (Choices: Sub exponential family – Lognormal, Pareto, Weibull ...

... mitigation systems with its capital? Ensure institutions have sufficient capital to support all the risk to which their businesses exposes them? Develop and use sound risk management techniques in monitoring and measuring ...

... Risk Rating Systems Portfolio Analysis/ Aggregation Securitization / Complex Derivatives Large exposures / Risk concentrations VaR Model Concentration Illiquidity Events & Jump to Default Strategic ...

... be addressed under Pillar 2: Interest Rate Risk in Banking Book Credit Risk –Stress Tests under IRB Approaches – Definition of ...

... their approach to ICAAP in Pillar 3 38 Scope of application of the capital adequacy framework Capital structure and capital adequacy ...

... developing economies as the requirements are too strict and can't be followed by banks operating in developing countries ii. Basel II tends to contribute towards pro -cyclical behavior iii. Basel II can also affect many aspects of the bank's decision making as it could lead to managers trying to manage the output of their risk management systems Which of the ...

... statement is correct regarding A. Only the approaches listed in I, ii & iii B. All the four approaches listed above C. ...

... to their risk profile and a strategy for maintaining their capital levels. ii. Supervisors regularly review and evaluate the bank's internal capital adequacy assessments and strategies as well as their ability to monitor and ensure full compliance with regulatory capital ratios. iii. Supervisors should expect banks ...

... only be used to satisfy the capital requirements from market risk charges and not for satisfying capital requirements from credit risk charges 3.A. IRB allows for three approaches including i. External ratings ...