Credit Risk Capital Calculation von Edu Pristine

Dozent des Vortrages Credit Risk Capital Calculation

Edu Pristine

Trusted by Fortune 500 Companies and 10,000 Students from 40+ countries across the globe, EduPristine is one of the leading International Training providers for Finance Certifications like FRM®, CFA®, PRM®, Business Analytics, HR Analytics, Financial Modeling, Operational Risk Modeling etc. It was founded by industry professionals who have worked in the area of investment banking and private equity in organizations such as Goldman Sachs, Crisil - A Standard & Poors Company, Standard Chartered and Accenture.

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... Capital Requirements under Basel I - List the Weaknesses of the Basel I Accord for Credit Risk - Explain the Latest proposal for Minimum Credit Capital requirements - Describe the Standardised Approach in Basel II - Describe the Internal Ratings Based Approach (IRB) for Corporate, Bank and Sovereign Exposures - Describe the Internal ...

... ratings to banks with adequate capital (as compared to the risks taken by the bank). – Maintaining adequate capital is required by the banking regulator. - Economic capital – Capital required to cover extreme losses with a certain confidence interval. – EC is usually estimated using ...

... banks to calculate EC (because of level of data and sophisticated modeling required). – Therefore, regulators usually provide standardized guidelines and easy to implement models for all banks (like Basel I and Basel II). – Regulatory capital usually would be conservative (i.e. higher) than EC, because regulators ...

... happen annually. – Quantile of the loss distribution: This refers to the confidence interval at which Credit VaR is to be estimated. Usually it is based on the desired credit rating of the Bank. For instance, for AA-rating, Credit VaR should be measured at 99.97 percentile (i.e. 0.03% chance of bankruptcy). ...

... Bank for International Settlements (BIS) introduced Basel I guidelines – Prior to 1988, many banks went bankrupt because of inadequate capital – Because of ...

... exposure = Max(0, Positive MTM). PFE = Notional × Add-on factor. Add-on factor depends on the type of instrument and its maturity. – Calculating Risk-weighted assets (RWA): Each exposure is multiplied by a risk-weight depending on the ...

... Claims from central governments, Central banks denominated in National Currency 0% Claims on domestic public sector entities, excluding central government, and loans guaranteed by ...

... were taking benefit of regulatory capital arbitrage by revolving long term facilities each year. – Insufficient benefit for Credit Risk Mitigation (CRM) techniques: Benefit of CRM like collateral, netting, third party guarantees and credit derivatives was not fully recognized. – Lack of recognition of diversification benefits across businesses and ...

... for credit, market and operational risk. – Pillar II: Supervisory review process (SRP): Certain critical risks like concentration risk, liquidity risk and Interest rate risk in banking book are to be measured by a bank as part of Pillar-II. As part of SRP, regulators would review if banks are keeping adequate capital for risks not ...

... risk, liquidity risk, reputation risk, Interest rate risk in Banking Book. Supervisors should review and evaluate banks’ Internal Capital Adequacy Assessment Process (ICAAP) and strategies. Supervisors should expect banks to operate above the minimum capital ratios and should have the ability to require banks to hold capital in excess of the minimum. Supervisors should seek to intervene at an early stage to prevent capital falling below minimum ...

... risk – Standardized approach – Foundation Internal Rating Based Approach (FIRB) – Advanced Internal Rating Basel Approach (AIRB) - Standardized approach: Is largely an extension of Basel I but is more risk sensitive than Basel-I. – External rating based risk differentiation between corporates: ...

... LGD, CCF for calculation of EAD and M is specified by the regulator for different types of exposures. For instance, BIS has specified 45% LGD for senior claims and 75% LGD for subordinated claims as part of FIRB approach. AIRB: It is the most advanced approach in which all input parameters are to be estimated by a ...

... – PD × LGD) × M – Where N is cumulative normal density function, N-1 is the inverse of cumulative normal density function. – ‘r’ is correlation of each exposure with single risk factor (say, economy). ‘r’ is dependant on PD of a borrower. BIS observed empirically that better rated borrowers default more because ...

... the correlation factor ‘r’. Higher correlation indicates greater dependence on economy and therefore larger would be the scaling up and vice-versa. Multiplying Worst-case PD with LGD gives an approximation of CreditVaR at 99.9% confidence interval. EL is then subtracted from Worst-case ...

... carry higher risk as compared to other exposures on corporates. SL categories are: – Object finance: where loan repayment is based on cash flows from a single asset. E.g. Ship vessel financing – Project finance: where loan repayment is based on cash flows from a single project. E.g. Lending to SPV ...

... to 24%, for retail exposures it is: – RME: 15% – QRRE: 4% – Other Retail: between 3% to 16%, dependant on PD of the retail borrower. Pooling of exposures: For retail exposures, it is operationally and financially not viable to estimate PD and LGD for each individual exposure. ...

... provided by the Basel Committee. Capital formula provided by the Basel Committee - Probability of Default (PD) the likelihood that a borrower will default over a given time period - Implicitly provided by the Basel Committee; tied to risk weights based on external ratings - Provided by bank based on own estimates - Provided by bank based on own estimates - Exposure of Default (EAD): for loans, the amount of the ...

... a given bucket. Point-in-time and through-the-cycle ratings: In a point-in-time (PIT) rating approach, obligors are classified into rating grades based on the best available current credit quality information. Whereas, in a through-the-cycle (TTC) rating ...

... great flexibility in determining how obligors are assigned to buckets, but it establishes minimum standards for their credit monitoring processes. Banks can rely on their own internal data, or data derived from external sources as long as they can demonstrate the relevance of ...

... pool commonly contains standard credit instruments such as bonds or loans. In contrast, a synthetic securitisation uses credit derivatives or guarantees in a funded (e.g. credit-linked notes) or an unfunded ...

... to securitisations. The IRB approach proposes three methods for calculation: – Rating Based Approach (RBA): Capital on basis of credit rating of securitization tranches – Internal Assessment Approach (IAA): Based on internal assessment on credit quality of securitization exposures – Supervisory Formula Approach (SFA): ...

... incremental contributions, and marginal contributions. Every methodology has its advantages and disadvantages, and might be more appropriate for a particular managerial application. The most common approach used today to attribute ECC on a diversified basis is based on the marginal contribution to the volatility (or standard deviation) of the portfolio ...

... Measures Monotonitivity: Portfolio with greater future returns will likely have less risk. Subadditivity: Risk of a portfolio is at most equal to the ...

... 1999). In particular, VaR is not sub-additive in general. A risk measure is said to be sub-additive if for any two portfolios X and Y. Thus, sub-additivity is a property of risk measures required to account for portfolio diversification. While VaR is always sub-additive for normal loss distributions, in more general cases the total portfolio VaR ...